The self-storage sector has historically been considered resilient and recession-resistant. This year, key trends are already emerging that will contribute to the health and performance of this $80 billion industry.
Despite risks of oversaturation in some urban markets, 2023 promises to be a strong year for self-storage investments.
What started in early 2000s continues to today. Where decrepit, one-story metal buildings with chain-link fences were the standard, now high-caliber, well-designed and polished facilities dot the landscape.
Today, new development is almost exclusively Class A product. Intown and suburban communities demand it. And customers now expect professional lobbies with music and complimentary snacks and beverages, staffed by knowledgeable and skilled managers selling space that is clean, bright and secure.
The once red-headed stepchild of commercial real estate is now the belle of the ball. The proof can be seen in the fervent attention from public REITs and private equity firms. Blackstone Real Estate Income Trust grabbed headlines in 2020 with its acquisition of Simply Self Storage for $1.2 billion.
Smaller, yet just as notable, transactions also support increased valuation. In 2022, Space Shop Self Storage, one of the top 20 self-storage operators in the United State, sold two portfolios totaling nine facilities to Extra Space Storage for $137 million, or approximately $250 per square foot.
Institutional and private investment firms are expected to continue to make Class A self-storage a portfolio staple, driving-up valuations and sale prices or, at the very least, stabilizing the institutional quality of the asset class.
Technology to curb expenses?
People are pricey. Payroll is one of the largest and continuously growing expense categories for self-storage facilities — consuming up to 50 percent of controllable expenses, according to some sources. It far outweighs maintenance, utilities, insurance and other expenses. Seeking tactics to control this line-item, a few industry players are tapping technology.
Automated offices can now be found at some facilities. Kiosks offer customers an opportunity to select an available unit, pay for it and unlock it. Once consumer adoption peaks, automated monthly payments and a centralized customer service center may very well have some operators arguing that onsite personnel are not as critical, especially in rural or exurban locations.
Yet, the jury is still out. Will consumers accept this alternative and still consider facilities safe and secure? Will automation without human interaction — virtually eliminating opportunities for upsell — negatively impact sales? Answers to those questions will ultimately determine whether the industry adopts.
Skyrocketing utilization rate
Before the turn of the century, only 2 percent of the U.S. population used self-storage facilities. By 2019, renters more than tripled to 7.5 percent and, today, that figure has climbed to 11 percent.
This rapid climb is due to shifts in how people live and use storage as an extra closet or room, which started before the COVID-19 pandemic but rapidly accelerated because of it. The shift in workstyle requiring a fully functional home office has driven the self-storage sector since 2020. Storage facilities are now chocked full of excess furniture and items typically stored in the guest rooms that have been turned into home offices.
Likewise, apartment footprints are shrinking, and housing of all types is getting more expensive, leading customers to utilize self-storage. Of note, over the past three years, Space Shop has experienced an exponential increase in move-ins, just recently waning, throughout a portfolio of nearly 50 facilities — both urban and suburban.
But credit should also be given to the industry itself. As it continues to shed its dungy basement storage image, consumers consider self-storage an augmentation of their homes. With refined architecture and professional operations, most locations are convenient, secure, clean and easily accessible.
Yet, how quickly the afterburn fades will be directly impacted by supply.
Oversupply poses a threat
Despite ongoing demand, potential oversaturation looms, which is a challenge the industry must monitor and address. The pandemic was like rocket fuel for self-storage. As move-outs slowed dramatically, additional units were needed to support home renovation projects and home offices.
Supply diminished and rates increased to the tune of 30 percent since 2020. Developers broke ground and REITs/private equity acquired and investors profited. However, as development cycles happen, significant risk exists as developers overbuild to meet the demand surge just as that surge softens.
The potential for flooding supply is high. Self-storage is a micro-market product; for urban locations, the trade area is typically less than one mile; for suburban facilities, it’s three to five miles. While that means many square miles to fill, it also makes scales quick to tilt to oversupply, driving down absorption and rental rates. Additionally, oversupplied submarkets potentially create a domino effect on pricing in adjacent submarkets and onward.
Now add risk to risk. Understand that self-storage is now a purpose-built asset with only one realistic use. A failed location due to market oversaturation leaves few options for repurpose other than demolition, a costly undertaking for redevelopment, and, until then, a community eyesore.
Deceleration is needed
On tap for this year: quiet and calm with controlled bursts of activity. Opportunities will exist for opportunistic investors. Many property owners holding out for 2021 pricing will be forced to sell — albeit at lower price points — due to their inability to hold the asset for an extended pro-forma and profitable utilization levels.
Opportunities will exist for developers as well. While many markets are reaching peak saturation levels, emerging growth markets still exist. Site selection and the ability to navigate challenging entitlements are key, as is the ability to accurately evaluate markets to determine potential demand.
Successful facilities will be those in ideal locations with a laser focus on operations that also integrate well into the community through architecture and design. Successful owners will be those with capacity to hold assets until full lease-up and market absorption, no matter how long it takes.
Last year, a slowdown — or a return to pre-pandemic levels — commenced. Capital markets, interest rates and rising construction costs are challenging the economics of new development. Consumer demand started its taper as workers were called back to the office (and continue to be), and inflation will likely squeeze discretionary spending, minimizing renovation projects and the like.
Yet, a return to pre-pandemic levels only means a return to a healthy property sector with steady, controlled growth that will meet growing consumer demand for the modern self-storage product.
— By Jason Linscott, principal of Stein Investment Group, parent company of Space Shop Self Storage. Space Shop is an industry-leading self-storage operator that has developed or acquired more than $750 million in self-storage facilities since 2010. For more information, visit spaceshopselfstorage.com.