By Jeff Stein
Rarely do we associate the term "sexy" with self-storage. But sexy sells, and the evolution of this product and its place in the market are making private and institutional investors take a closer look at the appeal of this asset class and capitalize on its recession-proof returns.
The Self Storage Association estimates approximately 10 percent of U.S. households currently rent a storage unit, generating an estimated $22 billion in annual gross revenue for property owners. Revenue at this peak level has pushed self-storage real estate investment trusts (REITs) to outperform every other REIT asset class and the Standard & Poor’s 500 since 1993, according to Wall Street analysts. Likewise, the recent sale of trophy self-storage portfolios reflected this value push with capitalization (cap) rates challenging those of prize office buildings—between 5.5 percent and 5.7 percent.
Private investors, such as Atlanta-based Stein Investment Group, are also pumping new capital into the sector. Within a 12-month period, Stein has invested $17.2 million in the storage industry, compared to an infusion of $20 million in retail and office combined for the same period.
So, what’s driving the evolution of commercial real estate’s new darling? What’s propelling the self-storage sex appeal? While some may argue that it's the noncyclical demand for the product, recent opinions indicate it’s the introduction of facilities as community assets along with the emergence of new client segments that are truly the most important factors in “bumping up the sexy.”
By 2020, an estimated 85 percent of the U.S. population is expected to reside in an urban environment, according to the “Atlanta Business Chronicle.” Already, many of the nation’s largest cities have experienced waves of urban resurgence in their downtown cores, driving the need for self-storage in new submarkets.
With single- or multi-family residences now integrated into mixed-use developments—and squeezing into smaller footprints—space is at a premium. Unwilling to sever the emotional attachment to their belongings, urban dwellers are seeking self-storage facilities that are accessible to the home front.
One such facility is Decatur Street Self-Storage, a Stein investment under construction in downtown Atlanta’s popular Old Fourth Ward district. The $9.2 million, five-story development caters to the residents of 26,500 upscale apartment and condominium units dotting the neighborhood, the 30,000 students who attend Georgia State University, and downtown Atlanta’s dense commercial areas. Despite the high barriers to entry typically found in an urban environment, Stein identified a residential node that was underserved (less than 7 square feet of self-storage per person), one of the many keys to successful market penetration.
A Workforce on the Move
As suburbanites flock to urban ZIP codes, the nation’s workforce is also on the move. Crisscrossing the country with only the necessities, short-term workers are moving for work and shaping a new long-term renter. This transient workforce locks up its belongings in a self-storage unit typically for 18 to 24 months while on the job away from home. According to real estate consultant Christopher Lee, almost $1 trillion of student-loan debt and stagnant household incomes are driving this trend.