The Efficient Market Hypothesis (“EFH”) suggests that financial markets efficiently incorporate all available information into asset prices.

If we look back at 2023 so far, what the EFH shows us is that the market has no idea where interest rates were or are going:

At the beginning of the year, the market was expecting interest rates (fed funds rate) to be ~4.25%; today, it is currently 5.50%, an error of nearly 30%.

The idea is we are in a highly unpredictable environment.

Last year, we saw the writing on the wall and incorporated higher interest rates into our models to properly address the risks associated with a more uncertain interest rate environment.

I don’t know what will happen with interest rates, and we are prepared for them to stay high for the time being.

High rates are unsustainable, and quite frankly, the US government won’t be able to afford it for long.

(The chart below shows how much interest the US govt will be paying as a percent of its total budget)

*Note that the graph above assumes a 10-year treasury yield of 3.8% (as of Sept 30, 2023, it was 4.58%!)

There are two paths that the govt can take from here:

Reduce government spending and the debt load (unlikely)

Or

Run with a higher inflation rate so the debt becomes a smaller percentage of GDP.

I’m inclined to think that higher inflation is the path we will find ourselves in.

One of the many reasons why self storage is a great sector is because short-term leases provide long-term inflation protection.

Storage Acquisition Opportunites Are Heating Up

The damage caused by the rapid pace of interest rate hikes is starting to show across the commercial real estate (CRE) sector. I was at a conference this week with industry professionals across the CRE spectrum, from developers to operators and anecdotally, CRE activity has reached a virtual standstill.

In our sector, we are seeing offers that had been dismissed six months ago come back to life. Sellers are starting to understand that the high-flying days of 2021 are gone.

Just this week, we put our first acquisition under contract, which we are very excited about.

Additionally, we are getting calls from brokers with clients who have newly constructed stores that are in distress.

I expect the pace of this activity to accelerate over the next 12-18 months, and we will see some incredible acquisition opportunities.

Thanks for reading, and have a nice rest of your weekend.

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Cory

Co-Founder DXD Capital, Radius+, ManageSpace​

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