Self storage proved itself again to be a reliable sector during challenging times. With people downsizing, companies giving up physical premises and college kids not on campus, self storage adapted, widened its customer base and gained even more public appreciation. But can it profit from these advantages going forward and continue to be a good option for investors?
During the pandemic, self storage was one of the CRE sectors that had access to plentiful capital, and the amount of space planned or under construction nationwide has been rising gradually month over month, per Yardi Matrix data. The national average rate for a non-climate-controlled 10×10 storage unit is currently $128, a 9% increase year-over-year, with corresponding figures for the Atlanta and Miami metropolitan areas as high as 16% and 20%. It certainly looks as if self storage operators and developers have reasons to be cheerful right now.
But what of the future? The streamlined, contact-free procedures put in place to maintain hygiene can still boost efficiency even when health concerns have diminished. And any increased diversity in the sector’s customer base could bode well for the long-term. On the negative side, construction costs didn’t get any cheaper. Is it still a great sector for small-scale investment or are bigger players taking over? Then there is the enduringly local nature of the industry — does this apply across the country or are some areas much better prospects than others?
To get more details about investing in self storage right now, we got expert opinions from Michael Bull (President, Office Investment Sales CEO) and Tyler McKee (President, Self Storage Group) of Bull Realty. This Atlanta-based company specializes in commercial real estate sales, leasing and advisory services and produces the popular Commercial Real Estate Show podcasts.
1. Self storage is often an essential service during crises, and it can weather them better. For investors, has the pandemic now put the industry in a more secure position than other real estate sectors going forward?
While Self-Storage has proven resilient in previous recessions and market cycles, this pandemic has created even more demand as people have:
a. moved during the pandemic,
b. have needed more room to work from home,
c. have bought more items needing storage like boats, bikes and campers and
d. companies shutting down office space have had increased storage needs.
2. Self storage is known for its mom-and-pop operations and for being relatively easy to start out in. Has the pandemic caused a shift in which types of investors are now looking at the self storage industry?
There has been a shift to more institutional investors in the sector. For example, Bill Gates became part owner of StorageMart in 2020. Self-Storage is sought after by REITS and for good reason. Self-storage REITS in Q1 and Q2 were the top performing sector in commercial real estate. For mom-and-pop owners 2021 might be the right time to consider selling with recent demand surge firming up performance. Many owners are selling while interest rates are low, before the possible increases in capital gains and before 1031 exchange is possibly limited to $500K.
3. Contactless operations were implemented across the industry and unmanned facilities are now more common. What aspects of self storage facilities do you think will most benefit from focused investment in the wake of the pandemic?
Technology has enhanced operations making properties safer health wise and more efficient economically. Some of the most beneficial are cell phone apps and online rental agreements. Another beneficial contactless operation is the implementation of online auctions, which allows more convenient auctions while also attracting a much larger buyer pool.
4. Which geographical areas do you envisage self storage developers investigating now to find new customer bases and to avoid over-saturation?
We have seen migration to the Southeast and Sun Belt which has led to heavy development. Self-storage is hyper-local. Many cities make it difficult for more storage facilities to be built. Look for opportunities in markets with a higher barrier to entry and for properties in the southeast and sun belt.
5. Repurposing vacant retail properties has been a win-win for the self storage industry, and for residents and town halls. Do you envisage new trends regarding how self storage facilities will be developed?
Adaptive reuse will continue to evolve including conversions of retail properties, office buildings, hotels, and cold storage buildings. Conversions are a great way to develop storage where high construction costs, zoning restrictions or lack of available sites may otherwise hinder development.
Self storage still promises good investment opportunities as we look toward the end of the pandemic. People who never rented storage before are now used to storing a wide range of items, requiring units in a variety of sizes. Self storage development has continued apace, and cost-effective conversion projects are considered by many to be the way forward. While family-run businesses might consider it a good time to sell, by adopting new operations that evolved during the pandemic, they might alternatively prefer to profit from the industry’s current good health. To find a location to start or expand a self storage business, the local nature of the industry means new customer bases can often still be found — the Southern states clearly beckon, and they’ll be plenty of demand for climate-control there!
