Many people find it difficult to part ways with their personal possessions and turn to self-storage as a way to hold on to these items while freeing space in their homes. Where this asset class really shines, however, is during periods of financial turmoil. By offering extra space at mostly affordable rates, when people need to adjust their living situations due to financial constraints, but want to keep their possessions, self-storage comes to the rescue.
That’s how the self-storage sector became the only real estate investment trust (REIT) category to emerge from the Great Recession with a positive return in 2008. During that year, publicly listed self-storage REITs had collectively produced annual returns above 5%, while the overall equity REIT market dropped more than 37%, according to historical data from the National Association of Real Estate Investment Trusts (Nareit).
Twelve years later, while the recent financial disruption caused by the COVID-19 pandemic resulted in historic job losses and widespread economic damages, the $39 billion self-storage industry is one of the top performing real estate asset classes, experiencing just minor scratches compared to many other property types – and it is well positioned for growth as the recovery ensues.
Currently, there are more than 55,000 storage facilities in the United States with a collective 1.7 billion square feet. The six largest public self-storage companies by annual revenue, which are Public Storage, Extra Space Storage, CubeSmart, Life Storage, National Storage Affiliates and U-Haul, account for nearly a fifth of the market, according to industry publication SpareFoot. Small operators represent a lion’s share of the industry with 73% of the market.
Prior to COVID-19, the self-storage industry was booming. Construction spending on self-storage properties increase 584% from January 2015 to January 2020, according to Cushman & Wakefield’s 2020 mid-year self-storage outlook.
But like all industries in the United States, the self-storage sector was impacted by the global pandemic. The economic toll of the virus caused a pause in the sector’s growth as construction activity and acquisitions slowed, according to JLL’s 2020 second quarter report, the latest available as of the writing of this article. Additionally, as federal, state and local governments implemented “stay-at-home” orders and other policies to combat the spread of the virus, move-in and move-out activities were reduced. In a response to the pandemic, industry operators canceled rental rate increases for existing tenants and discounted rates for new renters.
However, these actions likely contributed to stable industry occupancy rates, which were 91.8% in the second quarter, a decrease of just .2 percentage points from 92% during the same period in 2019, according to JLL. Moreover, self-storage REITs have been one of the only public real estate sectors to register a positive return year to date through Oct. 31 with a 10.96% return, while the total equity REIT market’s return is down an average of approximately 15%, according to Nareit.
A major part of the reason why the industry has outperformed this year is because unlike other asset classes, such as hotels, malls, and offices, self-storage companies were labeled essential businesses during the height of the pandemic, so the industry did not shutdown since storage service was necessary for many people.
Self-storage properties are driven by the “four Ds,” which are death, divorce, downsizing, and dislocation (or moving). Dislocation was a major factor that kept the industry afloat during the height of the pandemic, as many adults moved to avoid catching the virus. About 68% of adults who moved either moved in with family members or friends and needed to store their belongings while adjusting their living situations.
Other new users included university students, who suddenly needed a place to quickly stash their belongings before returning to their homes. Also, there were small business owners who abruptly closed their businesses, such as bars, restaurants, and event spaces, and needed to store their equipment and merchandise, according to Seeking Alpha.
Another possible explanation for why self-storage outperformed other sectors is because unlike most asset classes, there isn’t typically a social gathering component for self-storage units, and therefore the need to socially distance isn’t as debilitating for the industry. For added precautions though, many storage facilities improved their technology and adopted a “contactless” strategy with online reservations, electronic leases, and online payments.
On top of its solid performance during the pandemic, self-storage is poised for further growth, because the U.S. economy is in recovery mode. The economy grew at an annualized pace of 33.1% in the third quarter, and the U.S. unemployment rate fell to 6.9% in October from 14.7% in April, both suggesting a national recovery from the pandemic is in sight.
As the economy recovers, people are leasing and buying homes again, and therefore moving (“dislocation” of the four Ds) and driving demand for extra space. In the third quarter, apartment leasing in the country quadrupled the leasing activity in the second quarter, and sales of new single-family residential homes in September 2020 were up 32.1% from September 2019. Additionally, the construction slowdown of self-storage properties during the pandemic is expected to allow demand to catch up to supply in various markets, as supply had grown immensely in previous years.
Prior to COVID-19, investors were attracted to self-storage for its resiliency, and demand continues to grow as uncertainty surrounding other asset classes increases. Much like multifamily properties, another strong performing asset class during the pandemic, stabilized self-storage properties may provide more predictable income, which is appealing to investors in turbulent financial environments. In fact, industry insiders and experts say there’s a long list of eager buyers for self-storage properties looking for stable returns, according to National Real Estate Investor.
The self-storage industry’s reputation of resiliency during financially disruptive periods, such as the Great Recession, has so far proven to be true once more. While there are many challenges still ahead for the U.S. economy, as the nation recovers, the need for extra space is expected to increase again, and that may fuel the industry’s continued growth.
This article is part of a series exploring different asset classes. Read our articles about single-family rentals or the light industrial subsector.