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The self storage sector is thriving thanks to changing migration patterns and evolving consumer behaviors that owe largely to the COVID-19 pandemic, pushing the niche asset class “from a laggard to a leader,” according to senior economist Thomas LaSalvia of Moody’s Analytics REIS.

The sector’s pre-COVID woes are well-documented: too much development, which began in earnest at the end of the Great Financial Crisis, pushed rents and occupancy rates down with a vengeance.  And while net absorption averaged 196,000 units per year from 2019 through 2019, “this wasn’t enough to balance the inventory gains that averaged 311,000 units per year during the same period,” LaSalvia writes: during that time, vacancy rates pushed up to 14.5% from 10.4%.  And since the asset class has a low barrier of entry for investors, he says, it tends to have higher peaks and lower valleys than other sectors.

“At the end of 2019, the market was in one of these valleys,” LaSalvia recently told Scotsman’s Guide.  “The COVID-19 crisis turned out to be the shot in the arm needed to jolt the sector out of its malaise. During the early stages of the pandemic, the self-storage market gained stability that it maintained throughout the course of 2020.”

Specifically, construction slowed down and netted only 40,000 units completed by the end of Q1 2021.  Meanwhile, net absorption grew to more than 100,000 units during the same period and vacancy plunged 90 basis points to 13.7%. Annualized rent growth grew to 2.9%.

Investors are increasingly seeing the self-storage sector as an opportunity to diversify, and overall self-storage sales tallied $7.7 billion last year, one-third higher than 2019 numbers. Single-asset sales rose 13% year-over-year to $3.5 billion, and the number of unique investors also rose to an all-time high by year’s end.

LaSalvia attributes the change in part to changing migration patterns, as well as negative economic pressures and changing consumer tastes.

“The pandemic has undoubtedly accelerated the acceptance of a remote-work lifestyle. This phenomenon has prompted migration, a well-cited and rational factor for self-storage use,” LaSalvia says. “Moving forward, self storage will continue to reap the benefits of migration and catch the tailwinds associated with a strong economic recovery. As people adjust to post-pandemic life, many will find new locations to better fit their new lifestyles.”

 

Source: GlobeSt.

 

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The COVID-19 pandemic has forced the South Florida real estate industry to rethink the answers to a range of questions, including how buildings are designed, how goods are delivered, and where and how tenants want to live.

Here are the top 3 emerging trends local industry leaders are watching.

1. Outdoor Space Is Desirable

Retail stores and restaurants took a big hit as shutdowns, restrictions and health concerns changed consumer’s spending habits. Instead of going out to eat, people stocked up on food and avoided in-person shopping, causing a surge in online sales.

Jonathan Carter, executive managing director at Colliers International, says there are a number of deals being done to adapt current spaces to modern environments. And while outdoor environments and open-air concepts in retail stores and restaurants were trending before the pandemic, now there’s a bigger emphasis on it.

“If you had told me in August where we would be today, I wouldn’t have believed you,” Carter said. “The market has gone from having almost no tenants, to what he would now consider a landlord’s market. Landlords who previously had space with a lot of outdoor areas that weren’t perfect, suddenly those spaces are in demand.”

2. Drive-Thru Operators Are Thriving

Last year, the rise in demand for food deliveries, curbside pickup and drive-thrus at quick-service restaurants has been especially prevalent in South Florida, according to Zach Winkler, executive vice president of JLL’s South Florida retail brokerage.

“The demand for more drive-thrus is probably more intense here than any part of the country,” Winkler said. “I think it’s part of the way the restaurant world has shifted a little bit.”

Winkler said sales have remained strong for fast-food restaurants like Louisiana-based Raising Cane’s, and he expects to see an expansion of the chain in South Florida.

“Their sales remained very strong during COVID, and the fact that they’re one of the most efficient drive-thru operators out there,” Winkler said.

3. Offices Are Morphing

As large amounts of people continue to migrate to South Florida and many others prepare to return to the office after a year of working from home, companies are looking at different models for remote and in-office workers. With social distancing changing the way people interact with one another, employers want to give their employees more space and a healthy environment.

Jonathan Kingsley specializes in office and industrial representation of landlords at Colliers International, and he said returning workers are typically getting more square feet per person, while offices are being redesigned.

Remote work is here to stay, but Kingsley feels it won’t be on the scale everyone thought it would.

“Certain employees are absolutely required to work in the office 100% of the time,” said Kingsley, “There’s a second-tier in which there is a three-day at the office, two-day at-home model, three-day at home, and two at the office, and then there is another model where you work from home 100% of the time.”

Click here to for the remaining emerging trends.

 

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The US commercial real estate market is looking very cheap to foreign investors, who find their currency hedging costs aligning nicely with the direction of interest rates.

Currency hedging costs are driven by interest rate differentials between two currencies. Low US rates translate to lower costs for foreign investors looking to hedge the currency risk of their US investments. Here is why this dynamic is expected to continue.

 “Short-term and medium-term rates drive hedging costs,” Ciccy Yang, director of Global Markets for Hudson Advisors told listeners in CBRE’s weekly podcast. “And on that front, the Fed’s been giving very strong hints that more fiscal stimulus is needed to keep the economic recovery on track.”

If the stimulus is less than what the Fed prefers, Yang thinks it may have a more significant role in spurring the recovery. Its tools include more quantitative easing for an extended period and a further delay on the next Fed hike.

“The Fed currently forecasts that they’re going to be on hold until the end of their forecast horizon at year-end 2023 as per their dot plots,” Yang says. “In other words, they’re already forecasting short term rates will be bound to zero for quite a long time. Now, we already saw significant hedging cost declines from the beginning of this year when US rates fell significantly in the flight to quality and Fed easing on the back of the onset of COVID-19.”

The five-year annual hedging cost for Euro-based investors in the US has fallen 100 basis points this year to 1.2% today, according to Yang. In the same period, it has fallen 50 basis points to 2.6% for South Korean investors.

“There probably isn’t that much more room for these levels to fall further,” Yang says. “But given the likely expectation of accommodative Fed policy, it does feel like the lower currency hedging costs are generally here to stay in the near term.”

So far though, foreign investors are, for the most part, not biting.

In Q3, cross-border investment fell 71% year over year to $3.5 billion, according to Real Capital Analytics. This is still better than the low of $0.5 billion seen in the depths of the Global Financial Crisis.

The drop-off in cross-border investment might be partially the result of the types of properties being sold. Cross-border groups find it easier to purchase larger properties. Sales for assets priced greater than $50 million fell 61% year-over-year in the third quarter, while properties priced $5 million and below fell 39%, according to RCA.

Some foreign CRE investors, however, are stepping up their US  allocations. In the first nine months of the year, Korean investors accounted for 8.6% of all overseas investment in U.S. commercial real estate, up from 3.7% a year earlier, accordingto the Wall Street Journal,  citing Real Capital Analytics numbers.

South Koreans invested $1.56 billion, up from $1.24 billion a year earlier, trailing only Canadian and German investors, the WSJ said. A year ago, South Koreans ranked 10th among foreign investors in U.S. real estate.

 

Source: GlobeSt