The self-storage and multifamily markets are often said to run along parallel paths. Both asset classes follow a similar set of metrics—namely population growth, employment growth, and income growth—to determine a profitable submarket. Self-storage and apartment rent growth are linked and vacancy rates for both trend in tandem.[1]
Both asset classes are considered to be somewhat recession-defensive, and because operators are able to respond quickly to changing market conditions with frequent rental rate changes, both property types are considered to be an inflation hedge option in commercial real estate.
Upon completing its $1.2 billion acquisition of Simply Self Storage in late 2020, the CEO of a major public REIT said that the transaction was “a complementary addition to [our] high-quality portfolio of income-generating real estate, which is heavily weighted towards logistics and multifamily primarily in growth markets.”[2] Or as Forrest Gump would say, apartments and storage are “like peas and carrots.”
Within the traded REIT industry, the self-storage sector has produced an annualized return of 16.54% since 1994, the highest return on average of all REIT sectors during that period and an over 6% higher return than the S&P 500.[3] And that performance includes several notable downturns, including the dot-com bubble and the Great Recession.
While self-storage has demonstrated a resilient business model, it is not immune to negative economic impacts. After years of development up through 2019, many markets became oversaturated with storage space, which led to a retraction in rental rates and higher vacancies. Whether isolated incidents of oversupply prove temporary, of course, depends on long-term demographic trends and economic conditions.
However, a number of pandemic-related dynamics have brought a resurgence in storage demand. The closure of offices and college campuses as well as other lockdowns prompted many households to place belongings in storage units as they turned spare rooms and garages into home classrooms, offices and gyms.
The untethering of numerous office workers accelerated the “Great Migration” trend that was already underway. As Millennials represent both the largest and most active share of self-storage renters, their lifestyle changes are especially relevant for self-storage and multifamily owners, alike.1 And, as older households opt to retire, downsize and buy that RV they’ve dreamed about, they often place their worldly possessions in storage.
All of these factors helped the five major publicly traded self-storage REITs in the market today achieve their growth in 2021. Revenues for all national self-storage REITs jumped more than 15%, net operating income (NOI) grew to almost 23%, and expenses decreased 2.3%.3
Many market participants have wondered if the changes that shored up demand are temporary, but thus far, storage space needs appear to be holding strong. Barriers to development, including elevated land, material and labor costs, continue to inhibit new storage (and multifamily!) construction, a trend likely to hold through the coming year that we believe will help keep supply and demand at a healthy balance.
For long-term investors, self-storage and multifamily may be complementary asset classes worth considering. For apartment owners interested in participating in the growing demand, but who are ready to retire from being a landlord, there are passive real estate investments that may allow investors an ability to move from an active to a passive role of real estate ownership on a tax-deferred basis.
[1] Marcus & Millichap, 2022 US Self Storage Investment Forecast Report
[2] Blackstone.com, October 26, 2020
[3] Fool.com, Why Self Storage is a Smart Buy for 2022, December 21, 2021
https://1031capitalsolutions.com/2022/05/12/self-storage-complements-multi/
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