Commercial real estate’s self-storage sector continues to perform extremely well. Rents are rising, and stocks of some of the leading REITs in the sector, such as Extra Space Storage have really taken off in the last year.
And like the industrial and multifamily sectors, self-storage development is starting to experience an uptick. This has led to an increased demand for self-storage acquisitions.
Multifamily’s good times are obvious because of the major crash from which the single-family housing industry is still recovering. Industrial is hot right now, in part, because of e-commerce’s strength and improvements at Southern California’s major ports.
So what is the deal with the success experienced by self storage?
It seems that there is the impression that the sector is somewhat recession proof. During the last downturn, for example, many in the commercial real estate industry consider it the best-performing property type. The National Real Estate Investor article (linked to three paragraphs above) also points out that increased consumer demand to live in urban areas, with less square footage than a suburban dwelling, has driven more people to rent temporary space for their belongings.
A recent Marcus & Millichap self-storage report said that on the consumer end, growth is being driven by improvements in the job market. The commercial real estate services firm says that among the cities seeing strong demand are Austin, Denver, Nashville and Tampa-St. Petersburg, Fla.; where several people are moving for employment opportunities and renting apartments, increasing their need for extra space. In addition, there are many Baby Boomers reaching the retirement age, downsizing and moving to urban areas where they are able to be closer to shopping and dining. More business are also forecasted to be using self-storage than residential users, which currently make up the bulk of those who lease spaces, due to a tightening office sector in several major-metro markets.
Marcus & Millichap points out that the national self-storage vacancy rate is around 94 percent in most major metro areas. However, the company does warn that increased construction in the sector over the next year, in locales such as Dallas, Denver and Phoenix, could lead to a downturn in occupancies.
On the investment side, more self-storage-asset purchasers are increasingly private investors, M&M notes. They are mainly looking for Class A properties in the $1-million-to-$2.5-million range. The investors are able to get these deals done because lenders are providing more favorable financing due to the strong performance of the product type, and cap rates are between eight percent and nine percent for high-quality assets, depending on the market.
Finally, transactions are expected to continue at a strong pace, at least until the Fed increases interest rates, whenever that might be.