National Economy

• The historic post-pandemic recovery faded into the rear view entering 2023, as the byproducts of robust fiscal and monetary support early in the health crisis came to light. An aggressive federal response to shore up national economic conditions in 2020 and 2021 allowed business and consumer demand to bounce back ahead of global supply chain headwinds, creating heightened inflation that persists into this year.

• Companies across various industries are bracing for economic hurdles in 2023 by tightening hiring goals or enacting staff layoffs. This year, periods of net employment contraction are likely, mixed with stretches of positive hiring activity. This combination will produce a mild rate of overall payroll growth for the full year that is unlikely to keep pace with the expansion of the labor pool, lifting unemployment.

• During a more difficult period for finding employment, some young adults graduating high school or college may delay entering the work- force. This would reduce household creation and self-storage needs within this cohort. Nonetheless, a temporary stall may generate pent-up demand for young adults to find jobs and form households in the coming years.

National Self-Storage Overview

• In the wake of the COVID-19 pandemic, the rise of remote work and the migration it allowed to less dense and costly cities fostered a historic period for self-storage. Entering 2023, however, most major metros reported stagnant rents and rising vacancy as demand cooled.

• While a growing retirement age demographic and millennial cohort progressing through higher-income earning years act as long-term sup- ports for the sector, the near-term outlook is more clouded. Though retail spending proceeded at a commendable pace last year, inflation-wea- ry consumers will likely begin to pare back purchasing in 2023 if annual price gains remain above the historical norm. The 2021 migration wave also appears to have abated, evidenced by attrition in the single-family and multifamily housing markets.

• Property fundamentals will be aided this year by annual supply additions that will fall well below previous peaks witnessed in 2018 and 2019. Mounting interest rates could present headwinds to construction financing as well, potentially weighing on development by year-end.

Capital Markets

• After being exceedingly accommodative during the pandemic in 2020 and 2021, the Federal Reserve began to markedly tighten monetary pol- icy last year in order to combat high inflation. The central bank raised the overnight lending rate from a zero lower bound in March to above 4 percent by year-end. The most rapid succession of interest rate hikes since the early 1980s has successfully dampened inflation, but disrupted financial markets and hindered commercial property investment sales. Conditions should improve once interest rates stabilize.

• Bolstered by strong pandemic performance and a favorable long-term outlook, capital continues to be available for self-storage acquisitions. Elevated borrowing costs are nevertheless acting as an impediment to closing transactions.

Investment Outlook

• Though increasing capital costs impacted investment across all commercial property sectors last year, a notable portion of buyers continued to pursue self-storage opportunities, aided by fundamentals outperforming pre-pandemic norms. High-growth metros, in particular, should continue to see capital inflows, as migration supports an active user base in these areas.

• Additional investment interest, paired with tighter cap rates, has prompted many traditional storage investors to expand their selection criteria, pursuing properties in smaller towns or farther away from major urban centers. Buyers following the demand fostered by a growing 65-plus cohort will target not only major Sun Belt markets, but also satellite metros, such as Tucson and Fayetteville.