Office, Retail Owners Struggling With Vacancy Issues Should Consider Self-Storage

by Taylor Williams

By Joseph Woodbury, co-founder, CEO, Neighbor

Over the past two years, millions of Americans have drastically altered their work styles and consumption behaviors, which has resulted in commercial landlords, property owners and real estate portfolio managers adjusting their operating strategies.

Many businesses of many sizes are capitalizing on hybrid or remote work models by reducing their office footprints and reevaluating real estate needs moving forward. During the first quarter of 2021, U.S. office vacancy exceeded the amount of space that was leased by 34.8 million square feet, according to analysis from The Wall Street Journal.

Joseph Woodbury, Neighbor

Joseph Woodbury, Neighbor

The residential side of the real estate industry has demonstrated that people’s relationship with space is changing. Whether they can’t find a home large enough to fit all of their belongings or they need room for a home office, people are running out of space.

Likewise, retailers are continuing to respond to market shifts by growing their omnichannel sales platforms. While this typically involves investing more heavily in digital marketing and sales programs, some retailers that started exclusively as e-commerce brands, like Wayfair and Amazon, are also opening brick-and-mortar stores.

As demand for commercial and office space is decreasing and the consumer desire for “flexible space” is increasing, traditional self-storage properties are experiencing steady occupancy — specifically, a national average occupancy rate of 95 percent. As an investment proposition for both REITs and smaller property owners, self-storage now represents an opportunity to target an alternative asset class, capitalize on an emerging source of consumer demand and unlock new cash flow opportunities.

Consider Overlooked Tenants

In the post-COVID arena, investors will need to be openminded in terms of considering new tenant types and asset classes to maintain maximum space utilization and occupancy. In this endeavor, it can be helpful to examine other industries that have experienced seismic shifts and market shocks. One thing that adaptive market winners share in common is the early adoption of strong, substitute categories of commercial asset classes.

Commercial property owners looking to diversify their tenant mixes in order to fill vacancies can find success with self-storage. Whether a temporary or permanent solution, self-storage conversion projects require minimal investment in the absence of traditional tenants.

Over the last four decades, self-storage has become one of the most profitable and reliable sectors of commercial real estate. A hallmark of self-storage growth has been the sector’s ability to deliver consistent returns and noncyclical occupancy levels. Forward-thinking commercial owners and operators will capitalize early by repurposing distressed or declining assets with self-storage uses.

For example, a former WeWork office in the heart of San Francisco’s Financial District converted its basement into a self-storage center using Neighbor to cover short-term losses and generate recession-resilient income. After installing inexpensive cage buildouts, the property has reached 90 percent occupancy within its first three months on previously “unleasable” space.

Exploring New Territory

For some real estate owners and operators, self-storage can feel like a foreign category. Here are five fast facts that illustrate why investor dollars are flocking to self-storage:

The U.S. self-storage industry is valued at more than $500 billion, with some major REIT players experiencing year-over-year growth in excess of 100 percent. The acceleration of urbanization is a major contributing factor, with more individuals buying smaller homes and spending more time in those living spaces.

Marker penetration is rapidly climbing, with over 11 percent of Americans (or one in nine) now leasing a self-storage unit. Shockingly, this is up from just 1 in 17 Americans in the 1990s. Public Storage (NYSE: PSA) recently reported an exceptional third quarter as its core funds from operations (FFO) grew by 30 percent year over year.

The industry operates at a 95 percent national average occupancy rate, with the two largest REITs exceeding 96 percent occupancy. Even this measure understates occupancy potential, since most storage facilities could operate at 100 percent occupancy, but intentionally reserve vacancy in order to enable price increases as demand continues to climb. Additionally, renters will often stay for more than a year, providing consistent and reliable income.

Self-storage as an asset class is recession-resistant. Many investors still remember storage as the best-performing real estate asset class during the 2008 market crash. The industry has averaged 3.5 percent annual growth for more than 30 years. A report, titled “Self-Storage: Analyzing a ‘Recession-Resistant’ Sector,” details commercial mortgage-backed securities (CMBS) data and notes that only three of nearly 2,000 self-storage loans (totaling nearly $16 billion) in Trepp’s database were marked delinquent, unlike the heavily hit hotel and retail CMBS sectors.

Self-storage is an incredibly fragmented market. The top two REITs combine for only 10 percent of the market share by revenue. “Mom and pop” operators account for almost 80 percent of this massive category. This market fragmentation allows for easy entry by retail and office operators looking to repurpose only a fraction of a larger portfolio for self-storage tenants. Commercial owners and landlords aren’t required to become “sophisticated operators” to produce significant cash flow by repurposing and rebalancing their portfolios.

The Neighbor Solution

Even with these attractive features, some operators are still worried about repurposing space that was not originally designed for self-storage use. It can be a daunting task to consider managing a new asset class. So how can commercial landlords and operators capitalize on self-storage without standing up a new function or capability?

Neighbor enables residential and commercial real estate owners to identify opportunities to repurpose space like retail suites, office buildings, warehouses, logistics hubs and parking garages into self-storage facilities.

Neighbor’s platform has listings available in major cities in all 50 states. In cities where land is at a premium, like San Francisco or New York City, the platform is seeing high demand and growth simply because consumer demand is skyrocketing and sites for traditional self-storage projects are limited. Of course, there is plenty of vacant commercial space that can be repurposed.

Commercial properties listed on Neighbor’s platform have grown by a multiple of 25X since the beginning of the pandemic. Self-storage options on Neighbor include spaces at parking lots and garages, gyms, restaurants, malls and more. Due to the geographic reach of Neighbor’s platform, many REITs can simultaneously roll out portions of their portfolios in every state, creating millions of dollars in cash-flow potential that turns seemingly frightening industry shifts into financial growth opportunities.

Based in Utah, Neighbor connects renters looking for affordable self-storage options with owners of commercial or residential spaces looking for fresh cash flows via an alternative use.

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