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The State of the Self-Storage Market

“A Pandemic Space Race: Self-Storage Roars Back”

That is the headline of a recent New York Times article describing the investor demand for self-storage properties. Here’s another newsflash: Investor demand for self-storage is here to stay.

What is driving this demand? How has the pandemic affected customers, rents, and occupancy? Will future development soften rents? Let’s look at these questions and see if we can make sense of it all.

Occupancy and Rent Drivers

People are moving and decluttering their lives. They are throwing away stuff or putting what they don’t want to throw away into storage.

They are moving to escape the northeast and west coast (sorry New York and California). With the work-from-home trend, people discovered they can live in tax-friendly states or trade in the traffic-ridden cities for a suburban family-friendly lifestyle.

They are getting rid of stuff to make space for the work-from-home lifestyle (a lifestyle that isn’t likely to go away anytime soon). Now that mom and dad need a home office, those boxes of Christmas decorations need to go somewhere.

All this activity is driving up occupancies at storage facilities. Often, customers are renting longer than they expected. Storage has become a long-term solution to a short-term problem. This is driving up occupancies and rents. Despite the rental rate increases, fewer people are moving their stuff out of self-storage.

Higher rents are leading to stronger cash flows and thus the increased pricing and lower cap rates we’re seeing. Institutional investors who used to consider self-storage an alternative investment are now active in the space. One example is KKR. They just closed a three-property portfolio in Austin, TX, and Nashville, TN, and they have five more storage facilities under contract for nearly $100 million.

The pandemic showed, in the aggregate, people would rather keep their belongings in a storage unit than get rid of their stuff. This story played out during the recession of 2008-2009, and it happened again last year. Data from two recessions tell the story that self-storage is a stable asset class. KKR won’t be the last institutional investor to jump into the space.

Development

Some might be concerned about new development ruining the party. But how? When rents and occupancies are high for any type of real estate, developers usually build more of that property type until it becomes overbuilt, causing rents and occupancies to flatten or decline.

We don’t expect that to happen in most cities during the next 2 or 3 years for two reasons: high labor and steel costs. Based on our discussions with storage contractors, the price of steel won’t come back down to pre-pandemic prices. Some steel mills that shut down during the pandemic haven’t started back up. Bottlenecks and supply chain ssues are still hampering the delivery of materials, and the cost of labor is up in multiple industries, including construction.

The convergence of these issues makes it more difficult to estimate development costs, keeping pressure on developers to pick projects that have the highest probability of success over projects that may be priced out before a shovel hits the dirt.

The Rise of Unattended Facilities

According to Joe Russell, CEO of Public Storage, customers who rent a unit online, never talking to a manager, have higher household incomes and lower delinquency. Last year, Public Storage moved in almost 700,000 customers online, or 50% of all their rentals, so they should know.

I heard Joe speak at the Self-Storage Association Fall Conference & Trade Show a few weeks ago. He spoke about the push Public Storage is making into the digital, automated management platform.

When we were “secret shopping” a Public Storage in Denver, Colorado, the manager told us we don’t need to stop by the office when we’re ready to rent. We can do it all online, including the move in, without ever stopping by the office. “Wow,” I thought, “Then why are you here?” Some storage veterans think Public Storage is working toward having fully unattended facilities in 12 to 24 months.

What are some drivers of going unattended? The adoption of a digital lifestyle and labor costs. We can fly, rent a car, order food, and buy a car online. Why can’t we rent a storage unit without talking to a manager? The answer is we can if operators will make it easy for customers to do so. Labor costs are rising across many industries. Most storage managers are paid about $10 to $15 per hour. They can find jobs elsewhere paying more than that and, in some cases, benefits include college tuition. Storage operators will not be able to compete remuneration-wise. They won’t have to if they go unattended.

Conclusion

The work-from-home lifestyle is incentivizing the population to declutter and relocate to more affordable, tax-friendly states. This is driving increases in occupancy and rents at storage facilities. Development is slowing because of rising costs for labor and materials. These events have caught the attention of institutional investors who are seeking to acquire well-located facilities in growing cities and suburbs.

Digital conveniences that customers have become accustomed to are spilling over in the storage industry. Unattended storage is no longer a novelty. Led by Public Storage, among others, the industry is undergoing a mental shift around how customers find, rent, and move in at self-storage facilities.

We understand that business cycles repeat, and storage demand can soften in the future. We also understand that we are at an exciting time in the industry, and we are ready to continue acquiring solid deals in growing markets in business-friendly states.