The self-storage sector has proven to be relatively recession-proof during the pandemic and offers diverse investment opportunities and strategies depending on the location, according to a new report from Trepp.
The Oct. 8 report, titled "Self-Storage: Analyzing a ‘Recession-Resistant’ Sector," is heavy on commercial mortgage-backed securities (CMBS) data and notes that only three of more than 1,700 such loans (totaling nearly $16 billion) in Trepp’s database were marked delinquent in September, unlike the heavily hit hotel and retail CMBS sectors.
"This can be partly attributed to the fact that the bill for a self-storage facility is a very small portion of an individual’s or business’s monthly expenses," the data firm’s report says. "Thus, despite a downturn, the income effect on the self-storage demand is minimal."
The four Ds of demand that drive self-storage
That demand is driven by what the report refers to as the four Ds of self-storage: divorce, dislocation, death, and downsizing. "Unfortunately, there has been an abundance of these throughout this year due to COVID," the report says.
Adding to the segment’s resilience are its net operating income margins, among the highest of any real estate asset type at upwards of 60% to 70%, Trepp says, citing a Cushman & Wakefield report.
Those attributes have attracted a wide variety of players, including the five largest real estate investment trusts (REITs) that together own about 20% of the market: Public Storage (NYSE: PSA), Extra Space Storage (NYSE: EXR), CubeSmart (NYSE: CUBE), Life Storage (NYSE: LSI), and National Storage Affiliates (NYSE: NSA).
That leaves thousands of other owners and other investors who have helped drive construction spending up by 584% from January 2015 to January 2020, the Trepp report says, citing census data on self-storage facilities.
As for where investors might look now, the report says that while large "24-hour" cities have attracted a large portion of acquisition attention, "some experts are of the opinion that cities have already reached or are close to a saturation point wherein further addition will likely push the margins down."
Rising expenses and competition, how to add value to a flip
Rising expenses -- wages and especially advertising on social media -- also are having an impact, the report says, and with 49,000 properties already up and running around the country, whether and how to invest further in the self-storage industry are interesting questions.
That’s a lot of competition, especially in a segment that, unlike multifamily or office properties, doesn't typically have a lot of amenities to prompt someone to drive farther to get to, and, like those segments, feels restricted on how much rent can be raised.
“In such a case, how do self-storage operators aiming to flip assets provide a value-add?” the Trepp report asks, answering its own question by pointing to such strategies as adding truck rentals, selling storage basics, and offering more climate-controlled units that cost more to rent.
The report also points to remote management; that is, operating a facility without an on-site manager through digital interactions with customers. Trepp cites the experience of student storage specialists Storage Squad in this regard and says that operating model could make it more feasible to buy performing assets of small size in small markets.
A buyer’s market for acquisitions? Or build your own? Or buy some stock?
"Additionally," the report says, "since these small towns and rural areas are typically not on the radar for big players, it creates a buyer’s market for potential acquisitions."
Now could be a good time to look into that investment idea, as the Trepp report notes that while many self-storage REITs have slowed their acquisition activity because of the pandemic, that trend may reverse soon.
Adding to the competition: "Apart from the existing players, the market continues to be of interest to other big players as they look for high-quality investments in the ‘recession-resistant’ commercial real estate space," the Trepp report concludes.
So, for smaller players, the best options might be either buying stock in self-storage REITs, partnering with other investors in locally owned operations in small markets, or maybe even building your own, using the increasingly robust choice of self-service digital options.