Will Self Storage Prosper After COVID-19?
- Mar 11, 2021
Although self storage has increasingly become an attractive asset type in the past decade, relying on what insiders call “the four D’s”—disaster, death, displacement and divorce—the sector’s pandemic-driven positive performance still surprised industry experts.
Due to considerable oversupply in many markets across the country, occupancy levels were expected to drop significantly, but the exact opposite occurred. “We threw COVID-19 in and the delinquency problems that were anticipated never happened and the move-outs we thought were going to happen never happened. However, the move-ins continued to happen,” Mike Mele, vice chairman of the Self Storage Advisory Group at Cushman & Wakefield, told Multi-Housing News.
Despite the initial shock during last spring, the health crisis created pent-up demand for storage space. “The pandemic had idiosyncratic factors that enhanced demand for self storage, particularly due to renters moving to different housing, business closures and temporary displacement of college students,” Larry Braithwaite, senior vice president & portfolio manager at ASB Real Estate Investments, explained.
As a result of the sudden need for storage space across the U.S., the public REITs reached the highest occupancy levels seen during the self storage public REIT era, Braithwaite added. For the first time since 2017, the year-over-year street rate performance was positive for both climate-controlled and non-climate-controlled units as of October 2020, Yardi Matrix data revealed.
By the second half of 2020, the sector’s recession-resistant nature had become evident, leading to a surge in investor interest—both from existing industry players and new competitors looking to diversify their portfolios. Last year, investors closed a total of $3.6 billion in self storage deals across the country, according to the same data provider. Some of the largest transactions included Blackstone’s $1.2 billion acquisition of Simply Self Storage and CubeSmart’s $540 million New York City deal with Storage Deluxe.
What’s beyond the pandemic?
Although self storage has benefited from the pandemic-induced changes, it is questionable what will happen to the sector once we return to normalcy and the economy recovers.
As vaccines are rolled out, there’s high hope that the economy will soon return to normal. Nevertheless, the lengthy distribution process suggests that the pandemic-driven demand will continue to persist throughout 2021, according to Braithwaite. What is more, some changes, such as work-from-home, are likely to become permanent, continuing to sustain the demand for storage space.
Mele, however, suggested that post-COVID-19, the need for storage space will be underscored by the discretionary renter—the person who simply wants to buy new furniture or other goods. Americans shifted to high consumer mode during the pandemic, with spending growing by 9 percent in 2020, Deloitte reported. From March to November of 2020, spending on durable goods was up by $60 billion compared to the same period of 2019.
Americans’ growing need for storage space is also reflected in the fact that national storage usage has grown from 2 square feet per person 20 years ago to 8 square feet per person today, Braithwaite pointed out. “This upward trajectory should continue with more stores located conveniently to in-fill suburban and urban housing and enhanced amenities and services,” he said.
A slowdown in development activity might also help self storage markets maintain momentum and continue rent growth across the country. According to Mele, new construction peaked last year. “While development activity is only down by 15 percent to 20 percent this year, by 2023 it should be down by 40 percent or more,” he said.
Beyond these, the self storage industry is going to benefit from the accelerated transition to unmanned and autonomous facilities. “Self storage is the only major real estate sector where most stores are still owned by mom-and-pops, instead of institutional owners,” said Brad Minsley, co-founder of 10 Federal.
“Technology is going to represent the key that will allow the institutional operators to start aggregating these smaller stores that have been historically more challenging to operate in an institutional manner,” Minsley concluded.