Self-Storage Industry Outlook
Commercial Real Estate
This blog post comes to us from Brad Sherman. Brad Sherman has primary responsibility for all legal, investment and finance matters for StoreSmart®, an operator of self-storage facilities. He is an accomplished real estate and corporate lawyer and has over 20 years of experience investing in, or developing, numerous retail and single-family real estate developments. Below, he shares his insights on the self-storage industry.
Even during the Great Recession of 2007-2009, self-storage outperformed all other asset classes of commercial real estate. Self-storage has only experienced an actual loss rate (foreclosures) of about 2%, by far the lowest of all commercial real estate asset classes.
Generally, all self-storage projects fall into one of the following market classifications:
Despite the considerable M&A and consolidation activity, the self-storage industry remains highly fragmented nationally. The top 10 operators control approximately 16% of the facilities, the next 11-50 operators control approximately 6.5% of the facilities and with the remaining approximately 77% of the facilities controlled by independent owners. This fragmentation should provide for the opportunity for well capitalized and sophisticated players to selectively target individual assets and portfolios at attractive cap rates thereby enabling these players to amass attractive portfolios of assets and emerge as large industry players.
In-place self storage tenants are generally not price sensitive, as the self-storage rental fee is normally a small portion of a tenant’s disposable income. In addition, there is minimal communication between different tenants at a given facility, which allows for the operator to selectively adjust rental rates for individual tenants. These two factors combined allow for the operator to increase rates to market on an ongoing basis for in-place tenants and to maintain a relatively high year-over-year rental rate growth. This captured in-place demand is one of the main reasons large self-storage operators are able to, in general, increase rental rates by 5–12% annually.
Self-storage revenues are inherently diversified by tenant and facility, somewhat analogous to the multi-family sector. Since most self-storage facilities offer monthly leases, when market demand rises, prices can be increased at a faster pace than other real estate asset classes with longer term, in-place leases. That said, in the event of an economic downturn the opposite effect is a risk, which is mitigated if limited supply exists. The cash flow is further diversified by a widely unrecognized robust commercial customer base to complement self storage consumer tenants. These commercial tenants help support occupancy levels, lengthen rental terms and further diversify the tenant base.
The self-storage industry is more insulated from economic shifts as the need for space exists both when the economy is weak (as people downsize in housing, double up or move in with parents) and when the economy is strong (more disposable income and purchased goods requiring storage, as well as heightened demand for commercial users). Consequently, self-storage facilities are generally hold value better and recover more quickly if real estate markets sour, creating a hedge to weakening markets.
While office and retail sectors have experienced significant increases in vacancies nationwide during the Great Recession of 2007-2009, self-storage rental rates have risen, indicating relatively strong demand for the product. While there are no direct indices of delinquency rates across the self-storage industry, increased rental rates reflect strong occupancy levels.
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