We are currently in a unique real estate environment.
Due to the lockdowns associated with the COVID pandemic and the resulting monetary policy initiated by major governments across the world, inflation has become the focal point on everyone’s mind. Loose spending habits and fiscal stimulus have caused an imbalance between the supply of goods and services and their respective demands causing rampant price increases across industries.
This has triggered a response from the Federal Reserve to increase interest rates at a rapid pace in the hope of reducing the cost of goods and to curb demand to more normalized levels. However, as a result, a phenomenon called the Golden Handcuffs has emerged.
The concept of Golden Handcuffs refers to a situation where property owners are reluctant to sell their assets because they carry low-cost, low interest rate mortgages. In recent years, the real estate market has experienced historically low interest rates, particularly in the realm of single-family homes. According to the Wall Street Journal, roughly 75% of homeowners carry a mortgage on their home with interest rates below 4%. Now, since interest rates have risen so rapidly, many homeowners are electing to stay put in their current home rather than get a new, more expensive mortgage and move into bigger houses.
Because of the Golden Handcuffs people are experiencing, many states across the country have seen an increase in the price of single-family homes despite the major run up in pricing already experienced during COVID. This can largely be attributed to the extremely constrained supply of single-family homes on the market exacerbated by the current higher interest rate environment. Though many believe this phenomenon only impacts single family homes, it has massive effects – to the upside – on the self-storage industry.
Impact on Self-Storage
Self-storage refers to the business of renting storage units to individuals and businesses in need of extra space. It has gained immense popularity and recognition as a lucrative investment sector over the past few decades. The industry boasts impressive growth rates and a consistent cash flow, making it an attractive option for investors seeking stability and long-term returns.
The self-storage industry is unique in that it is largely associated with and connected to other real estate industries like multifamily and commercial properties. When one rents a self-storage unit he or she is generally doing so as an extension of their apartment, business, or house. If people believe they have outgrown their current living standards but don’t want to pay for a bigger house, they will instead rent a storage unit to compensate for the lack of space. As you can imagine, a 10 x 10 or 5 x 5 storage unit is far more affordable than purchasing a bigger apartment or home for one’s family.
Right now, it costs about 7% to get a new mortgage on a residential home. Current homeowners with a 2%, 3%, or 4% mortgage are going to flock to self-storage units as their families grow and their needs increase. Instead of renting a much larger, more expensive apartment or purchasing a new home at double the cost, why not simply rent storage to house those extra goods?
That is exactly what is happening.
This phenomenon will continue to persist so long as interest rates remain elevated. Unless the supply of single-family homes increases substantially and prices go down across the nation, the self-storage industry will continue to experience outsized gains.
At Safe Storage Investors, we are sticking to our namesake and are only focusing on the most opportunistic areas with steady and safe growth rates. By investing in certain markets that already have an existing, robust demand for self-storage, we ensure that we leave nothing to chance. By leveraging demand and the unique Golden Handcuff opportunity, we have been able to achieve steady and consistent diversified returns for ourselves and our investors. Check out safestorageinvestors.com to learn more.