Why self-storage real estate is such a resilient sector

A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox.

Self-storage, those non-descript, boxy buildings with hundreds of garage doors across the units, are a relatively low-risk, resilient investment, according to new research from Heitman. 

Unlike other sectors that are dependent on interest rates, job growth or income growth, self-storage is agnostic — people need to put their junk in storage regardless.

Heitman is a global real estate investment and management firm with about $10.5 billion invested in self-storage across more than 140 markets. 

Over the last 15 years, self-storage has outperformed industrial, multifamily, office and retail in net operating income, according to the Heitman report. It also benefits from several drivers behind customer demand, the largest being a lack of space at home due to a growing family. That’s followed by moving, death, downsizing and remodeling. 

“The risk measure for storage is quite low,” said Jeff Bingham, co-head of global investment research at Heitman. “We have 30 years of annual data now for listed REITs, those storage REITs. … What’s the correlation? How does it move with stocks and bonds and gold and REITs? With a traditional 60/40 [stock/bond] portfolio for a retail investor, the correlation is fairly close to zero.”

Bingham said that means the sector is as close as possible to a risk-free asset. Stocks of the REITs in this space, which include Public Storage, Extra Space Storage and CubeSmart, however, are down as much as 16% year to date. Slower home sales have weighed on investor sentiment in the sector, as has softer revenue growth. 

But there are now tailwinds, making for an attractive entry point.

“That ‘life event’ demand is really what we see driving our outlook,” said Annie Trucco, senior associate of investment research at Heitman, citing the aging U.S. population, specifically growing millennial families and downsizing baby boomers. 

Heitman’s data shows an increased number of those key life events over the next decade, compared with the previous decade, as a positive driver for the sector.

“That includes welcoming a child. You need to change a room in your home to a nursery. What do you do with that furniture? Or maybe you have aging parents, and they’re downsizing,” Trucco said. “There are just these general life events that happen, and they’re going to happen regardless of what’s going on in the economy.” 

Self-storage is not only in constant demand, but it has strong income growth, high operating margins, and low capital expenditure requirements. Asset values are down 11% from their peak, according to Heitman, and new development is constrained. 

As for inflation, month-to-month leases can mitigate that depending on current supply and demand. Storage is also much more affordable than housing, so as potential buyers downsize their sights on a new house, they tend to put things in storage. 

Demand is also hyper-local, and the industry is quite fragmented. That means investors can acquire assets from small owners and improve operations through institutional platforms, like the major REITs.