The self-storage industry is proving to be a remarkably stable and resilient investment, often performing well regardless of broader economic conditions. New research indicates this sector has consistently outperformed other major real estate categories, drawing attention from investors seeking reliable returns.
Key Takeaways
- Self-storage has outperformed industrial, multifamily, office, and retail in net operating income over 15 years.
- Demand is driven by life events like family growth, moving, and downsizing, making it less sensitive to economic cycles.
- The sector boasts low risk, strong income growth, high operating margins, and low capital expenditure needs.
Self-Storage Outperforms Other Real Estate Investments
For the past 15 years, self-storage facilities have shown superior performance compared to other real estate sectors. This includes industrial, multifamily housing, office spaces, and retail properties. The sector's net operating income growth has consistently surpassed these traditional investment avenues.
This consistent performance highlights a unique characteristic of self-storage: its relative independence from typical economic indicators. Unlike sectors heavily influenced by interest rates, job markets, or income growth, self-storage demand remains strong.
Did You Know?
Self-storage assets are currently valued 11% below their peak, making now an attractive entry point for investors.
Demand Driven by Everyday Life Events
The primary driver behind the robust demand for self-storage units comes from common life events. A growing family needing more space at home is the largest factor. People often need to store items when a new child arrives and a room converts into a nursery, for example.
Other significant life changes also fuel demand. These include moving to a new home, handling the estate after a death, downsizing residences, and home remodeling projects. These events occur regardless of the economic climate, providing a stable customer base for the industry.
"That 'life event' demand is really what we see driving our outlook," said Annie Trucco, senior associate of investment research at Heitman. "There are just these general life events that happen, and they’re going to happen regardless of what’s going on in the economy."
Aging Population and Millennial Families
Demographic shifts are expected to further boost self-storage demand. The aging U.S. population, particularly baby boomers who are downsizing, creates a need for storage solutions. Simultaneously, growing millennial families often find themselves needing extra space as their households expand.
Data projects an increased number of these key life events over the next decade. This demographic trend acts as a positive tailwind for the self-storage sector, ensuring continued demand.
Low Risk and High Operating Margins Attract Investors
The self-storage industry is considered a low-risk investment. It offers strong income growth, high operating margins, and requires relatively low capital expenditure. These financial characteristics make it appealing to a wide range of investors.
Jeff Bingham, co-head of global investment research at Heitman, noted the sector's stability. "The risk measure for storage is quite low," he stated. He highlighted 30 years of annual data for listed self-storage Real Estate Investment Trusts (REITs).
What is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs trade on major exchanges like stocks, offering investors a way to invest in real estate without directly owning property.
Minimal Correlation to Traditional Assets
The correlation between self-storage REITs and traditional investment portfolios, such as a 60/40 stock/bond split, is close to zero. This means the sector's performance often moves independently of the broader stock and bond markets. This low correlation provides a diversification benefit, making it an attractive component for many investment strategies.
This independence from market fluctuations contributes significantly to its reputation as a resilient asset class. Investors can potentially hedge against volatility in other parts of their portfolios.
Current Market Conditions Offer Entry Point
While stocks of major self-storage REITs like Public Storage, Extra Space Storage, and CubeSmart have seen declines this year, the current market presents an attractive entry point for new investors. Asset values are down 11% from their peak, and new development in the sector is limited.
Slower home sales have impacted investor sentiment and revenue growth. However, the underlying demand drivers tied to life events remain strong. This creates a potential opportunity for long-term growth.
Inflation Mitigation and Fragmentation
Self-storage facilities often operate on month-to-month leases. This flexibility allows operators to adjust pricing based on current supply and demand, which can help mitigate the effects of inflation. This adaptability is a key advantage compared to long-term leases in other real estate sectors.
The industry is also highly fragmented, with many small, independent owners. This fragmentation allows institutional investors, such as major REITs, to acquire assets and improve operations through their established platforms. This consolidation potential can drive further value for investors.
Demand for self-storage is also hyper-local. This means that successful investment often depends on understanding specific local market needs rather than broad national trends. This granular approach can uncover hidden opportunities.
Key Advantages of Self-Storage Investment
- Constant Demand: Driven by life events, not just economic cycles.
- Strong Income Growth: Consistent revenue generation.
- High Operating Margins: Efficient business model.
- Low Capital Expenditure: Less ongoing maintenance and upgrade costs.
- Inflation Mitigation: Flexible month-to-month leases.
