When investors look to private real estate opportunities, the larger and more familiar asset classes – multifamily, office, retail and industrial – come readily to mind. And while, historically, the big four have performed for investors over various market cycles, other property types have also done quite well.
One particular asset class that rebounded admirably following the onset of the pandemic in March 2020 is self-storage. And there are reasons to believe self-storage is worth a closer look if you are interested in a commercial real estate investment strategy.
Historical Outsized Returns
Surprising to many, self-storage has more than held its own compared to other property types over extended periods.
“From 2009 to 2018, self-storage facilities averaged an annual ROI of 16.9%. This number was higher than office, industrial, retail or apartments during that time. Self-storage has proven to be recession-resistant and is projected to have a CAGR of 134.79% between 2020 and 2025. Because of this, many investors are looking for ways to invest in self-storage. ”1- Forbes.com; October 21, 2020
While no private real estate sector is immune to economic or market downturns, self-storage may be better positioned than most because it is considered a necessity asset class. During periods of family disruption or significant life events, self-storage helps solve the challenges associated with what many refer to as the “four D’s” – death, divorce, disaster, and dislocation.
One could even add “downsizing” to that list. Still, the important point is that each event can occur in good and bad economic environments, creating a need for storage regardless of market conditions.
“Even during the Great Recession of 2007-2009, self-storage outperformed all other asset classes of commercial real estate. Self-storage has only experienced an actual loss rate (foreclosures) of about 2%, by far the lowest of all commercial real estate asset classes.”2- Brad Sherman, VP Legal Affairs, StoreSmart
The COVID Effect
When the pandemic hit with full force in March 2020, commercial real estate was impacted in ways industry experts could never have anticipated. Mandated lockdowns, business disruptions and closures, and the simple fear of an unknown future rocked the commercial real estate industry to its core.
Self-storage wasn’t entirely spared. While classified as an “essential business,” owners found tenants staying sequestered amidst concerns of the virus spreading. And, while that meant fewer tenants were terminating leases, new tenants were also staying away, so the number of new rental agreements dropped significantly. This situation didn’t last long, however.
“Self-storage pulled ahead of other property types in the reopening trade as the real-estate business rebounded this year during the easing of pandemic restrictions. The storage facilities around the country have brought the biggest returns to investors in public real-estate stocks this year.”3- WSJ.com; June 6, 2021
A Look Ahead
As we look at the remainder of 2021 and beyond, self-storage appears to be well-positioned to perform. Marcus and Millichap, in their 2021 Self-Storage Investment Forecast,4 cite several reasons why self-storage is an asset class that should show continued performance and growth. We paraphrase a few of those reasons here:
- 1. Households are consolidating.
Remote learning and work-from-home requirements are forcing homeowners to address reduced and repurposed space, prompting a need for off-site storage.
- 2. Distancing requirements are reshaping businesses.
Physical distancing requirements have changed how many businesses are configured, causing many to remove furniture and equipment that must be stored off-site.
- 3. Explosive e-commerce growth is fueling logistics changes.
The impact of rapid growth in online shopping has pushed some logistics firms to leverage self-storage units to improve service as a local extension of their delivery networks.
- 4. City-dwelling millennials must deal with space limitations.
Since the last financial crisis, the millennial generation has become the largest group in the self-storage renters. Space is at a premium in the dense urban areas where millennials often live, creating growing needs for storage.
- 5. Growing wave of boomers consider downsizing and moving.
As increasing numbers of boomers retire and consider downsizing or moving closer to relatives, many will look to self-storage as means of preserving their possessions and family heirlooms.
As you know, all investments have risks that should be carefully evaluated and understood before investing. And, as COVID has taught us, certain unforeseen events can have sweeping impacts on entire markets and economies. Commercial real estate was not immune.
But as our economy continues to recover and we begin to see past the pandemic, self-storage may be worth another look. High occupancy rates, low maintenance costs, relatively stable tenants, and limited supply in many areas are just a few of the characteristics of self-storage that it an asset class that investors may want to consider as an investment strategy.
Important Note: This material contains statements about future terms and performance of assets and other projections of future results related to self-storage assets. Forward-looking statements may be identified by the use of words such as “expects,” “anticipates,” “intends,” “plans,” “will,” “may” and similar expressions. The forward-looking statements are based on various assumptions, for examples, the growth and expansion of the economy, projected financing environment and real property market value trends, and these assumptions may prove to be incorrect. Accordingly, these forward-looking statements might not accurately predict future events or the actual performance of the self-storage sector.