Self-Storage Sector Holds Up | Think Realty | A Real Estate of Mind
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Self-Storage Sector Holds Up

Southwestern Cities Have Healthiest Rent Trends

The self-storage industry has grown significantly in recent years, with developers regularly finding profitable locations for new facilities. Also, as it provides vital services, it has a reputation for riding out challenging times relatively well. Add to this the comparative ease with which a self-storage business can be started, and it becomes clear why it is an enduringly popular sector with real estate investors.

One important question for any entrepreneur looking to start out in self-storage is where they should focus their attention. Analysis made by STORAGECafé, using data from their sister division Yardi Matrix, indicates that many storage facility operators in the nation’s largest cities have been able to maintain profitable rental rates during the challenging year of 2020, and prior to that as well. Interestingly, however, the places that have seen their self-storage street rates increase the most are in the Southwest.

Self-Storage for Downsizing, Flexibility and Smart Living

Self-storage is strongly linked with life events such as moving to a new home and accommodating an expanding family, so population increases in a city often spell good news for its self-storage sector. In addition, economic circumstances can create a need to downsize or to free up living space if a household suddenly has to take in extra members. For these reasons, self-storage is generally considered an essential service and so many facilities stayed open throughout 2020, swiftly introducing new health measures and contact-free operations, being of service to people experiencing the year’s challenges, and staying afloat economically.

A self-storage locker can also see more everyday usage. As it is much cheaper than residential space per square foot, many people with restricted room at home use it as a smarter, more cost-effective overflow for occasionally used items. Other clients may include fans of sports that require bulky equipment and anyone who relocates temporarily to smaller accommodation, for example to spend winter in a warmer climate. Storage space can also be useful for business purposes, providing a flexible amount of space for raw materials, products or paperwork and requiring no commitment to a long-term lease.

Self-storage Is Appreciated and Easier Than Other Sectors

When circumstances drive people to self-storage, inventory can lag behind demand, creating opportunities for investors. Local building regulations play a part in decision making, but developers often find profitable locations for building and they may also take on renovation projects with lower start-up costs. These days, new, high-rent city-center facilities and converted suburban retail spaces find their place alongside the traditional out-of-town lock-up garages.

Self-storage can be a less stressful business than other real estate sectors. Start-up costs may well be lower, and developers often note that it is easier to operate than comparable sectors that are more people intensive. In addition, communities often appreciate self-storage as it tends to be a local industry geared to serving customers within a radius of just a few miles, and town halls often welcome its ability to repurpose vacant sites and buildings.

Self-Storage Experiences Downturns, and Adapts

However, even a sector like self-storage can experience over-saturation, and construction of facilities has indeed slowed in some areas. And then there was the impactful year of 2020, where the sales volume of storage facilities totaled $2.3B for 32.9M sq. ft. in 521 properties, down from the 54.1M sq. ft. in 852 facilities that was sold in 2019 for almost $4B. But confidence in the market was demonstrated by the fact that the average price per square foot of $70.9 during 2020 was only slightly down on the average of $73.3 seen in 2019.

The industry has mechanisms for dealing with downturns, one being the temporary lowering of storage rents to maintain occupancy and a loyal customer base. The street rates advertised for units are an indication of supply and demand in any given place, and also of the sector’s profitability and attractiveness to investors there. By looking at average rates through several recent years and across the nation’s major cities, consistent trends can be observed, giving potential self-storage developers confidence and some of the vital guidance they need.

Almost Half US Large Cities See Positive 2020 Self-storage Rent Trends

Rents for non-climate-controlled 10’x10’ units — the ‘standard’ type often used as a benchmark — over the last four years provide a good measure of consistent trends in the industry. Across all US cities with over 500,000 inhabitants, the average street rate dropped from $126.8 in 2017 to $123.7 in 2020, the annual decreases being around one percent in 2019 and 2020 and half that in 2018. The average drop across all these large cities was -2.13 percent, with 46 percent of them seeing an increase. (The averages for all U.S. cities of any size during that time were slightly lower than the figures for these large cities.) The average self-storage inventory across the nation’s large cities by the end of 2020 was 6.82 sq. ft. per capita, roughly the same as for the nation as a whole, and a figure that has gradually increased since 2017.TOP US CITIES BY STREET RATE INCREASES 2017-2020

The cities with the highest street rates — San Francisco, New York, and Los Angeles — all saw them gain slightly between 2017 and 2020, attaining averages of $256, $237 and $232, respectively. At the opposite end of the price spectrum, Memphis, Indianapolis, and Oklahoma City all witnessed slight street rate reductions during that period, ending 2020 at $79, $79 and $65, respectively. Philadelphia, Phoenix and Seattle also make the top 10 of cities with improved street rates during 2020, but it is a group of cities in the nation’s Southwest which saw the most exciting increases.

Southwestern Cities Excel: Self-storage Operators Increase Incomes

Many cities in the Southwestern states have thriving economies and experience influxes of people who come either for work or for the great year-round weather. Self-storage has clearly become a vital resource for many of these people, whether they are moving to a new home, downsizing, engaging in the outdoor activities the region has to offer, or simply needing extra space for their possessions. It is good value in these places when compared both to larger cities across the country and to the national average, and rents are trending upwards.

top us cities with highest street rate increases 2017-2020

1. Fresno, CA: Growing and Thriving

Fresno is the economic hub of the fertile San Joaquin Valley, and it experienced a 7.46 percent population increase from 2010 to 2019. The city’s remarkable 20.74 percent average street rate improvement, going from $84 in 2017 to $102 in 2020 for a standard unit, indicates that self-storage is a thriving part of the local economy. The city’s 8.66 square feet per capita in 2020 is somewhat higher the national average. There are around 50 storage facilities in and around Fresno. 2020’s market activity comprised the sales of two facilities in the city’s northwesterly districts for a total of $15.94M and a combined square footage of 164,327.

2. El Paso, TX: Sun City Shines

Standard storage unit rents in this West Texas city saw a 15.14 percent rise from $72 in 2017 to $83 in 2020. The diverse economy here includes oil and gas, manufacturing and service industries, and although the influx of newcomers has only been moderate — 5.02 percent between 2010 and 2019 — Texas’s increasing status as a place to do all kinds of business may be having an effect in El Paso. The 6.14 square feet of storage per person here, lower than the national average, may indicate that the local self-storage sector has capacity for growth. There are many facilities spread out to the east and northwest of the city center, including a 24,225-square-foot property on Pellicano Drive that was sold in March 2020.

3. Las Vegas, NV: Considered a Good Bet for Storage

Las Vegas has a well-developed self-storage sector. Fears of oversaturation may be assuaged by a 13.31 percent street rate increase for standard units from $94 in 2017 to $106 in 2020. And confidence is also seen in the amount of new square footage currently under construction or planned in the metro area, representing 14.4 percent of the total current inventory, higher than in nearly all other large US metros. The city’s population grew 11.57 percent from 2010 to 2019, boosting the self-storage sector. The city of Las Vegas offers an enormous 19.12 square feet of storage per person, though it should be noted that the larger metro area offers less than half that amount. No less than five storage facilities changed hands in 2020, for a total of $64.28M.

4. Tucson, AZ: The Old Pueblo Attracts New Enthusiasts

Arizona’s second city attracts artists, among others, and in September 2020 one enterprising company allocated space to them at its storage facility in the suburb of Oro Valley. As with other places in the Southwest, many ‘snowbirds’ come here in winter for the advantageous climate. Street rates for standard storage units in Tucson rose 11.68 percent from $87 in 2017 to $97 in 2020, while inventory increased slightly from 10.65 to 10.84 square feet per capita. There are approaching 100 storage facilities in Tucson and the surrounding area, with four of them changing hands in 2020, representing a combined total of 215,871 square feet.

5. Albuquerque, NM: A Fine Climate All Round

Duke City has a growing reputation with incomers for its distinctive lifestyle, pleasant climate, low house prices, and the beauty of its surrounding scenery. Getting on for 100 facilities within the city limits provide them with storage, and the street rate for a standard locker went from $91 in 2017 to $98 in 2020, an increase of 8.21 percent. The inventory also grew during that period, from 8.13 to 8.89 square feet per person, a 9.50 percent increase since 2017 and somewhat more than the national average though not enough to depress rents. Market activity in 2020 consisted of two transactions for a total square footage of 84,682.

Anyone thinking of investing in the US self-storage sector needs to have confidence in the enduring demand for it among the population. They can find this by pinpointing markets where street rates have been consistently holding up, or increasing, even through challenging times. Of late, some of the nation’s Southwestern cities have been most impressive in this regard, with rents trending upwards.

Inventory levels sometimes lag behind demand and sometimes over-reach it. But whether investors wishing to build storage facilities catch the wave at exactly the right time or not, they can be reassured that the industry has an inherent flexibility and durability, finding new ways to provide storage for communities and adapting to clients’ needs. Self-storage has become an important element in the lives of many Americans, and that isn’t changing any time soon.