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 sectors—that 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. It’s 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 nation’s 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 nation’s self-storage facilities are in secondary (second-tier) or even third-tier markets. It’s important to note that being in a secondary market doesn’t 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, it’s 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 NAREIT’s 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.