The Impact of COVID-19 on Self-Storage

Topics: Industrial Real Estate, Commercial Real Estate

by Colin Cosgrove

Self-storage is among the sectors best equipped to adapt to this economically challenging time and new social distancing practices.

August 27, 2020
As the nation faces the ongoing COVID-19 pandemic, commercial real estate owners and operators continue to navigate the rapidly changing and challenging economic environment it presents. While no asset class is exempt from a difficult economic climate, self-storage typically performs well during times of crisis and is finding ways to adapt to the “new” normal. Although self-storage facilities do not fit the definition of an “essential” business, the properties are permitted to stay open as they provide services that are necessary to maintaining the safety, sanitation and operation of residences and businesses.1

Pre-COVID-19 Outlook for Self-Storage

The self-storage sector saw significant growth in the last five years, with annual revenue topping $39 billion in 2019.2 The baby boomer generation continues to downsize due to retirement and the millennial generation is emerging, comprised of approximately 80 million people. These drivers have increased the need for the self-storage asset class. Prior to the COVID-19 outbreak, the demand for self-storage units was on the rise from both residential and business customers, as evidenced by a nearly two percent increase in revenue from 2018 to end of 2019 as well as a two percent increase in occupancy.3 Many small businesses look at self-storage as an inexpensive option to store company equipment, displays and inventory, and alleviate the need for office space expansion. Additionally, many self-storage operators do not require long-term leases and rather offer month-to-month rentals which allows them to be nimble and flexible.4

Sustainable Property Performance1

Because demand for self-storage units is driven by life events including marriage, divorce, birth, death, relocation, and the general need for extra space, economic upturns or downturns tend to have little impact on the asset class. The self-storage recovered quickly following the Great Recession of 2008 and, although some tenants walked away from renting units during that time due to job loss, the sector bounced back in 2009 with strong performance that has continued since. The same is expected to happen following the COVID-19 pandemic. The projected demand for self-storage is likely to continue to stay relatively strong even if the U.S. economy is slow to recover due to social distancing and shelter-in-place orders.5 The sector’s national average vacancy rate was 9.9 percent at the end of 2019 and with the pandemic, it is projected to be 10.0 percent in 2020. On the other hand, newly constructed properties may see some challenges reaching their lease-up goals as markets were over-saturated with new supply and potential customers are practicing social distancing. Delays are expected in the delivery of new assets as new construction has slowed and many construction sites are shut down due to COVID-19 safety regulations.

Enhanced Demand Resulting from COVID-19

National vacancy rates should remain stable over the short-term as new demand offsets tenants that were lost to the weakening economy. This temporary enhanced need is a result, among other things, of workers turning spare rooms into home offices to facilitate working remotely, leaving house furniture displaced. Restaurants also utilize storage units for extra tables and other restaurant equipment not needed during the temporary closure of their dine-in service. Colleges have turned to online learning, forcing many students to vacate their dorms quickly and store their belongings until they can return to campus. Unemployed workers in industries hit especially hard by the pandemic, such as airlines and tourism, may be considering consolidating their households which could lead to the need for extra storage space.

Although the unemployment rate spiked to 14.7 percent in April 2020, the highest it’s been since the Great Recession,6 it has continuously been dropping over the last couple of months, with July’s unemployment rate of 10.2 percent. Self-storage has historically proven to be an adaptable commercial real estate sector during economically challenging times, and although a direct correlation cannot be drawn between the most recent financial crisis and the current situation presented by the global pandemic, and circumstances surrounding each recession are unique, fundamentals were strong prior to these economically challenging times. While temporary, the length and ultimate magnitude of COVID-19’s effects are unfortunately uncertain and multiple aspects of the economy, including commercial real estate sectors, are expected to be negatively affected by the pandemic.

Pre-Recession 2007 Pre-Recession 2019
U.S. Employment
Increased Y-O-Y** 0.8% to
138 million jobs
Unemployment 5.0%
Increased Y-O-Y** 1.4% to
152 million jobs
Unemployment 3.5%
U.S. Self-Storage Construction
40 million sq. ft.
3.2% of inventory
65 million sq. ft.
4.1% of inventory
U.S. Vacancy | U.S. Vacant Space
15.5% | 195 million sq. ft. 9.5% | 153 million sq. ft.

*Source: Marcus & Millichap Special Report, Self-Storage, April 2020
**Year-Over-Year

Self-Storage Navigates Social Distancing

Amid the COVID-19 pandemic, many self-storage operators have been implementing or adhering to a variety of health and safety procedures at each facility to follow the Centers for Disease Control (CDC) guidelines, including:

  • Low foot-traffic on grounds
  • Units spread out between tenants by offering every other unit
  • Limited access to facilities, offices and staff
  • Deep cleaning of facilities with indoor-access units

As the world is evaluating and using many new online programs, self-storage operators have also been proactive in utilizing online management software. Prior to COVID-19, storage operators were implementing various software options to provide tenants 24/7 access to their billing information and the ability to reserve units without making a physical visit. The pandemic has only sped up the effort to move forward digitally and it is expected to be the new norm. New technology is expected to improve safety for both consumers and operators and should result in minimal disruptions to operations.7

New call-to-action


Sources:

1Marcus & Millichap Special Report, Self-Storage, April 2020.
2https://www.sparefoot.com/self-storage/news/1432-self-storage-industry-statistics/
3JLL, Self Storage REITS, Q4 2019 PDF.
4https://www.sparefoot.com/self-storage/news/134-self-storage-industry-forecast/
5https://www.nreionline.com/self-storage/self-storage-survives-covid-19-so-far
6Bloomberg. Job Losses for 20.5 Million Americans Herald More Pain to Come. May 8, 2020.
7https://www.insideselfstorage.com/coronavirus-covid-19/storable-integrates-products-help-self-storage-operators-combat-covid-19


Disclosure
The views expressed herein are subject to change based upon economic, real estate and other market conditions. These views should not be relied upon for investment advice. Any forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.


Important Risk Factors to Consider
Investments in real estate assets are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the financial condition, operating results and value of real estate assets. These factors include, but are not limited to:

  • changes in national, regional and local economic conditions, such as inflation and interest rate fluctuations;
  • local property supply and demand conditions;
  • ability to collect rent from tenants;
  • vacancies or ability to lease on favorable terms;
  • increases in operating costs, including insurance premiums, utilities and real estate taxes;
  • federal, state or local laws and regulations;
  • changing market demographics;
  • economic risks associated with a fluctuating U.S. and world economy;
  • changes in availability and costs of financing; and
  • acts of nature, such as hurricanes, earthquakes, tornadoes or floods
  • disruptions in the financial markets and challenging economic conditions, including those resulting from the novel coronavirus and resulting pandemic, could adversely affect the operating results of properties owned by IPC-sponsored programs and the ability of such programs to service the indebtedness on their properties.