Last quarter, confidence about rental income was down for the second consecutive quarter and occupancy expectations were lower than in the previous quarter. Despite lessening optimism, actual rental income and occupancy performance increased in the third quarter of 2008 over the same quarter the previous year.

This quarter, 129 self-storage industry professionals took the time to respond to the SSCI. Respondents hail from 35 American states and three Canadian provinces. The current survey found rental income expectations continuing to decline. While nearly half of respondents report actual fourth quarter 2008 income increases over the same quarter last year, a majority expect rental income decreases in the first quarter of 2009.

Respondents are fairly evenly distributed between those expecting increases, no change and decreases with regard to expectations for first quarter physical occupancy rates. Those expecting changes in occupancy expect very slight changes. Economic and physical occupancy both grew over the same quarter 2007, but both these increases were smaller than the increases experienced in the prior quarter.

Respondents remain bearish on the national economic outlook. They expect little or no change in interest rates and increasing cap rates.

Rental Income And Concessions

Rental income expectations declined in the current SSCI. This is the third consecutive quarterly decline in rental income expectations and the first quarter in which more respondents expect decreases than increases in rental income. Mike Parham, CEO of the Parham Group of self-storage development companies, has, “Never, ever seen, in the history of this country, this bad of a confidence level in this economy.” With consumer confidence as low as it has ever been, “A large majority of what we are going to see in rental income is what we had last year.”

Parham sees fewer new renters in the discretionary market: Today’s renters “Have an immediate need that is important right now. Before it was planning-related, now it is more specific.” Parham believes that self-storage remains a need because of downsized homes and people staying in smaller houses due to home prices. While fewer people can afford to meet that need today, Parham predicts that, “A pent-up demand will be expressed when the upturn occurs.” He expects that to happen in the middle of 2010, “but that is a guess.”

Chris Sonne, managing director of valuation services for Cushman & Wakefield’s Self Storage Industry Group, concurs that growth will either remain flat or grow only slightly, lagging inflation. Sonne calls respondents’ concerns about rental income “a sound and reasoned response to the economic uncertainty we face. I have never heard such negative economic news in my life, so that causes a damper on expectations.” He says, “People do not expect rents and occupancy to decline, it is just a diminished growth rate.” Sonne thinks the declining income expectations, “probably reflect what most of us are feeling—that we do not really know what is next or how long this downturn will last.”

Respondents’ rental income expectations are fairly evenly split between those expecting slight increases, no change, and slight decreases. This is a less optimistic outlook than last quarter, when more respondents expected significant or slight increases (44 percent expected some increase last quarter, while only 31 percent do now).

When asked to compare actual rental income in the fourth quarter of 2008 with the fourth quarter of 2007, 12 percent note declines, 37 percent note no change, and 46 percent report increases. A quarter of the total respondents, half of those reporting increased rental income over the same quarter last year, report small increases, from 0.1 to 2.99 percent. Another 18 percent of total respondents saw increases of between three and 4.99 percent, and four percent of total respondents saw rental income increases of five percent or more.

In the fourth quarter of 2008, 35 percent of self-storage owners and operators report offering no concessions to potential customers. Sixteen percent offered a $1 move-in concession, and the remaining 49 percent are spread between offering slight, mid-range, and large discounts. Last quarter, 39 percent of respondents reported offering no concessions, so concession use was up in the fourth quarter of 2008 over the third quarter.

Occupancy Levels

While expectations continue to be curbed, 41 percent of respondents report that actual physical occupancy rates were up in the fourth quarter of 2008 over 2007 levels. Occupancy remained unchanged for 23 percent of respondents compared with the same quarter last year. Physical occupancy did not grow as much in the fourth quarter as it did in the third quarter, but 64 percent of respondents saw either growth or no change, while 35 percent saw reductions in physical occupancy.

In terms of economic occupancy, once again we see the majority of respondents expecting slight or no changes, but substantial reductions in the percent of respondents expecting significant increases is down from five to one percent. Forty percent of respondents expect slight or significant decreases in economic occupancy rates in the first quarter of 2009. While this is very close to last quarter’s 41 percent, the balance has shifted somewhat, with nine percent expecting significant decreases (up from six percent last quarter).

Parham explains why economic occupancy can increase in times of economic distress: “People are leasing smaller units. When that happens, it increases your economic occupancy but lowers your physical occupancy. Lessees still need units, but if they need a 10-by-10 unit, they get a 5-by-10 and cram it.” Sonne adds that owners and operators are, “Paying close attention to economic occupancy. They are making sure they collect or eject. When you are concerned about cash flow, that is the right focus. It is a comment on the rising sophistication of asset management for self-storage.”

Expectations Of The National Economy

Over half of respondents (51 percent) expect interest rates to decrease slightly during the first quarter of 2009. Thirty-seven percent expect rates to stay the same, and very small portions of respondents expect significant interest rate changes either higher or lower.

Sonne has seen buyers having real difficulty obtaining loans. “The underwriting criteria are so strict that it is very difficult to get loans, period. It is hard for people to get loans for under seven or 7.5 percent right now unless they have good partnerships, a track record, and take on personal liability.” Additionally, “Loan to value ratios have declined; even if you qualify for a good interest rate, you have to have a lot more cash or take a higher rate.” He goes on to say, “Money is still more expensive and harder to get. Banks are still frozen.” Sonne sees loan availability loosening up in or around the third quarter of 2009.

Parham concurs with Sonne’s assessment of the availability of capital. “To get something refinanced is damn near impossible, and to get financing to build a new project is even worse.” Parham has experienced the tight capital market firsthand, noting that, “Bankers are not refinancing.” This could be disastrous for owners in weak financial positions. As a result of rising cap rates, “When property values go down, owners do not have the debt-to-income ratio their lenders require. Some will be unable to make their performance work with their bank loans, so there will be fire sales.”

Most industry professionals expect interest rates to cause cap rates to either increase slightly (38 percent, up from 31 percent last quarter) or remain unchanged (32 percent, up from 31 percent last quarter). Sonne says, “Real estate values are declining not because of the asset’s value, but because of the capital market fallouts.” He predicts that, “Cap rates are going to continue to rise until some of the uncertainty falls out of the market, perhaps to historic norms, depending on how the market responds.” And he cautions that, regardless of the historic resilience of self-storage, “macro-factors [in the economy] must be considered.”

Even given the tight capital markets and uncertainty remaining in the economy, Sonne notes that investors can get, “An eight percent cap rate on a stable self-storage facility, while treasuries are offered at sub-two percent; that is hard to beat. Nobody else can get eight percent on their money today. The market will see that and, as things loosen up, they will respond to it. Capital has always been attracted to real estate.”

Just over two-thirds of industry professionals expect the national economic outlook to decrease either slightly (46 percent) or significantly (21 percent). This is lower than the 75 percent who expected decreases in the national economic outlook last quarter. Only 15 percent expect increases, and none expect these to be substantial.

Sonne notes that uncertainty remains prevalent because negative economic news continues, with diminished earnings reports and poor holiday retail performance. According to Sonne, consumers and business people alike “Are shell shocked, we don’t know where the bottom quite is. We need more information before we can look forward with confidence.” There will be a bottom, but “Before the market loosens up, we need some stability and liquidity. That could occur in a year or in two years.”

Industry Expectations And Economic Indicators

Through this unprecedented economic turmoil, self-storage earnings have continued to grow. As Sonne puts it, “the asset class remains fairly resistant to the dynamic changes in the economy.” Sonne does not expect an economic turn around to begin until the latter part of 2009. Even so, he remains “bullish on the asset class, given its performance history in bull and bear cycles, but caution is in order.”

Parham says, “Self-storage is a lot better off than office and multifamily. In the past we have weathered economic downturns. Once people figure out what the economy is doing, the consumers will return. We will still have that stability, but not the growth in demand we had before.” Parham cites overbuilding in the past decade as one reason income will stay flat.

Confidence is diminishing, but that is reasonable given the level of uncertainty in the markets today. Sonne says, “There will be more careful scrutiny and separation of winners and losers, people being more cautious, and that is probably wise.”

About The Self Storage Confidence Index

The Self Storage Confidence Index measures the outlook and sentiment of self-storage business professionals in various aspects of the industry regarding economic conditions and trends that affect self-storage. SSCI responses are generated from an online survey of self-storage owners and vendors. The survey is available each quarter at www.selfstorageconfidenceindex.com.

Colleen Laing is a Seattle-based freelance analytical writer and principal in Laing Communications. Her work has appeared in Seattle, ParentMap, and Public Manager magazines. She is the author of How to Get Your Amazing Invention on Store Shelves.