Self-Storage Forecast: Big Money, Big Deals

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In December 2020, Blackstone Real Estate Investment Trust (BREIT) closed on the $1.2 billion Simply Self Storage portfolio owned by Brookfield Asset Management. The acquisition makes BREIT the third-largest non-traded REIT in the U.S. 

In October 2020, Bill Gates, co-founder of Microsoft, purchased an ownership stake in StorageMart, the eighth largest storage operator in the United States, which valued the company at $2.7 billion. 

Why are vast amounts of capital pouring into self-storage?

Are investors out of options, or have they discovered an opportunity that others have overlooked?

We believe it’s the latter. Here’s why.

During 2020, when businesses shut down and travel bans went into effect because of the pandemic, self-storage REITs outperformed all other asset classes except for data centers, according to the National Association of Real Estate Investment Trusts (Nareit).

What’s more, contrary to expectations, self-storage occupancies and rates rose in most major markets tracked by Yardi Matrix, a storage data company. As of this publication, Yardi shows rates and occupancies continuing to hold steady or improve in those same markets.

In summary, storage facilities have proven to be recession-resistant in 2008 and 2020 and have provided a consistent risk-adjusted return for investors. These are exactly the types of investments Bill Gates and BREIT are looking for. 

What does this mean for

When the BREIT acquisition was announced, it shocked industry veterans. They were not expecting to be outbid by a relative newcomer to the industry. We expect that to happen again. 

Newcomers such as Buchanan Street Partners are ready to jump into the space with $350 to $500 million over the next five years in the acquisition and development of self-storage facilities. Rizk Ventures and Sparebox Storage have joined forces with a $200 million initial commitment, and another $500 million credit facility from JP Morgan to acquire existing storage facilities.

We expect strong competition from both these groups and other smaller, unknown shops looking for acquisitions.

Increased competition leads to higher prices, so we expect cap rates to hold between the five and six percent range (most likely closer to five percent) for most facilities, and dipping down in the sub-five, upper-four range for quality assets in high barrier to entry markets.

Both data and our experience confirm these expectations. 

In 2020, acquisitions activity was down roughly 20% compared to 2019, but sale price per foot was up roughly 11%. In other words, buyers are paying more for deals while closing fewer deals. We anticipate a continuation of that trend through early 2022.

Some deals will hit the market sooner rather than later. This is because of the talk of a potential capital gains tax increase by the Biden administration. Some sellers would rather cash in their chips now rather than wait and see what happens.

Some traditional lenders will take a forward-looking approach rather than a historical approach when reviewing deals. Stronger occupancies and rates will lead to increased confidence and desire to lend on self-storage facilities in quality markets.

Increased competition, low cap rates, and eager lenders will make the next 12 months an active year for