Welcome to the AAA storage podcast, your integrated real estate and development partner, exploring all things, self storage investing to bring you diversified success. Let's dive in.
Hello, and welcome back to another episode of the AAA Storage Podcast I have with me as always, Paul Bennett. Hey Paul, how are you?
I'm good, Brian.
It's good to see you, man. So last week we talked about, um, a kind of like a wisdom perspective on how you see things given your decades of experience in the real estate market. And this week I wanna talk a lot more about the data, the quantitative picture of where we find ourselves in the real estate market and this, so this is kind of a mid-year update in 2025. And it seems that the data indicates we are somewhat at a bottom in the real estate cycle.
I know there's a lot of nuance to that, which we'll get into in different markets are experiencing that in different ways. And of course, disclaimer, we cannot predict the future. We humans are very limited in that way and we're very bad at it, but. Seeing what we can see in the data. There is some indication that this, this may be a bottoming period, which means this is a really great time to consider getting into real estate.
Kind of self-serving, giving the podcast, and giving the, the sponsor here. But, uh, Paul, I want to hear from you, uh, what data are you seeing in these different markets that you've analyzed? I know you've been, you know, pouring over some notes. Uh, what are you seeing and what can you tell us about these different markets and how you're, you're thinking things are, are playing out as we're in the middle of 2025.
Brandon, it, it is really an interesting time, uh, uh, as I looked at data over the last day or two, um, in preparation for this conversation. Um, and I do have some notes in front of me. I don't normally, but there's a lot of, lot of numbers and a lot of data, and I was afraid I would forget some of it. So, um, but a couple things came clear. Number one is I think every sector is in a little bit different stage in the bottoming process, and we talked about that.
For, you know, the last couple of episodes in different ways. Um, but it, it, it's also very interesting to me as I looked at all the data and thought about the fact that we sit here today in May of 2025, almost June, almost exactly within two months of, of the onset of the pandemic and the lockdowns. And as you look across the sectors, even though they're in different places and, and, and they, they, you have different dynamics going on, all of. Where they are today.
Each one for its own reasons, is tied to the impact of, of COVID-19 and the pandemic. And the shutdown in 2020. Um, and, and everything that happened after that. So it is really, it really an interesting look. Um, but yeah, we've, I think, I think it's fair to say that in most sectors we're seeing either the beginning of a bottoming process or, or even late stages in some of the sectors of a bottoming process.
Interesting. Okay, interesting. So I know, you know, every market's different. We talked a lot about the different, you know, asset classes and even hyper-local markets and how you guys think about geographic regions and things like that. So, uh, where should we start? Where's like the, the entry point to all this data? Uh, is it a particular asset class or, or, or region? How do you, how do you think about it?
I think, I think let's talk about asset class. I think that's a
Okay.
to organize the thought. And we've, we've talked a lot about multifamily, um, you know, over the last few weeks, so we can kind of start with that one. Uh, as I looked at the data for each sector, I kind of, a theme emerged and I would say the theme for multifamily is gathering momentum.
Hmm.
if, if you look at. If you look at multifamily, um, it was subject to a pretty traditional, predictable dynamic. Um, when COVID hit, there was, there was some mobility people wanted to get out of the major cities in the Northeast and get to the southeast in the sunshine Belt, as it's called. And that combined with demographic trends and low interest rates caused a tremendous amount of development. Um, that all came home to roost in late 22, 23. Um, and you saw rent declines.
You saw project struggle to lease up because it was an oversupply in the market. Um, and, and there were some real headwinds. There were some investments that didn't turn out very well that were made in that 20 20, 21, 22 timeframe. What you see in the market now is, for example, rent growth is positive and just only slightly below the long term average. The long term average, uh, is a, is about 2.6% rent growth on average across the country, about 2.2%.
Hmm.
know, today, um, you, you've got vacancy up slightly in some markets up about. Um, you know, 2% overall to about 6.2%. Um, but you've also got a dramatic decline in new construction. New
Hmm.
in the multifamily industry is at a 10 year low right now. So what you see is it transitioning from a market that was out of balance in supply and demand to a market that's coming into balance. I don't think you'll see the kind of growth that you saw. in that 21, 22 period early coming outta the pandemic where rents were, there were markets where rent growth was 6 or 7% year over year. I don't don't think that's a normal state.
I think it was driven by the pandemic and some of the, effects of the pandemic. But I think you'll see it, you know, settle back in. And if you look at, I looked at about four different projections from CBRE, one of the major real estate firms in the country, Freddie Mac, Fannie Mae, Morgan. And what you see is all of them predicting rent growth this year in the 2 to 2.5 Range. JP Morgan's a little bit above that at 2.7%, and all of them are predicting vacancy rates right around the 6% range.
and feel like vacancies may peak a little bit later this year, but only a matter of a handful of basis points above where they are today. and then really stabilize. Um, so you, you've got, you've got pretty good fundamentals shaping up in the multifamily space. Um, and cap rates today are in the five and a half to five and three quarter range. Uh, they've crept up about 30 bips, 30 basis points in the last. Few months, uh, but seemed to be fairly stable. And that's a, that's on the high end.
I mean it, during the heat of the market, we saw cap rate sub four. Um, and so, you know, it's, it's, that's a, that's a crazy number in terms of the value of these properties. It's come back into a much more reasonable range now, you know, sub six, but, but not, you know, not way down in the low five. So, um. I, I think, I think you've seen net absorption go up by 46%. Um, you've seen rent growth stabilized. You're seeing occupancy fairly stable.
I think it's a clear picture that, that multifamily is sort of in the middle of that bottoming process. Um, and, uh, and I think the only negative in multifamily is that you're still seeing, um, negative leverage. You're still seeing. interest rates that are higher than the cap rates, and if interest rates will moderate a little bit more in the last half of 2025, which is at least a possibility, uh, I think you'll see that one negative go away in the market really start to get traction.
So, uh, maybe a little tough time to develop multifamily, uh, but certainly not a horrible time to acquire existing properties.
Cool. Interesting. Okay, that's helpful. So the theme with multifamily is gathering momentum C to B, maybe at the center of this bottoming period, possibly on its way up, uh, from ESSA's perspective, which is good.
Yeah, there, there's an outlier out there that I can't really predict and now I'm just gonna confuse people, but the, obviously the multifamily sector is tied to, the residential housing market.
Okay.
and today it's about $1,120 a month cheaper to rent, based on average rent rates for a two bedroom apartment than it is to buy. a, house that's a pretty big spread, but what you're starting to see in the housing market is you're starting to see some signs of weakness. Listings are way up, inventory's up. Prices are beginning to soften a little bit. somewhere in the neighborhood of 20% of all sellers we're willing to make a price concession to get the property sold. you're.
One of the things that's driven a lot of the demand over the last five years for multifamily has been the cost of housing and the cost of entry of money. That
Yeah.
cost of mortgages. those moderate a little bit, it may take a little bit of the wind out of multifamily sales, but I don't think it's significant enough to change the prognosis that it looks like it's really beginning to gather momentum.
Yeah. Okay. Okay. So is some of that complication also due to the, I, correct me if I'm wrong, but the, long dated maturities, long end of the curve for bond markets is still pretty elevated even though people thought maybe it was gonna. Come down a bit in this first, first half of the year, but it's still around 5%, I think, on the 30 year or 10 year or something like that.
So is that, is that kind of projecting, like pushing out that, um, I guess the, the positive outlook is, if that's the way I could say it.
Particularly in the housing market where you saw rates get
S
a little bit into the mid, sort of mid range sixes
mm-hmm.
you've seen 'em tick back up to around seven a little bit over what the housing market is telling you is 7% is too much. you
Interesting. Okay.
buying activity decline and inventories build every time, rates get around 7%. So, um, and, and unless. We get some rate relief. You're gonna see downward pressure on residential housing values, which may open up that market to some people who are prospective renters today, if that makes sense.
Yeah. Okay. Interesting. That's helpful to know that threshold 7% is something to, to look for at least on the mortgage rates. Interesting. Okay. Okay. What's the next asset class and, and theme you got going on?
gonna skip around a little bit. This one I won't talk about in great detail, but it's actually one of my favorites. Retail,
I.
for retail is stability. Um, what you saw was some, some short term pressure, um, you know, during the pandemic itself, when certain. of retail locations were shut down and, you know, people weren't going in there. But the ones that survived that have have done pretty well. And retail real estate's returned to normal fairly quickly. Um, and, and.
It, it, you know, the, the first pressure that it faced was all the, the buzz about all the online purchases that people were making, um, and how that was sucking the wind out of retail. And it, it did, it still has a real profound effect on mall properties and department stores. And, but the retail that I like more than any is grocery anchored shopping centers.
Okay.
although you can buy groceries online. 95% of all people still wanna go in the grocery store and, and go grocery shopping and grocery anchorage shopping centers have all of the neighborhood services that you can't get online. It's, you got, it's got your State Farm agent. It's got the, the nail place, it's got the, the pediatric dentist, it's got the veterinarian, it's got the, all the services.
Um, so a well located grocery anchored shopping center to me is, has been and continues to be, um, a great. A a. A great. Part of the real estate world, consistent demand, low vacancies. And interestingly enough, as I looked at some data, institutional investment in grocery anchor anchor chaplain centers is up 400%
Gosh,
of 2024. so, you know, you, you've got some real serious money that is looking at that grocery anchor space and, and, uh, and, and likes what it sees and has been deploying capital, you know, fairly, uh. Fairly aggressively. Um, lease volume growth, which is another statistic that you look at, is gonna be somewhat limited, but it's somewhat limited 'cause it's constrained by supply. The problem is you can't lease up a lot of stuff 'cause there's. Not a lot of stuff to lease up
Hmm.
if that makes sense. So the rent, the, the, the, the rent volume numbers are sort of flattening out, but that's really because there's so little supply in the market, there's so much demand, um, that uh, that there's just not room for a lot of lease, you know, new lease volume. Um, but you, you're seeing markets in some cases that are seen as much as 6% rent growth, um, in the retail space. And again. Retail's broader than just grocery anchored shopping centers.
Um, the general retail space, all these dynamics apply, but they're probably especially, um, uh, pertinent to the grocery anchored space in retail, which is again, um. I've owned several grocery anchor chap centers over the years and just developed one, um, outside Charlotte, North Carolina in the last few years. Uh, and I'll tell you, it's an interesting thing and we'll get off this one.
'cause this is a sort of a, an offshoot category, but we had a, the development I've talked about before, we bought the land in 2006
Mm-hmm.
we had a site plan. We, we battled through a zoning battle that took forever after we had to hold the property forever. Um. had a site plan that we thought would work, but we were having a little bit of initial trouble leasing up some of the other retail space in this mixed use development. It was 160 apartments. Um, and we had a daycare planned on the site and then about a
That's cool.
feet of retail. Um, along the way we were approached by a grocer in the Charlotte Market, Harris Teeter, and they moved. Too slowly, but that sparked us to talk to another grocer, Lowe's Foods in the market. They very quickly loved the site. President visited, signed a lease, and that grocery anchor transformed that entire project.
Wow.
Um, we, we, we leased up the, the, the rest of the commercial space and record time. Because of the rooftops that surrounded that property and because of the value of a grocer tenant in that muse development, it really flipped it on its head. And, uh, and, and now even the people that fought us in the zoning, there's a neighborhood adjacent to the property that, um, really, really battled hard in the zoning battle. Um, the convenience of being able to never leave their neighborhood.
Our, our development is connected to their neighborhood by a road. They can never leave the development and go to the grocery store, stop and get. Stuff at other retail locations would be back home in five minutes. They absolutely loved the project, but it was
Yeah,
to get there. So anyway.
that's huge. That's huge. It's interesting that it takes that. One thing that if you can get that anchor, it flips everything. And I totally get it. I live in kind of a food desert where uh, everything else is walkable except for a grocery store, and I really wish there was a grocery store right here.
Yeah. Yeah,
Cool. I love that.
is retail. The, the theme for retail is stability. It has been fairly solid, um, you know, in more recent, over the last two or three years and remain so, and particularly the grocery anchored space, um, you know, is seeing a lot of inflows of capital. Um, so really good values there. And, uh, and, and it's just a product that won't be replaced. And so I, I think it's an excellent area to look, um, the, the next. Sector up is industrial.
And I would say the theme for it is, it's fundamentally sound. you, you've got two parts of the industrial space in the terms of we think, uh, how we think about it. One is the general industrial space, which is really a hundred thousand square foot properties in up that space. Had its own COVID impact. Um, you know, COVID drove a lot more online purchases and caused companies to really rethink their supply chains and their logistics.
Um, and so there was a tremendous amount of demand for general industrial space coming outta COVID. Uh, low rates fueled everything that we're talking about in that timeframe. When you saw, you know, when you could go borrow money at 3%, everything, every deal was easier to pencil. Um, and so the, the, the, the. The importance of logistics and supply chains and the shifts caused by COVID combined with a lower interest rates caused, um, a little bit of oversupply in the general industrial space.
Um, so it, it had its sort of hiccup in 2023 rolling into 2024, but you're now seeing that balance out a little bit. Um, development has slowed. Um, and, and we're really getting back to the pre pandemic sort of balance between supply and demand. Um, so general industrial is, is, uh, is stabilizing with. With, um, vacancy rates in the seven to 8% range, which is a fairly low number. Brothers see it around 95, you know, around four to 5%, but still not way off.
Uh, where, where you'd like to see it? The small Bay Industrial. I. Which is the product we build, um, continues to be extraordinarily strong. I, I would tell you that it's ultra tight in most local markets. Um, national vacancy is around 3%, so, you know, 400 basis points lower than the general industrial category. Um, and it's interesting, I, I was trying to.
Look at data and get a feel for why there was such a supply problem in that small bay industrial, um, And part of the answer is developers like to do bigger projects.
Okay, tell me more.
the, um, there, there, it's, it's just a matter of efficiency. If, if I can build a million square feet, um, and lease it, that's in one project, that's easier than, than building, you know, our typical small bay business park will run. A hundred thousand square feet. So I'd have to find 10 pieces of land, get it zoned 10 times,
Yeah. Right.
10 separate projects to get to a million square feet. So I, I think there's a little bit of that. It was just an interesting comment I read, um, in doing a little bit of research, but, but overall, the industrial category is returned to sound fundamentals and the small base space. Continues to just be as hot as a $2 pistol. in most markets, it literally, in Las Vegas, there is zero availability, just one market to, to pick on.
and like you said, with a 3% vacancy nationwide, a product and it's, The people we've talked about before, it's local and regional service providers. It's last mile logistics. It's internet based businesses. It's light manufacturing. And now there's even a trend, although we haven't really gotten involved in it, of, man cave, uses for these industrial spaces. Guys that wanna put their, their, cars and their toys and, maybe create a living room environment and have a place to get away to.
I, several people have talked to me about it. I, just. I, hadn't been able to wrap my head around that, but apparently it's a use that's becoming more common in that small bay industrial space,
Interesting. I feel like this is something you should follow that rabbit trail and see what's up with that. 'cause that's, a fascinating factoid. Interesting. And you've mentioned before, I think too, of like batting cages. Is that something you've talked about before too? Things like that? Yeah. Yeah. Yeah.
After building this product since 2011, and almost all of our tenants being the people I've already described, local regional service providers, HVAC, contractors, plumbing contractors, car repair, providers. Last mile logistics, all that. In the last year, we have seen more retail or consumer facing uses for the space. The explosion of pickleball is a sport
Yeah.
sport in America.
Yep.
have two of our 20,000 square foot buildings that we would typically divide and. You know, 3000 square foot bays and have multiple tenants in, um, have actually we've leased the entire building into a pickleball operator and finished it out as a private pickleball club
That's crazy.
and a restaurant and a bar and non, you know, indoor
cool.
courts on the bottom. We've also seen the batting cape. We've had. Two facilities we've leased to batting cage operators, um, that, you know, that want 15 to 20,000 square feet at a pop where they have batting cages and they often have a workout sort of area. 'cause they're training with these younger athletes and so they're lifting weights and, and doing drills and that type of thing in addition to just, you know, hitting baseballs. And so anyway, it's been some very unique uses for that space.
So it's,
How interesting.
space. It's super flexible. That's one of the reasons why it's in such demand in almost every market in the country.
Yeah, I was gonna say, it's like, it's almost like the confluence of many different trends that if you say like, you know, the rise, the, the, the internet. Businesses, if you will, over the last couple of years, there's an increase in entrepreneurship in general, which, uh, has fueled, I'm sure a lot of this, but also the, the logistics, the e-commerce thing, people need little warehouses and fulfillment centers, things like that.
And then you get this consumer demand, if you will, the man caves, the, the batting cages, the pickleball cords. I think it's fascinating. Yeah.
And, and people who, I mean, I think people who aren't in the business think about self storage and they picture somebody like you or me moving our stuff into a self storage unit.
Mm-hmm.
is every one of our self storage. Facilities has a pretty significant business customer base, um, where businesses are keeping inventory in a self storage facility or if they're a landscaper, they're actually running their business out of a self store. They keep fertilizer and lawnmowers and stuff like that in the self service. And so, which is why we build. Self-storage and office industrial flex, or small bay industrial side by side. 'cause there's actually some synergism.
You get a customer in the self-storage facility that his business begins to grow. He needs more space. He can literally move on the other side of the fence into one of our office industrial Flex Bays. And we wind up with flex customers who need even more. You know, warehouse space, and they've got the 2000 square feet, they've got behind their a thousand square feet of office and they rent a storage facility.
So there actually is some synergy between the two that wouldn't really be obvious unless you're kind of in the business.
Yeah, that makes sense. I have a friend who runs a jewelry business and is, uh, getting out of his, uh, house because of so much inventory, he's gonna put that in some self storage kind of flex space. So. Yeah, it's, it makes sense. I love that. Okay, so we've got, uh, multifamilies gathering momentum. Retail is, uh, a point of stability and industrial is fundamentally sound. What's next?
Office continued
uh, a sour point in Yes. Real estate. Yes.
a great job of stringing it together, but where each of these markets is today is directly related to dynamics that were created as a result of COVID. None is more directly correlated to what happened in COVID than office. And it's obvious, right? Um, it, it, the technology was already there, Lockdowns during COVID. Really it just caused an explosion in the remote work world. and people have been very hesitant to go back to, the office, so to speak.
right now, The the expectation is that vacancy in the office market will peak in 2025 about 19%. that's a pretty significant. Vacancy, rate and I said 2025, it's actually gonna peak during the year 2025 at 19%. The data shows that it will continue to climb and actually finally peak and maybe start down in 2026. and there's a of pressure on older. Class B and Class C properties.
The Class A properties in core markets like Los Angeles, New York, Dallas-Fort Worth, Miami shown a little bit of sign of stability lately. but the, Class B and class C properties and anything with age on it, is facing real headwinds. And right now, today there's $175 million, so 175 million square feet of sublease space available in the market. also interesting to note that, That, are down dramatically, which is part of the recovery process, right?
When a market gets sideways, like office has, doesn't make sense to build new property. So slowly over time or sometimes quickly, that excess inventory gets absorbed. The market begins to stabilize, and, um, starts this year in the office world will be about 17 million square feet, the average. Starts on an annual basis. Over the last 10 years have been 44 million square feet,
Wow. Okay.
so I, I didn't do the math, but that's a. 60% decline, something
right? Yeah.
Um, so you're seeing the market, the, the, the development market react to what's happening with office, um, today and, and really, you know, pull back in terms of building new space. Um, another interesting dynamic in the office market is that the large companies, more than you know, 10,000 employees are the ones that are downsizing and abandoning office space.
Okay. I was just about to ask you a question that I, I was thinking maybe it'd be the reverse.
It's actually the, uh, the, the, uh, companies with less than a thousand employees are the ones that are expanding their office space. The, the amount of office space they're absorbing, they're growing, they're adding people. Um, probably have, this is an opinion, or not even an opinion, I thought. Um, but they probably have a little bit different cultures, you know. Um, and so people are, um. likely to give into the request that they come and work from the office.
Um, but so it's a, it's a, it's an interesting market. There are some people that are saying that they're seen early. Signs of recovery, leasing activity is up a little bit. Um, and there are some people out there that really focus on the office market that think you're starting to see the very, very beginning of a stabilization process. But unlike multifamily, where it's gaining momentum, office is a year and a half to maybe two years behind where multifamily is just as a point of reference.
So, um. it's, it, it, it may be entering the bottoming cycle, whereas multifamily is in the heart of the bottoming cycle. That's where that year to year and a half gap between where they are in their cycles probably exist.
Okay. I have. Not even an opinion, but a thought, uh, where, so office is in a continued challenging environment and you've got Class A structures doing okay in major markets. And my thinking was, oh, well, because they're. Typically really beautiful offices. You go to these big fancy, nice places with a, at a big tech company, for example, and they have coffee and you know, shopping around and all that kinda stuff. And so it's, it's attractive for people to go into.
So these bigger companies are. Paying top dollar for these places, class B and C not doing so well. 'cause they're older people are less likely to want to go. Um, but what you said was these larger companies are the ones that are actually shedding office space and smaller companies are growing office space. So yeah, I'm just fascinated by why that might be, but also why the, the peak might be coming, let's say in the next 12 to 18 months.
Uh, yeah, I'm just, I'm just fascinated 'cause one storyline out there is that Gen Z uh, workers want to be in the office because they want that mentorship and camaraderie and things like that, that millennials and older already got. So they're fine working at home 'cause they're mid-career Gen Z wants to be in the office. So that's, they're actually more excited to be back in. So, I don't know. There's so many different storylines. I'm, I'm interested in.
Yeah, it's a, it's a, it's a, it's a confusing market. I mean, quite frankly, um, it's a market I'm not interested in.
Okay. Yeah.
I, um, because, because there are, you know, four other sectors in the real estate world where. Sort of where they are and where they're likely to be going is more clear.
Yeah. Right.
I I, I, I think there's probably going to be an opportunity as this shakes out. I think it's early. I think you are a year to two years away to pick up some Class B You know, add a good value. But as there is in every market with this kind of thing happens, there's a dislocation between what buyers are willing to pay and sellers are willing to take.
Right.
market has not worked out that dislocation yet. So sellers are still wanting, you know, prices based on a, you know, an earlier time. And buyers aren't willing to pay that. So you're seeing transaction volume, you know, decline. Um, you know, month over month. Um, only transaction, not, not only, but I mean there are you, you, you've got some people that get backed in a corner.
Um, you know, that, that from a, you know, a debt standpoint where they've got maturities coming at 'em and they can't refinance because they're running it, you know? 80% occupancy, um, that are forced to sell, um, you know, in creative sort of deal structures. But the normal transactions between a buyer and seller, um, just aren't happening because there's a real dislocation in the office market.
They'll, they'll be a point where it'll break you'll be able to pick up a Class B or class C. You know, property in the right market at a good value that makes economic sense and have an opportunity to really see the value of that property grow above what you paid for it over time. But I just don't think we're there yet.
Yeah. Yeah. The work from home debate is still unsettled, so we'll see.
yeah, yeah. It's, but you know, that's the one that, that suffered the most direct from a real estate standpoint,
Right.
impact. Um, you know, uh,
Yeah,
was the office market and, and it's still trying to figure out. Where it's going.
yeah, yeah. Makes sense. Makes sense.
hospitality only really briefly. I didn't dig deep. Um, not a lot of data from me there. Um, but if you look at it relative to COVID, it was a very severe short term impact.
I. Um, you know, with during COVID, during the lockdowns, you know, it was a, a very severe impact on the hotel industry, but if you were able to survive that, it rebounded pretty quickly and it rebounded in a positive way because I think we were all so by inability to travel and be mobile during COVID, that people have done more of that post COVID.
Yes. Right.
and, and the hospitality industry has, has benefited from that. When I say hospitality, I didn't look at at restaurants and that type, I'm really talking about hotels.
Mm-hmm.
occupancy today, on average in the hotel industry is about 63%, two point a half points below the pre COVID occupancy. But rates and revenue per room above pre COVID levels. So what you're seeing is a return to solid profitability, even though occupancy is down, um, just a little bit. Um, and so the hospitality market, you know, is, is pretty stable actually. Um, I didn't look a lot at supply and demand, uh, and development, um, because it's just a, it's a asset class.
A lot of people don't look at as an investment. Um. and it has a very operating dynamic, right? You think about the stratas of real estate, if you're in the grocery Anchorage shopping center business, you know, your anchor tenant has a 20 or 30 year lease. Um, if you go to the hospitality industry at the other end of the spectrum, your tenant base turns over every night.
Right.
and which is also why you see generally higher cap rates in the hospitality industry because the cap rates were a reflection of the, um, likelihood of the, the continuance of the cash flow stream. And when you, when you literally turn your customers over every night, it's more volatile than a 20 year. Leased with Kroger.
Yeah, that makes sense.
that's a whole different conversation.
Yeah. Yeah.
but, but hospitality is, is fared pretty well and, and, and seems to be kinda leg spread wide. And, uh, again, occupancy's a little off. That's probably due to some of the new supply that's coming into the market. Uh, but overall profitability solid. Across the industry and, and, and looks pretty good. Um, I, I saved the, the one selfishly other than, um, the small bay industrial, uh, storage I saved for last. Uh, we've talked a lot about it. Don't need to beat it to death, but it's stabilizing.
It's absolutely, um, stabilizing and it, it, it suffered a very interesting rollercoaster ride because of COVID. We've talked about this before. The use of storage exploded when COVID hit. for obvious reasons. Um, people were cleaning out bedrooms to make offices out of them so they could work from home, or they were just bored and they were at home and they were cleaning out the garage in the attic and, you know, whatever. Um, occupancy went well north of 96%. You know, some markets, 97, 98.
that combined with low interest rates spurred a ton of development that started in 2021. End of 2022, the headwind started to show up in sort of mid 2023 as rates. There were downward pressure on rates because of the oversupply. Um, and we had a 28 month period where year over year rates, street rates advertised, rates declined. So, um, if, if you bought a facility, you know, in 2022.
Late 21, 22, what you had happened to you was you saw cap rates expand, which meant the value of the property went down and you saw your revenue decline over month for 28 months in a row. And if you bought a property in 21 or 22, you probably, are sitting right now at about. A 30% decline in the overall value of that property today
Gosh.
were to sell it. however, the market is stabilizing. Street rates have stabilized, they're starting to move upward. and as it does in, almost all markets, you're development has slowed dramatically. today the pipeline inventory is about 2.8%. of current stock. So it's, when we started talking about this a year ago, average it was about 3.2%.
So you've seen it decline from 3.2% of current stock to about 2.8. the projections that Yardi and, the people in the industry are doing show new supply at about 2.3%. in 26, 2% in 27, and then further decreases, but they're far enough out. They're not really willing to put a number on them from 2028 through 2030. you're, seeing a fairly consistent, I wouldn't say steep, but steady decline in development activity as rates begin to stabilize.
And that oversupply that came out of COVID gets absorbed. and if you're developing, like we do. I certainly care what rates are and I certainly care what occupancy are occupancy numbers are when we're leasing up a facility, I don't give a darn about cap rates. Um, and I don't really care. Um, uh, it takes four years to, to lease up a storage facility.
Yeah. Right.
if, if we break ground today, that facility is not gonna be stabilized and leased up for four years and. So the continued decline in, in development activity, the, the strengthening of the rates all tell me that in four years we're gonna be sitting in a pretty good place. Cap rates will compress again. Um, and I think the values will be, you know, I think the values will be attractive. Um, if you, like I said, if you, if you.
If you're buying something today, little different story or if you bought it two years ago, but as a developer, that four year timeframe and, and what happens to us if, if the market's a little slow, is, it's not that it doesn't lease up, it just takes us four and a half years or five years to get to stabilization where we can sell the property. And the good news is, although that does absorb a little bit of capital to carry a property a little bit longer than you may have projected.
Um, it's not a significant enough capital to really materially impact the returns. It'll lower the returns a little bit if we have to hold a property for five years instead of four years. But generally speaking, that drag on cash flow that a little bit slower lease up causes, um, is not. Doesn't have a profound impact on the, on the terminal returns to, to investors. So, um, you know, the, the storage market is stabilizing and we're seeing that happen right before our eyes in 2025.
And, and I think 26 through 30 looked like a really good timeframe to be in the storage business. So,
From, from a developer perspective as well as an investor perspective, right? So if you're speaking to investors and wanna summarize all these themes where you've got multifamily, retail, industrial office, hospitality and storage, and, those are most of which are either in the stable. Or gathering momentum kind of phase, this is a good time to be an investor. Is that right? what's, your overall take to, to, if you were to talk to investors right now?
I think it's an excellent time to be an investor, whether you're, I, think the timing, if you're buying an existing property is a little more critical. I. and so that varies a little bit between the sectors in terms of where you are in the timing. If you're developing, I'm pretty comfortable. I, think multifamily, is attractive. I think it's a great space to be in. I think self storage is attractive. I think office. Too risky right now. I'm not ready for it.
I think industrials sitting in a good place, right behind, the, multifamily and storage. and I, think retail didn't see the, volatility up and down. So I think it's a solid place to invest. I don't think you're gonna see the same returns that you'll see from multifamily and storage. but I think it's a solid place to invest if that's, And they're often, particularly if you're buying an existing property, often very attractive from an income standpoint if you're an income oriented investor.
it's a product that provides attractive cash on cash returns and has some real intermediate to long-term stability in that cash flow stream.
So I hear good news. I. Hear pretty, green lights, so this is good. Okay?
we're feeling, we're feeling good about what's happening across the market and excited to see our brethren in the multifamily, uh, world get up from the, you know, from their knees. They got beat up a little bit over the last few
Yes, yes. Yes, well, the future is uncertain. Um, but it seems really promising and hopefully, you know, markets are kind of stabilizing right now. I know at least in the equity markets, things are kind of up and down, but, uh, I hear, I hear good things. People are excited about the back half of the year, so, um, so hopefully that's the case in real estate for sure.
I, I think 2025 is a year where everything kind of gets its legs under it and, and, and is in the starting blocks, and I think you'll see it. Assuming there's some reduction in interest rates and assuming something doesn't happen on the geopolitical stage that you don't see coming.
Uh, I think, I think now is a great time to be looking at opportunities and, um, and starting to deploy capital and plan on, like we talked about, I. I think in last week or the week before, sort of spreading that capital over a period of time, you'll never hit the bottom Exactly. But if you're invested in storage in multifamily, and you do it consistently over the next two years, across multiple deals, I think you've hit the time about as well as you could.
I love that dollar cost averaging as they say. So. Okay, well, uh, I don't know about you guys, but I'm gonna follow the smart money of, uh, Paul Bennett and see where we can go from here. So Paul, I always leave our conversations so encouraged and, uh, this is, uh, not an exception. So thank you so much for your wisdom. I know you spent a long time pouring over this data to, to help us out as novices, as peons, you know, listening to. So you kind of go through all these things.
So appreciate your outlook and your perspective as always, and uh, we'll see you next time.
It is always fun, buddy. Thanks.
Alright, man. We'll see you.
Take care.