Self-Storage Surges On High Demand

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by: V T S

By Billy Fink

Once viewed as a bit of an outlier in the commercial real estate industry, self-storage has moved into the mainstream as an increasingly popular choice for both renters and investors. That demand has produced a spike in both investment sales and construction activity.

Fueled demand

The storage sector has benefited from a consumer-driven society that likes to buy - and hold onto - lots of stuff. Demographics and economic shifts also have fueled more renter demand as storage facilities tend to serve people in transition. Home owners and workers who were displaced during the economic recession have turned to storage facilities in force. Empty nesters, college students, members of the military - the list of potential customers is long, and they all need somewhere to park their extra belongings.

Added to that, storage facilities have shed their image as low-rent properties with sketchy clientele. Today's storage facilities are increasingly modern, professionally managed, and convenient with climate-controlled space and state-of-the-art security for storing items ranging from wine and documents to furniture and household goods. Storage facilities also are moving closer to their growing customer base in locations ranging from affluent suburbs to urban neighborhoods.

High occupancy rates

Occupancies have reflected that high demand. The Mele Group, a self-storage advisory group and partner affiliate of the National Self Storage Group of commercial real estate firm Marcus & Millichap, has released the results of a 2016 forecast survey it conducted with self-storage owners and investors. Nearly two-thirds of respondents, 62 percent, said they expect their occupancies to hover between 90 percent and 95 percent over the next 12 months, while 27.8 percent anticipate occupancies at levels between 80 percent and 89 percent. Approximately 13 percent said they hope for occupancy to rise above 95 percent, while 1.2 percent anticipate occupancy of less than 80 percent.

Those high occupancy levels are contributing to a building boom across the storage industry. It is reported that U.S. spending on mini-storage construction surged 73.3 percent in 2015 to reach just over $1 billion. That activity includes new ground-up construction, expansion at existing facilities and conversion of existing buildings such as vacant retail and industrial properties to storage use. Much of that development is concentrated in urban areas that have higher barriers to entry.

Why are investors flocking?

One of the reasons that storage is so attractive for investors is that it is a cash cow, generating solid rental income with relatively low expenses, compared to other property types. Unlike office or retail properties, for example, storage owners don't have to pay for costly tenant improvements or brokerage fees when filling vacancies. The sector also has been generating fairly steady rental rate increases.

Nearly half of respondents in the Mele Group survey (49.3 percent) said they plan to increase their rental rates by more than 3 percent within the next 12 months, while 32 percent said they would raise rates between 1 percent and 3 percent. Just 18.5 percent indicated they plan to keep rates the same.

The self-storage sector has been rewarding investors with steady returns for the past several years, and was the top-performing REIT sector in 2015. Results from some of the large storage REITs show that the bigger players tend to be some of the industry's top performers in terms of rent growth and occupancies. Public Storage (NYSE:PSA), for example, reported in its fourth quarter earnings report that rental income rose 6.7 percent in 2015, while occupancies ended the year at a weighted average of 94.5 percent.

In the near-term, both renters and investors continue to exhibit strong demand for storage facilities, particularly the modern facilities that are being built in many metros today. Yet, given the amount of construction in the pipeline, some critics are beginning to question whether the sector can maintain its momentum. The flood of new units currently under construction and proposed may test the true depths of the renter pool.