Monday Morning Quarterback (02/22/2021)

February 22, 2021

Street Rates Continue to Accelerate:

On Tuesday, Yardi published its national, monthly self-storage report for January. Yardi reported that street rates for 10×10 Non-CC units rose by 3.5% year-over-year (y/y), its fifth consecutive month. Furthermore, 10×10 CC unit street rates grew y/y for the fourth straight month, increasing by +2.3% y/y. Before autumn of 2020, street rates for both unit types had not grown since the end of 2017. Nonetheless, until the effects of the pandemic soften, the economic outlook will remain uncertain, increasing the chances of a pull-back in self-storage demand. Out of Yardi’s top 31 markets, only Tampa and Minneapolis–Saint Paul saw a decline in street rates last month. While Tampa’s 10×10 non-CC unit rates grew y/y, the Minneapolis-St Paul MSA fell in both non-CC and CC unit rates. This is a considerable feat considering the industry’s struggle with downward pressure on rates amidst a historically robust new supply pipeline.

Chart

Chart of January 2021 Year-over-Year Rent Change for 10'x10' Units

Supply Pipeline Slowly Chugging Along:

In January, 8.3% of the existing self-storage inventory were in the planning stages or under construction, a 10 bps month-over-month (m/m) gain. However, the latest projections continue to forecast a slowdown in new-supply completions this year. According to Yardi-owned STORAGECafe’s latest estimates, developers and operators expect to add 43.6 million square feet (MSF) of rentable self-storage space in 2021. Compared to 2020 and 2019, this year’s new supply pipeline will decline by 12% and 32%, respectively.

Self-Storage Earnings:

On Monday (Feb. 22, 2021), Life Storage (LSI), National Storage Affiliates (NSA), and ExtraSpace Storage (EXR) will release their 4Q20 earnings after market close. On Tuesday, all three self-storage REITs will host earnings conference calls. On Wednesday, Public Storage (PSA) will report earnings, and on Thursday, CubeSmart (CUBE) will follow suit. The day after reporting, PSA and CUBE will also host an earnings conference call. During the earnings calls, SkyView will be listening for commentary on 1) external growth opportunities, 2) shifting migration patterns and living preferences, 3) new supply risks, and 4) the sustainability of elevated demand levels.

Retail Sales Surprise to the Upside:

Retail sales surged to a seven-month high in January. After declining by -1% in December, retail sales shot up by +5.3% month-over-month (m/m), scorching Bloomberg’s survey of economists’ median estimate of +1.1% m/m. While a portion of that gain reflected a smaller drop in the unadjusted retail sales figures (-17.3% versus -18.5% in January 2020), the primary catalyst for the robust improvement was covid-aid in the form of extended unemployment benefits and $600 stimulus checks.

Compared to the same period in 2020, January retail sales improved by +7.4% y/y. The most successful segments included department stores (+23.5% m/m), driven by one-stop shopping at retailers such as Target and Walmart. Additionally, appliance and electronic stores saw a 14.7% m/m increase in revenues, while furniture store sales grew by 12.0% m/m. While it is still early, improvements in retail sales have lifted 1Q21 GDP growth projections, in addition to fears of runaway inflation.

$1.9 Trillion in Fiscal Stimulus:

With the $1.9 trillion stimulus plan making its way through Congress, the latest FOMC minutes showed that several Fed officials believed yearly inflation could breach 2% this spring due to seasonal adjustments and/or supply-chain issues. However, U.S. central bankers doubt that more robust price pressures would be constant enough to warrant tighter monetary policy. Treasury Secretary Janet Yellen stated that although the interest rates have remained low—which the Federal Reserve has the power to influence—lowering the current stimulus plan could permanently “scar” people with lifelong effects on their “lives and livelihoods. Additionally, the Congressional Budget Office suggested in a report last week that without an additional fiscal stimulus, the labor market will not return to its pre-COVID level until 2024.

Since early February, Senate and House committees have been working on individual pieces of the bill’s actual legislation. On account of budget reconciliation, lawmakers can pass bills with direct budgetary effects with a simple majority vote. However, the Senate and House must approve identical versions of subsequent legislation, which Democrats hope to accomplish before enhanced unemployment benefits expire in mid-March.

Of the bill’s components, the most contested is whether to raise the federal minimum wage from $7.25 to $15 over approximately four years. At least one Democrat, Sen. Joe Manchin (D-W. Va.), has publicly opposed the minimum wage hike, and without his vote, the Democrats cannot pass the measure. Moreover, several lawmakers have challenged the legitimacy of raising the minimum wage through the reconciliation process, arguing that it lacks direct budgetary effects.

Economic Calendar

The economic calendar is light this week. Jerome Powell, Chairman of the Federal Reserve, will speak to Congress about monetary policy on Tuesday and Wednesday. During the Q&A that follows, investors should look for any new comments about inflation and asset valuations. On Thursday, the Bureau of Economic Analysis will release their second estimate of GDP growth in the fourth quarter.

COVID Update

As of February 21, U.S. pandemic cases have risen to 28 million, while COVID casualties have neared 500,000. However, there is light at the end of the tunnel. Last week, new COVID cases amounted to ~470,000, less than a third of the cases we saw crop up every week in December and early-to-mid January. While the U.S. death toll took longer to peak, new coronavirus casualties declined by 30% compared to the week before – the most considerable week-over-week deceleration since September.