Here’s Why Self Storage Will Continue to Prosper in 2022

Although some fundamentals are expected to moderate, industry experts predict another strong year for the self storage sector.

self storage facility

Image by Florin Palamarciuc via Unsplash

Driven by major life-altering events, the self storage sector has experienced record growth over the past two years. Beyond the traditional demand drivers, the pandemic added new factors to the mix. Shifts in remote work and relocations, and the need for businesses to store goods and supplies locally have been major demand drivers across the sector.

As a result, the sector recorded a strong uptick in both occupancy and rental rates across the U.S.

“In spite of our concerns going into COVID-19, self storage in general, and my company, had one of its best years in the past 20 years. Tenants stayed longer, we were able to increase rents substantially and move-ins were strong,” Devon Self Storage CEO Ken Nitzberg told Multi-Housing News.

READ ALSO: Why Self Storage’s Slowing Rent Growth Is Not a Concern

Self storage rents reached historical highs in 2021. However, as businesses and schools started to reopen, some of the pandemic-specific drivers started to diminish, leading to moderating rent growth. Although significantly more muted than before the health crisis, the effects of traditional seasonality returned, putting some additional downward pressure on rent growth.

Yet, most operators are heading into the new year with uncharacteristically high occupancy rates, giving them the possibility to maintain and ultimately increase street rates, according to a recent Yardi Matrix report. While most experts predict a strong year for the storage industry, it remains to be seen if self storage will continue to prosper after COVID-19.

What’s driving long-term growth?

self storage unit

Image by Mak on Unsplash

While some short-term demand drivers have started to dissipate, the long-term need for storage space is bolstered by several demographic trends, including Millennial family formation, downsizing retirees and accelerated migration across the U.S.

The pandemic has urged many people to leave expensive urban centers in favor of suburban areas and smaller, lower-cost cities. This migration trend will likely persist in 2022, benefiting the storage sector, especially in the Sun Belt region, but also smaller cities near gateway markets.

“The question on everyone’s minds is whether this dynamic is representative of a shorter-term cyclical shift in consumer behavior or a secular change in how people live and work,” Michael Gordon, chief investment officer of Harrison Street, told MHN.

Harrison Street has been actively investing in self storage for the past 17 years, as part of its demographically driven investment strategy, Gordon said. Last October, the firm acquired 26 properties, marking the largest portfolio transaction in its history. The 95 percent-occupied portfolio spans six Sun Belt states and totals 2.7 million rentable square feet.

“There are markets with more than 6 percent annual population growth encouraging new storage development without much oversupply concerns,” Thomas Gustafson, national director of self storage at Colliers, pointed out.

Oversupply won’t be a concern?

After the development boom in 2018, due to concerns over excess supply, several metros were compelled to limit their development pipeline to help balance supply and demand. However, given the sector’s robust performance, new deliveries over the past couple of years were largely absorbed quickly, and developers are now eager to work on new products. Emerging markets with considerable population growth, as well as large gateway cities, will continue to provide opportunities for new development.

READ ALSO: Self Storage Continues to Soar in 2022

Despite developers’ keenness on building new product, most of the pipeline is still in the planning stages and will remain so due to significant delays caused by rising construction costs and schedule drag. “This should push new deliveries out to 2023-2024 and beyond,” Gordon said.

Additionally, Gustafson anticipates that as newer climate-controlled units—with the latest technology, security, lighting and amenity features—become more wanted across urban and suburban markets, it will be increasingly difficult for operators with older facilities to survive. Therefore, for older assets to remain competitive, capital expenditure upgrades may be necessary.

Positive outlook

Although industry experts expect occupancy and rental rates to slightly moderate this year, the shift in the way people live and work will likely continue to foster a competitive environment for the self storage sector in 2022.

Due to healthy market fundamentals, investor interest is set to remain high, as well. According to Gordon, “self storage valuations have seen a bit of a parabolic increase since the start of COVID-19,” he said. “I would expect that asset and portfolio valuations continue to trend upward, and stable cap rates continue to be in the 4 percent to 6 percent range, depending on quality of asset and market,” Gordon added.

All in all, thanks to the record-setting performance over 2021, the self storage sector is set for another strong year.

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