Why the Self-Storage Industry Needs to Be on the Radar of Every Net Lease Investor
Self-storage has become one of the hottest product types within commercial real estate and values are at an all-time high. Short-term demand drivers boosted by the pandemic are contributing to the strong performance the sector has seen through mid-2021, and investor sentiment remains incredibly bullish. With asking rents on the rise and vacancy falling, or at least remaining stable for the foreseeable future, there is a favorable outlook for cap rates and property values going forward.
We caught up with Dana Summers, our resident self-storage expert, to discuss current trends, future outlooks and why he believes investors should be paying close attention to the self-storage industry.
Lanie Beck: How has the self-storage sector evolved over the last decade, and how has the investor profile changed in this time?
Dana Summers: The perception of the self-storage industry has changed dramatically in the past 10 years as facilities have become more sophisticated, better built and more mainstream. As a direct result, self-storage is becoming a more institutionalized class of commercial real estate. There are now several U.S.-based publicly traded REITs focused on self-storage including CubeSmart, Extra Space Storage Inc., Life Storage Inc., National Storage Affiliates Trust and Public Storage Inc. These REITs continue to grow, adding to their portfolios and expanding their footprints and holdings. These and other large holders of self-storage facilities are competing fiercely to increase their market share in this ever-changing and growing asset class. But the majority of self-storage owners are still private, although many of them rely heavily on the industry’s largest and well-known managers to maintain the integrity and growth of their facilities.
LB: What’s driving investor confidence in the sector?
DS: Investor confidence has been growing as more and more people rely on self-storage facilities to fill a variety of short- and long-term needs. Migration to and from urban areas, aging populations that are downsizing, an improving economy and job growth that leads to consumer spending which leads to accumulation of goods, family growth within the millennial generation, construction delays and the need for temporary housing, lifestyle changes, divorces, deaths – these circumstances all lead to growing demand for self-storage and that’s catching the attention of investors.
Why Should Investors Consider Self-Storage?
LB: Which investor types are most active in self-storage today, and which product types are in the highest demand?
DS: REITs and institutional investors, along with larger private self-storage owners, are the most active right now, and they’re seeking assets throughout the sector. Class A and B product, both climate-controlled and non, are in high demand in growth markets with robust in-migration and new household formation. We’re seeing demand surge in warm climates as these areas benefit from employment growth, increasing populations and improving demographics.
LB: Are these same areas seeing increases in new development too?
DS: Absolutely. The Southeast and West regions are definitely targets for new self-storage construction, but it’s not limited to these areas. The Mountain and Midwest regions are also seeing an increase in new units. New development and investor demand are growing in all areas that are being impacted by shifting trends, many of which have been influenced or accelerated by the pandemic. Remote learning and working, for example, are taking away storage space in peoples’ houses as the need for a dedicated home office grows. Businesses, too, are needing to store excess items as they reconfigure office space to accommodate for physical distancing. Relocation trends to less dense areas are also driving new storage use and demand, and demand is not expected to slow. As we enter 2022, the self-storage sector is poised to continue riding these demand tailwinds.
LB: What advice would you give to real estate investors who’ve never considered self-storage as part of their acquisition criteria?
DS: Self-storage is an ever-growing and increasingly popular asset class for many reasons. There is a large income potential with very low overhead in comparison to other types of commercial assets. Office buildings and retail properties can have high tenant improvement costs, while self-storage has virtually none. There are also relatively low on-going maintenance costs, and a small to mid-sized self-storage business can be relatively self-sufficient. Moreover, leases are month-to-month, allowing owners to quickly capture market rental rates. Investors should focus largely on the “3-mile demographics” when evaluating an investment. Seek relatively strong population bases and household incomes within that radius, and know that close proximities to dense neighborhoods and multifamily complexes should generally be a strong driver for self-storage demand.
October 20, 2021