The year was 2016, and I was a newly minted Director of Acquisitions tasked with acquiring multifamily properties. It was a rough year.
I underwrote deal after deal, but I couldn’t make the numbers work to match our investment strategy. After some internal discussion, we decided to focus our attention on a different asset class: self-storage.
At the time, I knew nothing about self-storage, so I took three weeks and immersed myself in every resource I could find, such as online articles, books, podcasts, and finally, the Self-Storage Almanac. Then after underwriting multiple deals and closing on five within nine months, I realized self-storage is one of the best real estate investments an investor can make.
Based on my experience, I want to share three reasons why I believe now is the right time to invest in self-storage.
Recession-Resistant
If you’ve done any research on self-storage investing, you’ve undoubtedly found articles describing self-storage as a recession-resistant asset class. I remember reading about this phenomenon years ago when the only performance data available to support such a claim was from the Great Recession of 2008-2009. Now, we can add the COVID-19 recession of 2020, as shown in figure 1.
The data show the returns for real estate investment trusts (REITs) in each sector for 2008 and 2020. Keep in mind, these are REIT returns and don’t reflect returns of private deals.
As you can see, self-storage was the only sector that posted positive returns in 2008 and one of two sectors that posted positive returns in 2020.
How has storage performed since 2020? Figure 2 shows the Web Rate, Price/SqFt over time.
The red line indicates when the REITs were lowering prices due to lockdowns taking place in March 2020. (Remember when the world ran out of toilet paper?) The green line shows rates increasing around mid-2020 through March 2021.
According to reports from Yardi Matrix, rates have continued to climb this year, setting records over the summer. Figure 3 is the most recent information from Yardi Matrix showing year-over-year (Y-o-Y) rent changes for 10×10 units. Think of it as a snapshot of the rate trends this September compared to last.
As you can see in figure 3, rates increased Y-o-Y in every market that Yardi tracks. There was some decline in rates from August to September, which is typical for this time of year. However, the previous monthly reports from Yardi show the same Y-o-Y rate increases across major markets for all of 2021.
The takeaway is storage roared back quickly from the decline in early 2020 and maintained that momentum throughout this year.
Now that we’ve established self-storage as recession-resistant based on data, the logical question is, why is storage so recession-resistant?
People use storage for various reasons, but they NEED storage when moving, downsizing, or relocating for a job. Those events multiply during recessions and help sustain and, in the case of 2020, drive demand for more space. Once customers are paying for a unit, a slight five-dollar rent increase isn’t going to make them mad enough to move out. But that increase can positively impact an operator’s net operating income. Hence, the positive returns in 2008 and 2020.
Fragmented Ownership
Approximately 75% of self-storage owners own only one or two facilities. These owners don’t always utilize industry best practices like management software, online rentals, and internet advertising to fill units and maximize value.
What does this mean for self-storage investors? It presents an opportunity to acquire facilities and improve operations, resulting in a well-managed portfolio of self-storage properties. But that’s not all. Owning a well-managed portfolio of facilities allows for the sale of the portfolio to a well-capitalized group eager to grow and willing to pay a premium.
It’s hard work to find, fund, and close deals one or two at a time. Institutional groups recognize this and will reward the company that has done the work.
For example, in 2021, Public Storage acquired ezStorage’s 48 locations in D.C., Virginia, and Maryland for $1.8 billion. In 2020, CubeSmart paid $540 million for an eight-property Storage Deluxe portfolio in New York City. In 2020, Blackstone acquired the eight million square foot portfolio of Simply Self Storage from Brookfield Asset Management for about $1.2 billion.
According to reports, all three portfolios traded in the low to high four percent cap rate range. For doing the hard work of acquiring a portfolio of well-managed facilities, these sellers received a significant payday.
Fragmented ownership ties in with my final reason why now is the time to start self-storage investing:
Institutional Investors
What do KKR, Blackstone, Bill Gates, and all the REITS have that allows them to pay sub-5 cap rates for portfolios? A low cost of capital.
These groups borrow at one to three percent interest, which allows them to pay a three or four percent cap rate for deals. These groups are playing a different game than everyone else, and that’s good for us.
What is the key to interest from institutional investors and a high valuation? A portfolio of facilities that are similar in quality and located in good markets where they want to be. In other words, acquire the types of assets institutional investors want to own. More institutional investors will be jumping into the self-storage space in the coming months, making the pool of buyers that much more attractive for groups like us that want to exit our portfolio in the coming years.
Honorable Mentions
I’ve covered the top three reasons why now is the right time to start self-storage investing. But I want to add a few more reasons as honorable mentions:
Low expense ratios and zero foreclosures: The expense ratio for the types of facilities we target is roughly 30% to 35%. About $0.30 to $0.35 is used to pay expenses for every dollar in revenue, resulting in high-profit margins, low break-even points, and virtually zero foreclosure rates.
Inflation Hedge: When someone rents a unit, they sign a month-to-month rental agreement, not a long-term lease. If expenses rise due to inflation, you can raise rents to capture that potential revenue or cover your costs. Customers are sticky and usually won’t move out due to a nominal increase in rent. Besides, where would they go? Down the road where another facility is charging the same amount? That’s unlikely.
Lending Options: “Self-Storage Emerges as Lender Comfort Zone,” reads the headline of an August 12, 2021, article from Multi-Housing News. The article describes how lenders want to add more storage loans to their portfolios. We’ve seen first-hand how eager lenders are to compete on terms and win our business, and we don’t see signs of it slowing down.
Conclusion
Self-storage data has proven, not once, but twice, that it is resilient through recessions. Rental rates have continued their upward trajectory that began last year and show little signs of declining to pre-pandemic levels. Life changes drive storage demand, creating customers that typically absorb rent increases, allowing owners to hedge against inflation. Fragmentation among owners provides an opportunity for the ones who can execute a viable acquisitions plan and exit properly to institutional investors with a lower cost of capital.
If someone asks you why you’re invested in self-storage, you can say, “Self-storage is recession-resistant with opportunities to exit to institutional investors. Why wouldn’t I invest!?”
