Why the Self Storage Industry has Outperformed other Real Estate Investments
Not all commercial real estate investments are equal. Diverse demand drivers have allowed the self storage industry to historically outperform other sectors through economic ups and downs. Currently, the office market suffers from low occupancy, a result of the work from home movement. Online retailers bolstered the need for industrial warehouses. Mass migration to Sunbelt markets led to all time high apartment rents, which have since tapered. Demand for other real estate types fluctuates based on market conditions because of narrow demand drivers. In this blog we will review why the self storage industry has outperformed other real estate investments and why it has become an integral part of American life.
HISTORY OF THE SELF STORAGE INDUSTRY
THE NEWEST CORE ASSET
The core assets in commercial real estate; office, apartment, industrial, and retail had the advantage of growth through most of the 20th century. Self storage, however, was not widely adopted until the 1970s. Most storage builds in the 1980’s and 1990’s were single story, drive up units without any temperature control. Today, multi story and climate controlled facilities dominate new construction. Still, facilities built over the past 50 years created excellent returns and profit for their owners.
MOM & POP'S
The term “Mom & Pop” implies an unsophisticated individual self storage owner/operator. Historically, self storage facilities were often built on excess land parcels or blighted plots because they did not have any clear use. Real estate investors also placed self storage facilities on plots of land as a “covered land play” in areas investors predicted would have greater value for future development. Over the decades, as suburban America expanded, infill development around these facilities indeed made the sites increasingly valuable for a new self storage facility or another use.
The imaging below shows that development was sparse around a drive-up facility constructed in 1992. The land was likely inexpensive at that time and future development uncertain. Over the next 30 years, its location proved to be well chosen, as Albuquerque's largest industrial corridor emerged alongside hundreds of single family homes. Its performance prompted the largest storage company in the world, Extra Space Storage, to purchase the store.
1996 aerial imaging of Albuquerque
2023 aerial imaging of Albuquerque
Gone are the days of new self storage facilities being built on the outskirts of town on cheap parcels of land. Infill parcels in highly dense areas now are prime targets for self storage development.
REIT ROLLUP
For many years Mom & Pop stores held an advantage over institutional owners; their local knowledge and relationships superseded the benefits of scale. Mom & Pop's no longer run the show. Advancement in technology such as online rental platforms allow for adjustable daily pricing. There are many old facilities that do not even have a website. REIT’s offer teams of experts dedicated to the self storage rental experience. Economies of scale create local dominance; the more stores operated within a market, the more power to steer rates. Mom & Pop’s have maintained their renter base because of the “sticky” nature of self storage customers, but new customers flock to safer, sophisticated REIT stores.
Largest Storage Owners:
Extra Space Storage
Public Storage
Cubesmart
Public Storage, the oldest self storage REIT, has nearly tripled its facilities since 1996, expanding from 64 million rentable square feet to over 218 million rentable square feet. The institutional arms race has heated up with Extra Space Storage's (formerly second largest storage company) $12.7 billion acquisition of Life Storage (previously the fourth largest storage company).
SELF STORAGE PERFORMANCE
Compared to other commercial asset classes on an indexed basis, self storage offered the highest cumulative returns of any real estate investment category over the past three decades. And the self storage industry continues to grow; as of 2022, households using self storage reached an all-time high of nearly 14.5 million of 11.1% of total US households.
The self storage industry has diverse demand drivers, frequent rental rate changes, and “sticky” customers, meaning tenants aren’t likely to move to a different location to save a minimal amount of money once moved into a unit, which all contribute to the industry’s outperformance over time. Adjustable rates allow for rates to mirror inflation, unlike long term office or retail leases where rates are locked in for longer periods of time.
ECONOMIC DRIVERS FOR THE SELF STORAGE INDUSTRY
Individuals and businesses lease storage for a slew of reasons. These reasons vary on a case by case basis, but Americans have a lot of stuff. And they don’t like to look at it or get rid of it.
THE FOUR D'S
Significant life events such as divorce, death, dislocation, and downsizing have traditionally created storage demand. These life events occur despite what occurs in the macroeconomy and drive the need for self storage. The self storage industry has proven to be a stalwart in times of uncertainty. Disruption causes a need for storage. Our lives are often disrupted during difficult economic times, which has meant that in some cases, storage has had a countercyclical growth pattern. One of the best examples of this is the Covid-19 global pandemic which led to record breaking rental rate growth for over two years when the globe was largely confined to home.
THE 2020 SHIFT TO WFH
The pandemic reshaped America. Work from home and excess free time inspired new projects and home revitalization. Homes became gyms, offices, cinemas, and much more. Storage became necessary in decluttering the house to allow for these new uses, like home offices. Permanent lifestyle changes like the work from home movement created another demand driver, particularly amongst the Millennial and Gen Z demographics. 57% of self storage renters fall into the two younger age groups, and now rely on the asset class as an integral part of maintaining their lifestyles.
HOUSING AND INCOME CONSTRAINTS
Low housing affordability plagues the United States. The income required to purchase a home has grown by 49% in a year and a half. To buy a median-priced home, the average American needed to make $58,752 in August of 2021. Higher mortgage rates and low available housing supply caused this number to inflate to $87,312 in January 2023.
Over the long term, those who would have been homeowners with excess space will stay apartment renters. Apartment rents remain elevated growing at a 4% rate after exploding by 15% in 2022. As Millennials accumulate more goods, storage can offer a more economical alternative to renting a larger apartment. A 5x10 storage unit costs $1.89 per square foot and the average apartment is similarly priced at $1.93 per square foot. However, in terms of total cost, the 5x10 only sets someone back $94 per month while the apartments clock in at $1,760. If an apartment renter can downsize to save hundreds of dollars by renting a small storage space, they may increasingly look to do so during difficult economic periods.
CONCLUSION
America is feeling the effects of higher interest rates, commercial lending pullbacks, and bank failures. The self storage industry has weathered storms like this before. With a potential recession on the horizon, development activity will pull back. This means less new supply to meet the increasing need for storage. As such, self storage is safe place to shelter and invest capital in harsh conditions and grow in bullish periods. Invest with the experts. Are you interested in investing with DXD Capital, or do you have additional questions? Meet with a member of our investment team to discuss current opportunities, answer any questions, and when you are ready, guide you through our investment process.
Sources
NAREIT Monthly Property Index Values and Returns
