Adapting to Rising Interest Rates: Strategies for Investing

Understanding the Effects of Interest Rates on the Self-Storage Industry

Today, we'll be discussing a very important topic in the self-storage industry: the effects of interest rates on self-storage investments. My experience in the self-storage industry has helped me gain valuable insight into this topic and today, I want to focus on some big questions that come up for people - new and experienced - regarding interest rates and their self-storage investments.

Interest rates play a crucial role in the self-storage industry, and it's important for investors to understand the impact that rising interest rates can have on their investments. As interest rates rise, it becomes more expensive for people to borrow money, which can have a ripple effect on the overall economy and the real estate industry. With this basic understanding in mind, let’s take a closer look at the effects of rising interest rates.

The Impact of Rising Interest Rates on Self-Storage Investments

One of the most common questions we receive is whether rising interest rates are positive or negative for the self-storage industry. The answer is not a simple one, as it depends on several factors.

On one hand, rising interest rates can be positive for the self-storage industry, especially if people are downsizing from their homes. As interest rates rise and force people to leave their houses, they may need to find a place to store their belongings. This can create an increase in demand for self-storage facilities, which can be positive for investors.

However, rising interest rates can also have a negative impact on self-storage investments. As interest rates rise, the cost of borrowing money increases, which can lead to higher mortgage payments and lower cash flows for investors. This can be particularly challenging for investors who have purchased properties at a high price point, expecting interest rates to remain low.

The Importance of Understanding Interest Rates

Understanding interest rates is crucial for self-storage investors, as they can have a significant impact on the value and profitability of their investments. Investors should pay close attention to interest rates when making investment decisions and should be prepared for the potential impact of rising interest rates on their investments.

In addition to monitoring interest rates, investors should also consider other factors such as:

• Market Conditions 
• Location
• Competition 

When evaluating self-storage investments, it’s vital that we pay attention to these factors. By taking a holistic approach to investment analysis, investors can make informed decisions that will help them maximize the value and profitability of their investments.

How Interest Rates Affect the Self-Storage Industry

As someone with experience in the self-storage industry, I have seen how economic factors can affect the industry's income. Previously, we have discussed how the recent rise in interest rates has impacted the industry. Let’s dive in a bit more to help gain a better understanding of it all.

To understand the future of interest rate impact on the self-storage industry, we need to understand the past. The Great Recession created a boom in the self-storage industry because many people lost their homes and needed a place to store their belongings while they figured out their next move. However, the recent rise in interest rates has had the opposite effect. Because of rising rates, mortgages have gone up substantially. Over 93% of all in-place mortgages in the United States are under four and a half percent interest rates on a 30-year mortgage. This means that even with the rise in interest rates, most people's mortgages are still manageable. As long as they don't need to refinance or move, they are okay.

This means that, despite the rise in interest rates, mortgage manageability has remained approximately the same. This creates a stagnation effect in the self-storage industry.

The Problem with Rising Interest Rates

The problem arises when people need to move or buy a new home. With the rise in interest rates, homes have become unaffordable for many people. This is not good for the self-storage industry. Self-storage facilities make their money from movement, and when people are not moving, the industry suffers.

Occupancy Drops

As a result, there has been a significant drop in occupancies in the self-storage industry. The housing market shut down in the fourth quarter, and occupancies followed suit almost immediately. This has been the biggest drop in occupancy that the industry has seen in years.

Adapting to the Change

The stagnation effect is not permanent, and as the economy stabilizes, people will start moving again, and the self-storage industry will pick up. In the meantime, there are ways that the industry can adapt to this change. One way is by offering incentives to existing customers to stay with the facility. This can include discounts, loyalty programs, or referral bonuses. Another way is by focusing on marketing efforts to attract new customers who might be downsizing or looking for extra space.

Interest rates play a critical role in the self-storage industry, and investors must understand the potential impact of rising interest rates on their investments. While there is no simple answer to whether rising interest rates are positive or negative for the self-storage industry, investors should consider various factors such as market conditions, location, and competition when evaluating self-storage investments. 

To recap, the recent rise in interest rates has created a stagnation effect in the industry, leading to a drop in occupancies. However, the self-storage industry can adapt to these changes by offering incentives to existing customers and focusing on marketing efforts to attract new customers. As the economy stabilizes, the self-storage industry is expected to pick up again. Overall, a holistic approach to investment analysis and a deep understanding of the impact of interest rates are crucial for investors looking to maximize the value and profitability of their self-storage investments.