Previously, I wrote about the self-storage industry and why a combination factors could make this sector boom — maybe forever. In this post, I’ll take a closer look at why the outlook for this investment in the near and long term is exceedingly bright.
What makes this sector especially attractive to investors? And what insulates it from some of the market dynamics that have whacked other (more sexy) sectors?
In the storage world, while fluctuations in vacancy can be seasonal, they are less cyclical. During the winter months (Q4 and Q1), the weather is less conducive to moving, and kids are in school. But in the warm months (Q2 and Q3), moving activity picks way up, and demand for storage is high. There are constants that offset the ups and downs. For example, in any given year, roughly 12 percent of the population is moving.
Self-storage is uniquely insulated from economic cycles. When the economy is weak, people shed big, expensive houses, and, as we have witnessed, kids who have left the nest return to live with their parents until things get better. What happens to all the stuff? It goes in storage. Conversely, when the economy is strong, people have more disposable income and purchased goods, which require — you guessed it — storage.
In addition to some of the more obvious market demand drivers, there are three constants that are pillars of the self-storage business but are not likely to be trumpeted on the front cover of a self-storage REIT’s annual report because of their grim connotation. They are financial hardship, divorce and death.
Finally, there are other demand drivers on the upswing that bode even better for the self-storage sector in the near term. First, apartment demand is up, but available storage space in apartments is minimal. This generates greater demand for storage facilities, especially closer to urban areas. Second, the recovering market for sale of houses gives rise to more moving activity, which is another leg of the stool in the demand for storage. Third, college attendance is at an all-time high, further bolstering storage demand.
All’s fair in love and “store”
As for the rent growth outlook? Self-storage tenants are generally less price-sensitive because the rent, as a percentage of their disposable income, is proportionately small.
Self-storage tenants generally don’t compare notes about who’s paying what rent for their unit. This gives the owner/operator the opportunity to raise rents on individual units in somewhat of a “bubble,” with less pressure from comps.
Since all units rent monthly and roughly half of all units rent for less than a year, when market demand rises suddenly, the frequent turnover allows the sector to react and raise average rents more quickly than wait for long-term office/retail/industrial leases to expire.
Further, all of the self-storage REITS and many sophisticated owners are now using software systems that constantly reprice units based on demand for that unit type on that day and based on market data the owners put in. You can see this repricing in action when you try to rent a unit online; it shows up as a price spike for one unit type that only has one or two remaining.
Then there’s the “captivity factor.” Think your office tenants are captive? Nah! But when you see what it takes to schlep all of your excess stuff to a storage unit in the middle of July, you start to believe that your storage tenants aren’t going anywhere quick. Your natural real estate instincts are telling you what that means: steadily rising rents!
There’s only one potential threat for the self-storage sector that should be apparent to anyone who has been through a couple of market cycles, and it’s the same one that exists for all sectors of real estate: “stupid growth” (translated: over-supply).
Right now, self-storage companies guard occupancy rates and sometimes rental rates fiercely. It’s probably a good time for the self-storage industry to become more transparent in terms of supply and demand on the local level in order to grow the sector intelligently.
Shift from “Mom & Pop”
Absent stupid growth, the outlook for self-storage is bright for, well, at least a generation — so bright that much of the self-storage product today is being designed and built or refitted to “investment-grade.” What’s an investment-grade or “Class A” self-storage property?
- Located in a major MSA
- Excellent road or highway exposure, ditto for access
- Brick, block or tilt-up construction surrounded by asphalt or concrete
- New, spiffy, clean, well-maintained, minimal deferred maintenance
- Strong market fundamentals and/or high barriers to entry
- 90 percent or higher occupancy
- Top amenities: electronic gates, alarms, exterior lighting, video surveillance
- On-site managers
So, will today’s “self-storage mogul” start to look more and more buttoned-up and institutional? Not so much like mom and pop living in a double-wide on the property with a mean guard dog? Yes and no.
The top five self-storage companies (four of which are REITS) control 11.5 percent of the product in the U.S. That’s roughly 5,600 properties. The next 150 privately held companies on the list own or operate 10 or more self-storage facilities. The next 4,000 firms on the list own or operate two to nine facilities, and the remaining 27,000 or more firms have just one. Conclusion: Widespread, long-term opportunities for investors to upgrade and aggregate properties into portfolios. Those efforts are well underway and being undertaken, as you might expect, by some very sophisticated market players.
A longer form of this post was first published on LinkedIn. The source for all statistical information in this article is the Self Storage Association (SSA). Additional industry insights were provided by Ashton Rowles, Managing Director of Valuation & Advisory Services for Colliers International in Washington D.C.
Steve is Senior Vice President of Colliers International in Washington, D.C. Having worked for both owners and occupiers, he writes about regional and national business trends. In his spare time, Steve is an accomplished cook and is also putting the finishing touches on his first movie screenplay. Connect with Steve on LinkedIn.