The Stability of Self-Storage
Through economic ebbs and flows, the self-storage sector continues to prove its strength.
Although real estate industry players are wary about labeling any sector as recession-proof, the self-storage sector tends to be a stable asset class during economic booms and downturns, according to Paul Letourneau, manager of commercial real estate lending with Chicago-based Alliant Credit Union.
And over the last decade, self-storage facilities have become more flexible spaces, which is driving greater demand for the product. Across the country, these facilities are being used in novel ways, such as short-term product warehousing for small businesses; incubator space; personal workspaces; and wine storage in climate-controlled units. These new uses, coupled with traditional storage needs, create increasing demand and stability in the self-storage sector.
According to Letourneau, self-storage facilities have adjusted to urban environments and their residents’ needs with multi-story climate-controlled properties that feature customer lounges and high-tech monitoring and security systems. Meanwhile, suburban markets show greater demand for traditional single-story self-storage facilities with space for RV and vehicle storage. However many suburban facilities are adding climate-controlled units and more security to meet customers’ needs.
“The bottom line is that customers — from baby boomers and millennials to small business owners — view self-storage facilities as a necessity,” says Letourneau.
The variety of uses also helps create demand in all phases of the economic cycle — during periods of economic growth and downturns. During downturns, individuals may downsize their residential properties and opt to move sentimental items or items that they expect to need in the future into self-storage facilities. During periods of economic growth, self-storage facilities offer smaller warehousing space and short-term lease options that allow small businesses to accommodate the ebb and flow of product, operations and space needs.
Also, the incorporation of climate-controlled units opens a variety of creative uses for self-storage facilities. High-tech and climate-controlled facilities allow customers to use self-storage spaces for personal workspaces, auto storage, and wine collections.
As a capital provider, we must be flexible and agile in our structures with creativity and today’s self-storage usage deviating from historical traditional uses. One example would be a landlord who converts a dark retail or warehouse space into self-storage use that is economically viable and climate controlled.
Both developers and investors are watching the stability of the self-storage sector with great interest, Letourneau notes.
Self-storage construction first broke $1 billion in spending in 2005. Although the sector had a small downturn in annual construction spending from 2008 through 2014, construction spending has been on the rise from roughly $1 billion in 2014 to nearly $5.5 billion annually by 2017, according to the U.S. Census Bureau.
It is estimated that there is over 2.3 billion square feet of storage space or roughly 8 square feet per individual with more coming online. Although supply has caught up to demand in a few markets, there is still a need for more square footage in many underserved markets.
Overall, the commercial real estate investment market is strong with a significant volume of deals across a variety of property types and locations, Letourneau notes. There is a lot of capital available in the market and investors are looking to cautiously deploy it.
“In the current cycle, borrowers are not looking for excessive debt,” Letourneau says. “But they are looking to deploy capital in investment assets with moderate leverage.”
And self-storage properties are garnering interest from a wider variety of investors as they begin to understand the merits of investing in the sector.
According to this year’s Self-Storage Almanac, 18 percent of facilities are owned by the six largest public companies; 9 percent are owned by the next top 100 operators (minus the REITs), and the remaining 73 percent of properties are owned by small operators.
While some markets are nearly oversaturated with self-storage product, there is a significant need for self-storage space in many second- and third-tier markets, and many lenders are interested in the space and open to financing deals.
“Alliant Credit Union is favorable about the self-storage sector and looking to do more activity, particularly as the industry continues to gain traction and consolidation, as well as awareness from key investors and industry players,” says Letourneau.
The future of the self-storage sector, particularly lending and investments, should continue to be strong and competitive — especially in underserved markets. For investors and developers looking to jump into the market, it is a good time for both sides of the aisle as consolidation should continue.
When selecting a financial partner, it’s crucial for investors to find a lending institution that is open-minded and educated on the self-storage sector, Letourneau notes. Understanding the local demographics and needs of customers within a three-mile radius is key to crafting a successful tailor-made flexible financial partnership, he adds.
He predicts that the self-storage market will continue to expand in popularity for all stakeholders — users, investors, developer and lenders — as more investors and users become familiar with the flexibility that self-storage facilities offer, as well as this asset class being one of the most resilient among all real estate property types.