A guide to self-storage investing amid market instability

The self-storage sector has historically demonstrated remarkable stability, even during major economic downturns. However, current uncertainties around inflation, interest rates, and valuations require investors to take a more nuanced approach to self storage investment. This guide provides strategies to successfully deal with self-storage investing amid market instability.

How market instability impacts real estate

Self-storage real estate tends to be relatively resilient to economic troubles. however, while self-storage tends to weather storms, other real estate sectors see significant impacts from market instability. We want to highlight these differences compared to other real estate sectors: 

• Retail: Rising rates tend to reduce consumer spending, slowing tenant growth and sales. Property values decline.
• Office: Higher vacancy from remote work reduces rents. Capitalization rates rise, increasing investor hurdles.
• Multifamily: Development stalls and property values drop as rates rise. Investors require higher risk premiums.
• Hospitality: Corporations cut travel and consumers reduce spending during downturns. Revenue per available room plunges.

Unlike these cyclical sectors, self-storage demand correlates more with life events than economic swings, providing storage options with unique resilience.

The history of self-storage’s recession resistance

Self-storage consistently demonstrates remarkable stability even in major economic crises. To underline the resilience of self-storage real estate take a look at the following historical examples:

• During the 2008-2009 Great Recession, the self-storage industry realized 5% revenue growth even as most commercial real estate plummeted 25-67%. Demand increased as foreclosures and job losses forced downsizing. 
• Amid COVID-19 pandemic, self-storage occupancy achieved 96.5% in the third quarter of 2021 compared to 91.5% in the first quarter of 2020

This counter cyclical demand for storage facilities is driven by life events like moving or downsizing that persist through downturns. Self-storage provides essential flexible capacity enabling major life transitions. This fundamental need for storage facilities underpins its resilience.

Here is some useful self-storage REIT data that illustrate self-storage performance by geographical region: 

As it is evident from the figures above, in Q3 2023, after a prolonged period of growth, the industry is now approaching a point where net operating income is stabilizing.

Investing in self-storage

There are various ways how you can invest in storage facilities either by doing it or yourself or by utilizing passive investment strategies such as REITs and syndications:

• Passive investing: Invest as a limited partner in self-storage syndication, like those offered on investbase, to benefit from institutional operating expertise. Drawbacks may include a lack of control and longer exit horizons.
• Public stocks/REITs: Publicly traded self-storage REITs and stocks like Public Storage or Life Storage offer liquidity. However, returns tend to be lower than direct ownership.
• Direct ownership: Acquire an existing facility or develop a new property. While offering control, this requires extensive real estate expertise and has high upfront capital requirements.
• Franchising with a proven operator can reduce management burden. However, hands-on oversight of the asset remains an obligation of direct ownership.

In general, passive self-storage space investing provides attractive risk-adjusted returns for those seeking self-storage exposure without intensive asset management responsibilities.

Understanding the new normal

The self-storage industry enjoyed a prolonged period of smooth sailing, with steady growth high annual returns over the last decade. However, the landscape for storage space has gotten more turbulent recently. Here’s an overview of the key factors causing waves:

The impact of rising interest rates

After over a decade of historically low interest rates, the Federal Reserve has aggressively raised rates over the past year to curb inflation. This directly impacts self-storage, as higher rates make financing more expensive. For acquisitions requiring debt, higher interest costs can reduce net operating income. For existing owners, refinancing or renewing variable-rate debt could mean significantly higher debt servicing expenses.

While self-storage has traditionally been valued based heavily on income, higher borrowing costs mean factors like loan terms, leverage ratios, and debt service coverage ratios now play a larger role in valuation. With more weight given to risk metrics, valuation has become more complex.

Ongoing economic uncertainty

From pandemic-related disruptions to supply chain woes and rising consumer costs, self-storage businesses in the economy face some hurdles. As investors adjust their broader real estate strategies to account for changing economic conditions, caution may also creep into self-storage allocation decisions.

Additionally, in times of economic anxiety, smaller players often pause expansions and acquisitions. This consolidation of activity among larger institutional and private investors can lead to increased competition for deals, potentially lowering returns.

Development boom reaching maturity

Fueled by rising demand, low interest rates, and optimistic outlooks for housing development, self-storage saw a construction boom over the past decade. Over the last five years, however, the supply of newly built units increased by 125 million square feet. However, with rising construction costs and lending rates, new development has slowed. This reduced pipeline of new empty storage properties could mean less selection and pricier assets for buyers in the future.

Completions and inventory — Source: CBRE

Shifting local market dynamics

While macro conditions may fluctuate, self-storage performance is heavily driven by local market dynamics like demographics, market demand, zoning, competition, and housing trends. Some markets, such as Charlotte, North Carolina; Nashville, Tennessee; and other high-growth areas, may be oversaturated.

While others remain undersupplied and ripe for growth. For example, New York and Los Angeles have some of the lowest amounts of self storage space compared to the rest of the country, with around two and four square feet per person respectively. In contrast, the national average stands at 7.1 square feet per person.

Investors must closely evaluate the dynamics market-by-market.

Overall, economic uncertainty, rising interest rates, slowing supply growth, and diverging local market conditions have combined to create a more complex investing landscape. The smooth sailing days appear to be over. However, choppy waters don’t mean investors should abandon the ship. You simply need to adjust the course.

Adapting your approach to valuation

With increased market volatility, valuations are now more complex. Traditional valuation metrics like capitalization rates must be weighed against other factors, including:

• Impact of rising interest rates on debt service.
• Revenue growth potential based on market rental rates.
• Renovation costs to maintain competitiveness.

A multi-pronged valuation approach is required in today’s climate. Work closely with commercial real estate and self-storage professionals to accurately assess asset value in relation to market risk and return. An accurate valuation will allow you to make informed offers and negotiate from a position of knowledge.

Strategies to navigate market instability

If you’re looking to invest in self-storage for facilities by yourself we compiled a number of strategies on how you can deal with markets being less stable right now:

• Target value-adding acquisitions: Look for assets with the potential to increase rents or decrease costs through renovations and operational improvements. This strategy requires less upfront capital than new construction.
• Focus on income stability: Prioritize locations with sustained occupancy rates above 80% and avoid assets with excessive rollover risk. Markets with a growing population and steady demand provide resilience.
• Partner with experienced operators: Operational expertise is key to optimizing performance. Look for established management companies with a proven track record.
• Maintain capital reserves: Keep funds available for capital improvements, renovations, or maintenance that may arise. This provides a financial cushion to handle unexpected costs.
• Evaluate risk tolerance: Not all investors have the same appetite for risk. Analyze your portfolio construction and growth objectives to determine appropriate exposure levels.

The self-storage landscape is changing, but attractive investment opportunities remain for informed investors. By adapting your approach to valuations, targeting resilient markets, and employing prudent risk management strategies, self-storage investments can continue providing portfolio stability and long-term returns, even amid economic fluctuations.

Utilizing self-storage market research

High-quality market research is more critical than ever for self-storage investors. Studying expert opinions, like this self-storage podcast, can also help you inform your strategy. 

Comprehensive market analysis helps identify potential opportunities and provides key insights to inform acquisition strategies. Focus your research on both macro and micro market factors:

Macro market factors

• Local population and job growth trends: Analyze whether the local population and employment opportunities have increased or declined over recent years. Growing populations and job growth fuel demand for self-storage. For instance, the rapid population growth and booming tech industry in Austin, Texas, have significantly increased the demand for self-storage facilities in the region. From 2010 to 2020, Austin’s population grew by nearly 33%, reaching approximately 961,000 people. During the same period, Austin’s employment opportunities expanded by over 40%, particularly in the tech sector.

• Housing trends: Check metrics like home sales, residential rental rates, and new housing construction starts. More homes being built or rising home sales indicate the need for storage. For example, in Denver, Colorado, home sales increased by 12% from 2019 to 2020, while residential rental rates rose by 7% during the same period. Additionally, new housing construction starts in Denver saw a 15% increase, reflecting a growing demand for self-storage solutions in the area
• Household formation and demographics: Look at the number of households being formed locally and the average household size. More household formations and smaller household sizes increase self-storage demand.
• Business environment and storage demand drivers: Research the mix of businesses in the area. More small businesses and startups generate commercial storage needs.
• Self-storage supply and occupancy rates: Track the existing supply of storage facilities locally and their occupancy rates. High occupancies indicate strong demand in excess of current supply. For example, in Miami, Florida, the occupancy rate for self-storage facilities has consistently been above 92%, with a limited increase in new storage developments. This high occupancy rate highlights the strong demand for storage solutions in the area, suggesting that the current supply is insufficient to meet local needs.
• Rent growth figures: Look at recent rent growth at area storage facilities. Strong rent growth indicates landlords are able to raise rates while maintaining occupancies.

Micro market factors

• Traffic counts and visibility: Analyze traffic counts on roads adjacent to the facility. Higher traffic volumes equal more visibility and access for tenants.
• Local tenant mix: Determine if more residential or business tenants are prevalent nearby. This helps tailor offerings to local demand.
• Competition in the immediate area: Identify storage facilities within a 1-3 mile radius of the target site. More competitors in close proximity increases competition.
• Condition, amenities of nearby properties: Review the condition, age, and amenities of nearby facilities. Poorly maintained or minimal amenities present an opportunity to take market share.
• Geographic barriers to entry/expansion: Look for geographic barriers like busy roads, railways, or waterways surrounding the site that may limit new competitive supply.

A variety of data sources can provide market insights

• Commercial real estate listing sites: These sites provide listings and information on self-storage facilities for sale or lease, including occupancy data. Some of the biggest sites include LoopNet, Crexi, QuantumListing, Reonomy (the leader in the off-market search). 
• Self-storage industry associations: Trade groups like the Self Storage Association provide market research reports and data on trends.
• Public records and census data: Census data offers population demographics. County/city records provide permitting info on new construction. Census.gov is a good place to start. 
• Real estate and economic development sites: Many websites provide commercial real estate data. Economic development sites offer info on business growth. You can check out Elevate Rapid City, One Columbus, Choose Folsom, etc. 
• On-the-ground surveillance of target markets: Drive targeted markets to observe competitors and occupancy levels first-hand. Speak with local real estate professionals.

Work closely with an experienced operator or advisor to access and analyze the most relevant data. Allow ample lead time for thorough underwriting before acquiring assets or making offers in this market climate.

Looking ahead

So what’s in for the self-storage market over the next month and years? a number of trends are looking to shape the supply and demand dynamics:

Moderating new supply

Limited new development means existing properties won’t face as much new competition, allowing for sustained occupancy rates and rental growth. Markets with strong population growth and undersupplied capacity offer particular upside. For example, you can research Miami, Atlanta, Phoenix, and Tampa to compare their population growth to self storage supply. 

Fragmentation allows consolidation

The highly fragmented market enables larger players to selectively consolidate through acquisitions of smaller operators and single assets priced below replacement cost. These can immediately contribute to portfolio income stability. In March 2023, Extra Space Storage made history by buying out Life Storage for a whopping $12.7 billion, creating the largest self-storage company in the country with over 3,500 locations. This merger is expected to give Extra Space a real boost in terms of strategy, operations, and finances.

Public Storage also got in on the action in 2023 by snapping up Simply Self Storage from Blackstone Real Estate Income Trust for $2.2 billion.

Rising ancillary revenues

With existing tenants already onsite, storage facilities lend themselves to additional revenue streams through add-on services like moving supplies, truck rentals, mailboxes, wine storage units, e-commerce order fulfillment, and virtual offices. These diversified income streams improve returns.

Tech-enabled operations

By embracing automated technology for things like access control, payment collection, pricing algorithms, and remote video monitoring, operators can tightly manage costs while enhancing revenues. Increased automation can lower operational costs and also reduce reliance on labor and low operating costs.

Demographic tailwinds

Favorable demographic shifts underpin storage demand growth. Factors like increased housing turnover, higher divorce rates, elevated small business formations, and downsizing of both households and offices correlate strongly with more storage unit demand over the long term.

Investing in self-storage requires adapting to evolving market conditions. While the road ahead has some bumps and curves, maintaining perspective on long-term demand drivers, focusing on resilient properties, and leveraging fundamental sector strengths will keep your portfolio on track. With a balanced approach, self-storage remains an attractive asset class amid economic and interest rate uncertainty. This guide provides a roadmap to follow the opportunities while navigating the challenges.

To sum up

Self-storage facilities continue to provide an interesting investment opportunity for real estate investors in particular because the market has proven resilient over the last two major challenging market periods for real estate:  the financial crisis from 2008 to 2009 and the pandemic from 2020 to 2022. 

If you’re interested in investing in the Self Storage market there are a couple of passive investment opportunities you can choose from such as ETFs crowdfunding in investing in syndications with investbase.

If you are a more hands-on investor, you may want to research the market-suitable projects to develop yourself.