Self-storage properties outperformed in 2021. In fact, throughout the health crisis, they’ve demonstrated remarkable resilience.
Prior to 2020, the sector was contending with falling rents due to record construction activity. However, the population’s swift adoption of remote learning and working, as well as mass migration to less dense areas, created new needs for self-storage that reversed the trend. The jump in demand lowered the national vacancy rate to a multi-decade low and revived rent growth across the country. By June 2021, the average asking rent for a standard unit had climbed to $1.24 per square foot, a benchmark last achieved in 2016.
Moving into 2022, the pace of rent gains will slow to a more sustainable rate, partly as some pandemic-related demand drivers abate. Many schools and businesses are finding safe ways to reopen. College students are retrieving their stored belongings and heading back to campus. Some home offices are being reverted to spare rooms. Despite these changes, the core triggers of self-storage use will continue to benefit the asset class. Let’s examine what they are and how the industry could be impacted in the upcoming year.
Self-storage demand will always be bolstered by population migration. The pandemic drew attention to a suburban relocation trend that was already underway, driven primarily by the aging of Millennials. More than half of this generation are now between age 30 and 40, a period often associated with family formation. Many will begin to seek larger homes, most readily found in the suburbs. A need for self-storage will also come from older generations who are downsizing their households, including recent retirees moving to areas with less challenging climates and tax policies. Common situations like these are why relocation is the second most common reason for renting a storage unit behind simply needing additional space.
Population growth will also impact self-storage this year, particularly in the Sunbelt states. Residents and employers are gravitating toward these areas, which will aid near-term job growth and, by relation, long-term self-storage demand.
In addition, properties in secondary metros near large gateway markets are poised to benefit. San Bernardino, San Diego and Riverside, California, were the least vacant markets for self-storage in the country in mid-2021, as the regionally lower costs of living drew residents from nearby Los Angeles and Orange County. At the same time, facilities in certain slower-growth markets will also be in demand. Metros such as Los Angeles, New York and Philadelphia have a low level of self-storage inventory relative to their populations, with fewer than 5 square feet of space per capita. Limited land availability in these areas constrains the scale of local self-storage development, drawing focus to existing sites.
Competitive Investor Landscape
In a survey of investors conducted by my firm, we discovered a high level of confidence in the self-storage property type. Many respondents anticipate holding their assets this year to capitalize on historically low vacancy and renewed rent growth. Simultaneously, the average sale price of storage properties has appreciated by more than 30% over the past five years, which will prompt some of those investors to sell as they adjust their portfolios.
These new listings will enter an extremely competitive bidding environment. Strong buyer interest is applying upward pressure on sale prices and downward pressure to capitalization (cap) rates. Before the pandemic, self-storage assets changed hands with an average cap rate above 6%. The latest estimates show the mean cap rate on trades has dropped to mid-5%. Investors seeking higher yields will look to secondary and tertiary markets with favorable demographic outlooks.
Buyer competition is also being fueled by new investors entering the sector, a trend that’s unlikely to abate while properties continue to perform above historical norms.
A Favorable Outlook
Demand drivers like population migration and growth will continue to benefit the self-storage industry in the upcoming year. Aging Millennials forming new and larger households, plus downsizing retirees, will foster a greater need for unit rentals. Facilities in markets where people are moving as well as slower-growing metros where inventory is limited all stand to profit.
These favorable demographic trends open opportunities for investors nationwide. That said, ample interest from both new and seasoned buyers will apply upward pressure on pricing. Some investors may widen their selection criteria as a result.
Overall, the record-setting performance of self-storage properties in 2021 will continue to foster a competitive landscape, resulting in an investment environment that is both deeper and broader. While the easing of pandemic-related restrictions will temper some of the recent demand drivers, the industry is expected to have another banner year in 2022.
Steven D. Weinstock is a first vice president and regional manager for Marcus & Millichap, a commercial real estate investment services firm with offices throughout Canada and the United States. He’s also the national director of the firm’s National Land and Self-Storage Groups. Prior to joining the company in 2001, he owned and operated a brokerage and property-management company. To reach him, call 630.570.2250 or email [email protected].