When investing in commercial real estate, it’s often easy to forget that there is a vast array of available options beyond the mainstream property types. To that point, investors are often surprised to learn that the U.S. self-storage market is expected to grow to over $115 billion by 2025, which would make it one of the nation’s fastest-growing sectors (1).
Based on this property class’ strong performance through 2020, as well as several ongoing, historically beneficial demographic trends, real estate investors may want to seriously consider investing in self-storage this year. Here are our four main reasons why:
1. Self-storage has historically been resilient through both economic upswings and downturns
Self-storage has historically been a resilient property class, with U.S. self-storage occupancy rates fixed above 90% since 2015 (2). This performance was largely fueled by the past decade of robust job and household creation, in addition to increased population mobility. On the flipside, this sector has also performed well during past economic downturns, and self-storage real estate investment trusts (REITs) were the only real estate asset type that generated positive returns during the 2008 Recession (3). And while there is no guarantee that self-storage’s performance will repeat in the next economic downturn, it’s worth noting that the U.S. self-storage sector reached historic occupancy rates at the end of 2020, at the height of the COVID-19 pandemic.
Self-storage’s unique flexibility is due to the fact that the sector’s tenant base consists heavily of households that are in the process of relocating – something which occurs during both economic upswings and downturns, albeit for different reasons (4).
Additionally, many tenants primarily use self-storage when they don’t have sufficient storage space at home (4). This is a common issue during periods of economic turmoil, as people downsize their living spaces or move back in with their families, but there are also reasons why this would occur during economic booms, when people are more likely to make more purchases and have children (5). Additionally, with many businesses looking to downsize or transition to a remote work model even after COVID-19, the storage needs resulting from vacant restaurants, retail spaces, and office suites will likely continue fueling self-storage demand.
2. Both rent levels and sale prices for self-storage assets increased in 2020
Last year’s widespread population displacement and restaurant and business closures increased demand for storage solutions, which consequently drove up rent prices nation-wide. By December 2020, the average rent for 10×10 SQF non-climate-controlled units had grown by 3.5% year-over-year to $118 – a price level not seen since 2018 (6). Rents for climate-controlled units also increased during this period, achieving a respectable 2.3% y-o-y growth.
Additionally, self-storage units are typically rented out on a month-to-month basis rather than long-term, meaning that property owners/operators can more effectively adjust their rent levels in response to evolving submarket conditions. And despite this short-term rent structure, tenant retention rates are generally relatively high, with most tenants unlikely to switch facilities in the event of a nominal rent increase (7).
Self-storage properties were also able to maintain relatively high sale prices in 2020. Like most property classes, self-storage prices stumbled during the onset of COVID-19, but by August the national average price per square foot for self-storage asset acquisitions had already rebounded by 33.4% y-o-y (6).
And there are several reasons why this increase in self-storage sales prices may not be a short-term bump. While the full effects of COVID-19 remain unclear, the pandemic has undeniably altered the relationship between the U.S. workforce and traditional office spaces, and the overall U.S. economy is generally not expected to return to pre-pandemic levels until at least 2022 (8). This means many businesses and individuals will likely continue relying on self-storage facilities for the foreseeable future. Furthermore, long-term national demographic trends such as America’s aging population and increased population mobility may continue bolstering self-storage demand going forward, as they have in the past.
3. Self-storage assets are easy to manage and cheap to maintain
The expense ratio for self-storage properties typically ranges between 35-40%, meaning that for every dollar in revenue approximately $0.35 to $0.40 is used to cover expenses, which leaves a decent margin for effective operators (9). This is because self-storage assets are relatively simple and straightforward, from both a structural and operational perspective, and generally entail fewer unexpected expenses and CapEx costs relative to most other property classes. When it comes to self-storage facilities, the bulk of expenses for facility owners consists of property taxes, management fees, and advertising costs.
Furthermore, since there is minimal communication between tenants at a typical self-storage facility, it’s common for operators to selectively adjust rental rates for individual tenants to increase their net operating income. As a result, while self-storage assets are a relatively light-touch investment relative to other commercial real estate properties, there are a number of unique ways in which property owners/operators can potentially generate additional returns.
4. There is strong institutional interest in self-storage investments
Since 2012, the self-storage market has grown by ~8% each year, and the average self-storage operator achieved a 41% profit margin over this period. With numbers like these, it’s no surprise that institutional investors have taken an interest in self-storage investment opportunities – well before most retail investors even became aware of this niche.
Because self-storage properties historically have very low default rates and foreclosures are nearly nonexistent, financing for self-storage is readily available (11). And many prominent institutional investors and private equity funds are seeking out self-storage assets as an alternative source of yield, either by acquiring existing facilities with stabilized cashflows or developing new assets themselves. For instance, over the past year there were significant institutional acquisitions of large self-storage portfolios across the Tri-State Area (New York, New Jersey, Connecticut), and we expect continued demand from institutional buyers, including the larger self-storage companies like Extra Space Storage that operate their own REITs (4).
The main concern regarding self-storage
Every worthwhile opportunity entails a degree of risk, and in the case of self-storage the main concern is the specter of overdevelopment. Self-storage completions have shot up in recent years, and to date there are over 49,000 self-storage facilities scattered across the U.S. (2). According to the latest industry figures, there is 5-8 net rentable square feet (NRSF) of self-storage space available per person within a three-mile radius of their home (4), and as a result there are growing concerns that the U.S. self-storage market is oversaturated.
That being said, development has rolled out unevenly across the U.S., and there are a number of markets that remain significantly undersupplied. For instance, according to the 2020 Self-Storage Almanac, demand continues to outpace supply in the Tri-State Area, where the average demand of 3.61 NRSF per person outstrips the average available supply of 2.82 NSRF per person. In other words, while self-storage investments may not be very attractive in over-developed markets across the U.S., there are still viable opportunities worth exploring.
If you’re interested in investing in self-storage, consider our latest Class A development project in New Jersey
Self-storage facilities may not seem as glamorous as many other commercial property types, but make no mistake – this resilient niche has performed well in previous years and is actually benefiting from the current economic landscape in several ways.
Our first self-storage deal in northern New Jersey takes all the above factors into consideration, and the target submarket is even more undersaturated than the greater Tri-State Area, with only ~1.7 NRSF available per person within a 3-mile radius of the deal asset. We are excited to be working with a premier sponsor team on this deal, which includes a founding member of Extra Space Storage – the second largest self-storage operator in the U.S.— and an experienced developer who has spent the past several years focusing specifically on New Jersey self-storage projects.
(1) GlobeSt, “Self-Storage Market Has Flourished in the Last Decade”
(2) SpareFoot, “U.S. Self-Storage Industry Statistics”
(3) Trepp, “Is Self-Storage Truly ‘Recession Resistant?’”
(4) 2020 Self-Storage Almanac (28th Annual Edition)
(5) MarketPlace, “Americans are having fewer babies, and it might have to do with the economy”
(6) Yardi Matrix, “Self Storage Bulletin – Jan 2021”
(7) BiggerPockets, “The Pros and Cons of Self-Storage Investing”
(8) FiveThirtyEight, “The Economy Won’t Be Back o Normal Until 2022 Or Later”
(9) Radius , “Thinking About Investing in Self Storage? Here Are the Pros and Cons!”
(10) BiggerPockets, “Top 5 Reasons I Invest in Self Storage”
(11) CP Executive, “Confidence in Self Storage Remains High”