Why Self-Storage Needs to Be on the Radar of Every Net Lease Investor

The perception of the self-storage industry has changed dramatically in the past 10 years as facilities have become more sophisticated, better built and more mainstream. As a direct result, self-storage has become one of the hottest product types within commercial real estate and values are at an all-time high. Short-term demand drivers boosted by the pandemic are contributing to the strong performance the sector has seen through mid-2021, and investor sentiment remains incredibly bullish. With asking rents on the rise and vacancy falling, or at least remaining stable for the foreseeable future, there is a favorable outlook for cap rates and property values going forward, and this asset class needs to be on the radar of every net lease investor.

While self-storage is becoming a more institutionalized class of commercial real estate, with several U.S.-based publicly traded REITs focused on self-storage, the majority of self-storage owners are still private. Private and institutional investor confidence has been growing as more and more people rely on self-storage facilities to fill a variety of short- and long-term needs, and REITs and institutional investors, along with larger private self-storage owners, are the most active right now. These groups are seeking nationwide assets throughout the sector, with Class A and B product, both climate-controlled and non, in high demand. Furthermore, demand is surging in warm climates as these areas benefit from employment growth, increasing populations and improving demographics.

In addition to demand for existing product being strong, the Southeast and West regions are among the areas seeing robust levels of new self-storage construction, however, activity is not limited to these areas. The Mountain and Midwest regions are also seeing an increase in new units. New development and investor demand are growing in all areas that are being impacted by shifting trends, many of which have been influenced or accelerated by the pandemic. Remote learning and working, for example, are taking away storage space in peoples’ houses as the need for a dedicated home office grows. Businesses, too, are needing to store excess items as they reconfigure office space to accommodate for physical distancing. Relocation trends to less dense areas are also driving new storage use and demand, and demand is not expected to slow. As we enter 2022, the self-storage sector is poised to continue riding these demand tailwinds.

For investors, these properties offer a large income potential with very low overhead in comparison to other types of commercial assets. Office buildings and retail properties can have high tenant improvement costs, while self-storage has virtually none. There are also relatively low on-going maintenance costs, and a small to mid-sized self-storage business can be relatively self-sufficient. Moreover, leases are month-to-month, allowing owners to quickly capture market rental rates. Investors should focus largely on the “3-mile demographics” when evaluating an investment. Buyers should seek relatively strong population bases and household incomes within that radius and know that close proximity to dense neighborhoods and multifamily complexes should generally be a strong driver for self-storage demand. For all these reasons, we predict the next few years will see a noticeable uptick in new entrants to the space, as investors new to the self-storage sector discover this ever-growing and increasingly popular subset.

Dana Summers is Senior Director at Stan Johnson Company