Recession In 2022? U.S. Self-Storage Says Bring It On
Self-storage is sometimes called a "recession-proof" asset class.
It has a history of profitability even during the worst of times — such as in 2008, when the sector eked out positive returns of 5%, even as every other asset class suffered.
So, with the prospect of a recession looming once again, self-storage's mettle might be tested again.
Developers and investors are betting that the sector will triumph once more in a downturn, and coming off a strong 2021, self-storage development is strong in many U.S. markets and investors are buying the properties with gusto.
"Self-storage has proven over time to be recession-resistant, and if we're not already in a recession, we are certainly headed for one," said NAI Horizon Executive Managing Director Denise Nunez, who is based in Arizona and specializes in self-storage.
The property type offers a safe haven for capital, especially in such growth markets as Arizona, which has benefited from migration from other states, Nunez said.
"Self-storage is thriving in this environment," she said. "Occupancies are at all-time highs, with rents continuing to be pushed up and new inventory leasing up at, for the most part, a very good pace."
Arizona, and the entire Sun Belt, is hardly alone in seeing self-storage expansion.
Over 131M SF of new self-storage space is planned and under construction nationwide, with roughly 50M SF of that total scheduled for delivery in 2022 alone, according to a new report by RentCafé, citing Yardi Madrix data. If all of that 131M SF comes online, it will represent roughly a 9% increase in the entire stock of U.S. self-storage space.
The report notes that more than half of the new supply, some 68M SF, will be in the largest 20 U.S. metros — with New York and Los Angeles first and second in planned and under-construction self-storage space. About 12M SF and 6.3M SF are underway in those markets, respectively.
Growth in those places is probably a function of their sheer size, but the No. 3 and No. 4 slots for self-storage development demonstrate that population and job growth in secondary metros is fueling demand for self-storage, the report states.
Dallas-Fort Worth comes in third nationwide, with 5.4M SF planned and under construction, and Phoenix is next, with 4.6M SF in the pipeline.
Development is in both urban and suburban settings, RentCafé reports, but the pattern varies from place to place. Among the top 20 metros for development, Las Vegas and Sarasota, Florida, are seeing the most suburban self-storage. Metro Chicago and Boston, on the other hand, see new self-storage developments almost entirely in urban settings.
Current development may be spread fairly evenly in metro areas, but urban development is trickier because the land is scarce, said Yardi Product Specialist Isaac Hiatt, who specializes in self-storage.
"In the cities, developers are looking for conversions, such as former big-boxes or other properties that aren't being used, and they're finding them," Hiatt said.
Driving the development surge in self-storage is the strength of the traditional demand forces, Hiatt said, which are known as the "four Ds" in the industry, namely death, divorce, dislocation, and (variously) disaster or downsizing. But there is an additional dynamic at work, he said, namely reactions to the pandemic.
"As people started working from home, they started to realize that they need a place for a home office. Or a place for home gyms," Hiatt said. "So people started decluttering. So there's just been more demand because people have realized that, hey, I'm at home all the time."
Even with some return to the office — and it has been a sluggish process — Hiatt said he expects the trend of decluttering to continue as people work three or so days at home or seek less expansive (and smaller) dwelling spaces in the face of higher rents.
"We’re seeing continued evidence that many companies are continuing to ... maintain the level of flexibility for the workforces," Public Space CEO Joseph Russell said during the company's Q1 2022 earnings call early in May. "That too continues a very healthy driver. Even when certain employees are being pulled back to work, they’re likely not being pulled back on a full-time everyday basis."
The surge in development might potentially deter some investors from increasing their holdings in self-storage, fearing overbuilding, but Hiatt said the strength of demand has mostly allayed those fears.
"There's always that risk of overbuilding, but the thing is with self-storage is the risk tends to be hyperlocal," Hiatt said. "Developers tend to tap the brakes in a very specific market in which they see overbuilding, but there are typically other markets to try, even in the same metro areas, so overall development continues."
On the whole, investors are still believers in self-storage, attracted by the continuingly strong fundamentals.
Some markets are hotter than others, but nationally, rents are forecast to increase and vacancies decline, according to Marcus & Millichap. In 2019, the national vacancy rate for self-storage came in at 9.5%. Last year, the rate had fallen to 6%, and the company forecasts that it will inch up to 6.5% by the end of 2022, still considerably lower than before the pandemic.
Particularly tight markets include Atlanta (a predicted vacancy rate of 3.5% this year), Riverside-San Bernardino, California (3.1%), and southeast Florida (3.3%), and none of the 36 major markets that Marcus & Millichap tracks are forecast to have a vacancy over 8% this year.
Nationally, rents are up to $1.33 per SF this year from $1.14 per SF in 2019, Marcus & Millichap reports, with every market seeing an increase in rents compared with 2019, from the most expensive — New York City ($2.67 per SF, up from $2.57 per SF) — to the cheapest, Indianapolis (92 cents per SF, up from 82 cents per SF).
The hot fundamentals inspired a wave of investment activity in 2021, with nearly 95M SF of storage space trading last year for a total of $9.9B, according to Yardi Matrix. This marks a 137% surge compared to 2020 when the total transaction volume was $4.1B.
"Self-storage owners are definitely looking to expand their footprint within their given markets," Hiatt said. "They're always looking for opportunities to purchase smaller portfolios to add to their larger stables."
The self-storage REIT Public Storage, for instance, has been an aggressive buyer of properties recently. During the first three months of this year, the company acquired 10 self-storage facilities with 800K SF for $127.7M. Investors have rewarded Public Storage for its strategy, with its stock up more than 19% compared with a year ago.
Likewise, the other three major self-storage REITs have seen stock increases since last year, even in the face of the recent slump in the equities markets.
Life Storage has seen its stock increase more than 19% since a year ago, while Extra Space Storage has enjoyed more than a 22% increase in its stock price over the last year. CubeSmart has seen a more modest gain of more than 5% over the last year.
Major diversified investors are also expanding their self-storage plays. In May, global investment firm KKR acquired five self-storage facilities totaling about 4,100 units in Arizona, Florida and Texas for $98M through an opportunistic equity fund. KKR launched Alpha Storage Properties as a self-storage investment platform late in 2021.
The largest players aren't the only ones eager to be in the self-storage space. Recently Titan Development, based in Albuquerque, New Mexico, closed on Titan Development Real Estate Fund III at $122M. While the fund isn't targeting just self-storage — it will focus mainly on multifamily and industrial projects — it will also seek out opportunistic deals in self-storage.
"Given our experience in developing seven self-storage projects, all of which we profitably exited, we continue to evaluate these opportunities," Titan Development partner Kurt Browning said.
The continued growth of the self-storage sector is being driven by urbanization and the influx of people, companies and jobs into the Sun Belt region, which is where Titan is active, Browning said.
"Self-storage has also been resilient to varying economic environments," Browning said. "Given the smaller footprint of the properties and the smaller equity requirements, self-storage can be an attractive addition to our fund platform.”
Valuations are at all-time highs and a lot of product is changing hands right now, Nunez said. The institutional buyers continue to have access to capital at great rates in spite of interest rate increases. That will keep them coming to growth markets such as Arizona.
"Companies like Taiwan Semiconductor and Intel’s expansion are bringing more suppliers and jobs, which is driving more housing, community development and services offered in those communities," Nunez said. "Self-storage thrives on transition, and Arizona is [in] probably one of the greatest transition periods of its history."