Rising Star in Real Estate: Why Investors are Turning to Storage Facilities

Moving trucks and storage units have become the new mainstays of American life. With one in five US households renting extra space, self-storage serves as the housing market’s enduring ally in managing life’s transitions.

The roll-up metal doors of self-storage are indispensable as modern life changes quickly. Moving for work, newlyweds in small apartments, or parents with empty nests – self-storage offers space when things no longer fit at home. The industry does well because families, new businesses, and retirees always need more room.

Self-storage is more than just extra space—it’s an investment that continues to rise in value, outperforming other commercial real estate even in downturns.For investors, self-storage units remain a star opportunity, with demand tied more to major life events driving storage needs rather than broader economic swings. And business is booming: Proficient Market Insights predicts the industry will experience CAGR of 7.53% through 2027.

So for investors seeking sheltered returns or portfolio diversification, self-storage represents a compelling option. Here’s a closer look at why this growth is happening and how investors can capitalize on these durable tailwinds.

The rise of storage facility investments

CBRE projects a robust 9.2% average annual return for the self-storage sector from 2023-2027, fueled by steady demand drivers including:

Urbanization

Urbanization is a major driver behind the growing need for self-storage. As over 80% of Americans now live in urban areas, the shift towards city living often means smaller living spaces.

This has led many to seek additional storage solutions outside their homes. With the average cost for a 10×10 storage unit at $116 per month, these units provide a practical way for city dwellers to manage their extra belongings without cluttering their living space.

As cities grow and homes get smaller, the demand for self-storage increases, offering a convenient and affordable way to keep items that are important but not immediately needed.

Life milestones

Major life milestones feed the need for extra space during times of transition – new households forming, downsizing retirees, renovations, and relocations. Whether temporary or long-term, self-storage enables flexibility as life’s changing space requirements evolve.

In 2024, record numbers of Americans will turn 65, with many downsizing in retirement. Meanwhile, the U.S. Census reported 1.4 million new housing units completed in 2023 as new households take shape. All these moves and realignments, amid household formations, aging demographics, and housing growth, fuel ongoing self-storage demand.

Work trends

As more employees work from home, households convert living spaces into makeshift offices, requiring excess items to be stored offsite. Similarly, companies downsizing corporate offices still need storage for their displaced assets.

The rapid growth of home-based micro businesses also creates demand, using storage units to hold overflow inventory and materials. As of April 2023, over 33 million small businesses operate in the United States, representing 99.9% of all US companies. This explosion of home offices and small ventures is fueling self-storage demand.

Investor interest in the self-storage industry

Self-storage investments have increasingly gained traction as a compelling and distinct asset class within the broader commercial property space. The sector includes small operators, larger operators like U-Haul, and four self-storage Real Estate Investment Trusts (REITs).

Self-storage investing is now squarely into Wall Street’s spotlight due to factors such as:

Stable returns

Storage facilities generate reliable cash flow via rent income that tends to remain steady even when other real estate segments struggle. As an example, vacancy rates held at 8% in 2022, producing durable cash flows for investors seeking stability.

Self-storage business operators typically offer month-to-month leasing, which allows flexibility to adjust rental rates for new tenants based on evolving market conditions. With an average 40% yearly tenant turnover, there are regular opportunities to update pricing. Additionally, since moving stored possessions can be a hassle for existing tenants, operators can use rate increases to grow cash flows over time for this stable client base.

Economic resilience

Self-storage demand correlates more with life events driving storage needs rather than broader economic cycles. People will continue storing belongings during a recession. This makes storage more resilient than hotels, offices, or retail tied closely to economic swings.

Cost efficiencies

Developing and operating storage facilities requires less upfront and ongoing costs compared to other commercial buildings giving investors more room for profit. For example, in 2023, the national average for multifamily new construction was $350 per square foot while a common self-storage facility costs between $90-$120 to build.

Limited Management

Storage spaces are simple to oversee with minor maintenance needs and no massive operational staff beyond on-site managers. This light management load reduces operational expenses and leads to an average profit margin of 41%.

Economic drivers fueling investment

Besides stability inherent in the self-storage investment market, current economic factors also encourage investment in self-storage including:

Higher Interest Rates

While higher interest rates increase the cost of capital, they also slow the pace of new developments, leading to less competition for existing facilities. This environment creates attractive investment opportunities for well-capitalized investors or those with access to favorable financing.

In addition, higher rates encourage investors to pursue value-add plays within the self-storage sector. Upgrading existing facilities or improving operational efficiencies requires less capital than new developments, yet can still drive significant returns through increased occupancy and rental rates.

Inflation

Self-storage facilities’ ability to adjust rental rates quickly in response to inflation makes them an attractive investment. Unlike other real estate sectors where long-term leases may lock in rates, self-storage leases are typically month-to-month. This pricing flexibility allows owners to raise rates reflecting current market conditions. As a result, they can preserve growing revenue streams and hedge against inflationary pressures.

Challenges and considerations

Despite the increased interest in this alternative asset class, there are current risks that real estate investors should be aware of such as:

Market supply

While the self-storage industry has seen rapid growth, especially during the pandemic, this has led to an oversupply in some areas. As of July 2023, operators cut rents by as much as 28% below 2021 levels in certain markets, signaling an imbalance between supply and demand.

Nationwide, the supply of storage units is increasing again after slowing in 2022. However, Statista’s 2023 projections still show slower year-over-year growth compared to the heights of pandemic-fueled expansion.

Opportunities exist to match storage development to community needs, especially in high-growth areas like the Southern U.S., which saw 87% of the country’s self-storage development in 2023. Investors can focus on these regions rather than oversaturated markets.

Capital Funding

With interest rates remaining significantly higher, developers are focusing more on acquiring existing properties rather than new builds. The slowdown in fresh construction projects enables well-capitalized investors to find favorable value-add opportunities within existing properties.

At the same time, commercial lenders are continuing to tighten their requirements, reducing credit and loan opportunities across all commercial real estate sectors. The combination of increased borrowing rates and bank policies requiring more equity has made financing new facilities costlier. This further incentivizes value-add plays on existing properties over new development.

Industry consolidation

Smaller facility owners now compete with multi-billion dollar public storage REITs, especially in top metro markets. Large national platforms, with their extensive access to capital and operational expertise, actively position themselves to consolidate assets through acquisitions.

For example, in March 2023, Extra Space Storage purchased LifeStorage for $12 billion. Extra Space expects to achieve synergies in areas like marketing costs, solar footprint, and potentially increased credit rates. And in September 2023, Public Storage completed its $2.2 billion acquisition of Simply Self Storage.

This consolidation wave presents a challenging obstacle for operators without access to such vast resources. As large players optimize nationwide portfolios, smaller owners will find it increasingly difficult to compete on scale, pricing, and operational efficiency.

Key takeaways

Self-storage presents a compelling real estate investment opportunity. Its unique status providing space in times of change allows it to outperform other property types by remaining resilient amid varying economic conditions.

Beyond resilient returns, the clear demand drivers tied to major life events indicate continued growth on the horizon. Self-storage’s flexible cost structure also enables adapting pricing to shifts in inflation or broader economic conditions.

While challenges like commercial real estate funding and industry consolidation require monitoring, self-storage can still provide long-term value as an alternative asset class for the right investors.

As self-storage investing becomes more recognized as a stable, long-term real estate play, investors seeking stability and diversification should meet with their financial advisors to evaluate options. Given the sector’s projected growth and resilient demand drivers, investing in self-storage assets could provide a buffer for portfolios against market turbulence.

Publish Date & Time : 21 Feb 2024, 03:37 pm

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Author

Asaf Raz

Asaf is Agora’s Head of Marketing and a growth expert providing consulting services to tech startups and VCs. Asaf is also the host of The Deal Makers Podcast, where he hosts top CRE talents for conversations where they share their success stories and industry insights.

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