Self-storage is known for its ability to weather swings in the economy that negatively impact other property types. However, the end of the last decade was marked by developers and investors who rushed to capitalize on a great opportunity. As builders added to the supply and investor demand drove up prices, the need for storage began to decline as the country sunk into a major recession. The storage industry experienced its first major decrease in operating performance.

The industry has now attained the point reached by other property sectorsthat is, performance depends on the type of market and operator. There are two types of markets, primary and secondary, and two distinct types of operators, real estate investment trusts (REITs) and non-REITs. The non-REITs are divided into large non-REITS, which includes facilities with 300 or more units, and small non-REITs, which are facilities with less than 300 units.

This article examines the current operating performance of REITs and large and small non-REITs. Its focus is the primary markets, which are defined by the U.S. Census Bureau as the nation's 50 largest metropolitan areas (MSAs), having a population of at least 1 million people. Its believed these first-tier markets offer the best opportunity for lower-risk investments due to their high barriers to entry, greater population density, high household incomes and employment opportunities.

Self Storage Data Services Inc. (SSDS), an independent research firm that maintains the nations largest database of self-storage operating statistics, estimates there are about 18,000 storage facilities in the primary markets; 75 percent of these facilities could be considered investment-grade. The majority of REIT facilities are in one of the 50 primary markets.

The majority of the nations self-storage facilities are in secondary (second-tier) or even third-tier markets. Its important to note that being in a secondary market doesnt mean a facility will not perform as well as those in a primary market. Nor does it mean the return on investment will be less. On the contrary, its often the secondary markets that yield the greatest rate of return, which justifies the investment risk.

Where Are We Now?

According to the National Association of Real Estate Investment Trusts (NAREIT), self-storage has been significantly outperforming all other property types during the economic recovery. Based on NAREITs Index of Total Returns, the accompanying graphic illustrates how much better self-storage is performing compared to other investments including retail, industrial and office.

Nationwide operating performance is strong and getting stronger. The strength of demand for storage depends to a great extent on the economic recovery, so a word of caution: Owners should expect to see only moderate increases in asking rental rates, physical occupancy and rental income over the next year compared to what operators experienced in 2012. Nevertheless, current storage fundamentals are improving and are expected to continue doing so in 2013.

Greater barriers to entry and limited construction financing means there will only be limited new supply in the primary markets over the next 12 to 24 months. Demand, however, continues to increase as a result of the recovery in the housing market and improving employment opportunities. Both can generate a need for a household move and new demand for storage. As the economy continues to improve, so will consumer confidence, and more people will seek storage.

SSDS measures performance based on changes in asking rental rates, physical occupancy, concessions and rental income (revenue). The performance-at-a-glance table summarizes performance in the fourth quarter 2012 based on the SSDS preliminary findings on more than 7,000 facilities in the primary markets, in public and privately operated facilities.

Overall, both the REITs and non-REITs experienced improved operating performance in the fourth quarter of 2012 compared to the fourth quarter of 2011. As a result of owners being able to increase asking rental rates and physical occupancy by 2 percent, and due to a large decline in the need for owners to offer more costly concessions, the average facilitys rental income increased 5.5 percent.

By the end of the 2012, facility operating performance had returned to pre-recessionary levels in 21 of the 50 primary markets. Six markets were back to the same level of performance at the time the recession started, and 13 markets, or one-third of the country, was still operating below the third-quarter 2006 peaks.

However, the level of operating performance in the fourth quarter of 2012 was not the same for everyone. The REITs and large non-REITs experienced better performance, but that wasnt the case for small non-REITs. Furthermore, the REITs outperformed the non-REITs in the same primary markets in each of the four regions of the county, and the large non-REITs outperformed the small non-REITs.

Conclusions

The slow but steady economic recovery, the limited new supply, and the gradual absorption of vacant units has allowed most facilities in all the primary markets to return to their pre-recession levels of performance. Self-storage owners should continue to see improvement in performance during 2013, bearing any major economic downturn. Storage facilities in primary markets will outperform those in the rest of the country due to an ever-increasing population density, higher household incomes, better job opportunities and stricter barriers to entry.

The REITs' growth in the months ahead will be slower than what it was in 2012. While their occupancy levels are higher than those of the large non-REITs, their rental rates are also nearly 20 percent higher, giving the non-REITs a slight advantage going forward. But the REITs have a also competitive advantage, particularly over the small non-REITs, due to their superior access to technology with which to build effective revenue-management systems and their easy access to lower-cost capital for marketing. As a result, some small non-REITs will use the services of a third-party management companies to better compete with the larger operators.

Charles Ray Wilson is the founder of Self Storage Data Services Inc., an independent research firm that maintains the nations largest database of self-storage operating statistics. Hes an internationally recognized leader in providing independent research on the self-storage industry. Hes currently the managing director of Cushman & Wakefield Western Inc. For more information, visit www.ssdata.net.