Five years ago, self-storage began transitioning to an institutional asset class with all the positive attributes of each core real estate sector (multi-family, office, retail and industrial) without any of the disadvantages. Storage debt default rates were among the lowest in commercial real estate, and storage was the darling of investors. That all changed with the onset of the Great Recession, and institutional investors retreated back to what was familiar and comfortable—core real estate. Unfortunately, a number of investors got into the storage industry during 2004 to 2007 at peak valuations, so while operationally storage has held up well, in hindsight, their timing wasn’t ideal.
While some investors have fled self-storage, they are beginning to recognize and appreciate the resilience of the sector and the stable operating performance it delivers, and renewed interest is emerging. Another interesting source of capital that has emerged for storage is retail investors.
In the real estate downturn of the early 1990s, many real estate companies were faced with two options: filing bankruptcy or going public as a real estate investment trust (REIT). Retail investors were the key to the public REIT market’s success. They were attracted by strong dividends and were able to invest in REITs at a low-cost basis and participate in asset appreciation, a nice twofer.
Meanwhile, institutional investors who put money in real estate in the late ’80s were the sellers. REITs transitioned from retail to institutional ownership from the mid-1990s to the mid-2000s, and private institutional real estate ownership also increased significantly as real estate became a desired asset class, subsequently driving up pricing. Many investors are currently licking their wounds and selling off real estate assets again, and retail investors are positioned to pick up the pieces and get in at the right basis at the bottom of the cycle. Déjà vu?
Self-storage doesn’t possess the shortest lease (that distinction belongs to hotels, with a one-night lease), but it also doesn’t experience the immediate drop-off in demand of the lodging industry. While inflation isn’t a concern in the near term, with real unemployment hovering close to 20 percent, eventually inflation will appear. When it does, properties with shorter lease durations will have the ability to adjust rates quickly to take advantage of increasing prices and act as an effective inflation hedge.
As long as storage continues to weather the storm, investors will remain attracted to the sector and be eager to provide capital to leading operators who have a strong and deep management team and a demonstrated record of success and are willing to co-invest alongside outside investors. Stay tuned; things will get interesting soon. Be prepared to take advantage of compelling investment opportunities.
John R. Nikolich is managing director and founder of Flint Creek Partners LLC. Nikolich has more than 20 years of experience in the real estate industry and has raised more than $6 million in equity and debt capital for public and private real estate companies. He founded Flint in 2002 to provide custom-tailored investment banking solutions, venture capital and financial advisory expertise for private and public real estate clients. For more information, call 847.462.5927; e-mail firstname.lastname@example.org; visit www.flintcreekpartners.com.