Enter, Exit or Adjust? A Summary of Market Trends to Inform Self-Storage Investing Strategy

As we move into the second quarter of the year, self-storage stakeholders are naturally looking to the remainder of 2019 and what lies ahead for the sector. At this point in the extended real estate cycle—and on the heels of several years of skyrocketing development volume—many investors are evaluating whether this is the right time to enter or exit the self-storage market or adjust their overall strategy.

The good news is, there remain several indicators of sustained strong demand for self-storage, which is still outpacing supply in select U.S. markets. That said, warranted concerns over slowing rent growth have some investors approaching opportunities with caution. To help you make smart decisions, let’s summarize the prominent trends impacting the market.

New Players Enter

For the better part of two decades, the self-storage real estate investment trusts (REITs) have ruled the market. I anticipate that while they’ll remain big players in 2019, they’ll retreat to the sidelines as institutional and private equity continues to flood the sector.

While rental-rate increases have slowed due to the influx of development, still-attractive capitalization rates are appealing to private investors. Further, self-storage is widely believed to be recession-resistant, or at least highly resilient, compared to other asset classes, with some of the demand driven by consumer downsizing and displacement.

Many self-storage experts predict a slight downturn in the market in 2020 or the year after, so we’ll likely see investors bolstering their portfolios this year in anticipation. Some will be new to the industry. For example, the similarity between self-storage and multi-family assets, both in demand drivers and operation, is drawing seasoned multi-family investors to the storage sector, often with the goal of creating synergistic, resilient portfolios. Private self-storage owners and developers looking to capitalize on high demand will want to consider doing so this year, as investors and lenders alike remain hungry for the product type.

Properties Become More Competitive

As more supply and players enter the market, self-storage properties will need to be highly amenitized to remain competitive. For example, secure gated access and climate control will be critical in most areas. Specialty offerings such as purpose-built wine storage will come to be expected in affluent submarkets.

Newly constructed or renovated facilities will see more upside potential for rent, hedge against a potential recession within the next couple of years and thrive in the long term. For these reasons, my company has been bullish on acquiring primarily newer class-A or recently upgraded assets that are fully amenitized and those in need of light value-add renovations.

When someone purchases an older building, he runs the risk of being functionally obsolete for today’s self-storage uses and tenant expectations. These properties could require a much higher than anticipated capital investment to bring it up to current standards, and the project might not be feasible. Therefore, it’s more important than ever to approach these investments with caution and perform appropriate due diligence.

Markets Continue to Grow

Many investors are hesitant to acquire in cities or regions that have seen an overall drop in rental growth. These declines are primarily a result of the record amount of new supply that has entered the market. That said, finding the right property in the right location that supports the demand can come down to the specific intersection, much like with grocery-anchored, daily-needs shopping centers in the retail space.

It’s important not to acquire where self-storage deliveries are ahead of housing. This means a city might experience oversupply on one side of town while experiencing a strong need for the service on the other. Storage facilities have a small trade area, and tenants aren’t going to drive more than 15 to 20 minutes to a facility, especially with large or valuable items in tow.

This year, we’ll likely continue to see strategic development in markets that are popular for job relocation due to growing employment opportunities and appealing quality of life. Investors should also consider areas where there’s ample housing is in the pipeline to support self-storage demand. There are also strong opportunities in several submarkets in Florida and other parts of the Southeast, as well as parts of Texas and Denver to the west.

I believe the self-storage sector will remain active in 2019. While the recent waves of new construction and rent increases have likely peaked, there remains ample interest and opportunity in the market as fundamentals and demand continue to be strong.

Todd Siegel is vice president of commercial investments for Passco Cos., which acquires, develops and manages multi-family and commercial properties throughout the United States. The company has acquired, managed and developed more than $4.7 billion in property since its inception. For more information visit www.passco.com.