The self-storage sector has rightfully earned a reputation for being recession resilient. Unlike many other commercial real estate sectors that heavily rely on economic growth, self-storage is uniquely positioned to weather economic cycles due to its reliance on lifestyle trends.
This article explores the supply and demand dynamics that allowed the self-storage industry to outperform other asset classes in the aftermath of the 2008 Great Financial Crisis (GFC), drawing insights from various Self-Storage Almanacs spanning decades. While exploring the demand factors, we also examine oversupply—the Achilles heel of the industry, even in periods of economic growth.
In a 2001 LA Business Journal article, A.G. Edwards & Sons analyst John Sheehan said, “If anything, an unsure economy adds to changing lives by companies downsizing and dotcoms going bust.” Volatility becomes a driving force for self-storage demand as lifestyle changes, such as migration, college, military enlistments, marriage, divorce, retirement, and job turnover, consistently fuel the need for storage solutions, even during economic downturns.
Unpredictable events, such as disasters like the recent COVID-19 pandemic, further intensify demand. From 2020 to 2022, the need for home offices, businesses storing extra furniture for health protocols, and students opting for off-campus education all contributed to robust demand. Rapid inflation and low interest rates led to a spike in home sales that led to an abundance of movers. As noted in the 2023 Almanac, 31 percent of self-storage customers are making space at home and 25.4 percent of customers are changing residence. Demand was firing on all cylinders by 2021.
There is an important distinction between recession resiliency and recession-proof. From the outside, our industry is often tracked and judged by the performance of the self-storage REITs. In 2014, the sector's five-year compounding annual total return was 29 percent, according to NAREIT. However, the REITs comprise of only 36.6 percent of the rentable square footage available.
Historical data reveals that past recessions did impact operators, leading to lower occupancy rates, increased turnover, and concessions. Even major players like AMERCO, operating as U-Haul, experienced challenging market conditions post the dotcom bubble, resulting in a successful restructuring through Chapter 11 bankruptcy by 2004. Self-storage REITs collectively faced a 5.3 percent decline in occupancy by 2010 from its peak in 2007, highlighting that even the best operators are not immune to economic struggles.
Taking a step back to the 1990s, despite a national ratio of under 3 square feet per capita, the industry faced concerns of oversupply due to rapid development. The savings and loan debacle of the late 1980s and the early 1990s economic recession led to a pause in self-storage development.
However, by the late 1990s, a belief that the nation was underserved sparked an explosive wave of development in the early 2000s. Public Storage operated 260 properties in 1986, 290 properties in 1992, and 1,309 properties by 1998 by way of a series of large portfolio acquisitions. As REITs began to expand and consolidate, Americans became more educated about the product.
Today, the industry has been suffering from rental rate and occupancy declines due to the lack of transaction volume within the housing market. Ironically, the housing market between 2004 and 2006 saw more transactional volume per month than in 2020 to 2021. So why did we see low occupancies during the early to mid-2000s? Supply.
According to the 2013 Almanac, national non-climate-controlled 10-by-10 rates were $0.83 in 2008, $0.78 in 2009, $0.78 in 2010, $0.79 in 2011, and $0.83 in 2012. Performance was concerning at times but held relatively flat. The sector proved its resiliency relative to the miserable performance of the other asset classes. It is important to note that self-storage facilities can be cashflow positive at 65 percent occupancy, better than most other assets. With hundreds of tenants, a significant net negative turnover is a slow process. But recession resiliency is not as simple as continued demand for self-storage. As mentioned, the most impactful factor leading to the industry’s success during the recovery of the GFC was the lack of supply.
Following the Great Financial Crisis, a credit crisis unfolded, making it difficult for developers to secure construction loans until around 2014. The scarcity of liquidity led to a significant drop in new construction, allowing existing operators to regain occupancy and revenue. By 2015, occupancy percentages for most REITs had rebounded to the mid-90s. The limited amount of new supply was absorbed within 12 to 24 months, far quicker than the historical average of 36 to 48 months. This period set the stage for challenges in the latter half of the 2010s, as the industry’s performance led to a wave of new construction and subsequent oversupply on construction financing became readily available.
From 2014 to 2020, the total amount of self-storage space grew by nearly 17 percent. According to a 2016 Baird survey, 83 percent of all survey participants anticipated a slight or large impact from new supply over the next 12 months. Austin, Charlotte, Denver, Minneapolis, Nashville, and Northern New Jersey saw inventory grow more than 25 percent between 2015 and 2019.
The 2020 Almanac finds that in 2014, only 0.10 percent of the national inventory was considered to be in lease-up. By 2019, 13.4 percent of inventory was in lease-up.
While the last few years haven’t officially marked an economic recession, indicators like transaction volume, property values, rental rates, and occupancy have trended downward. Similar to the aftermath of the 2008 crisis, tighter lending environments are evident today, acting as a form of regulatory measure to prevent a glut of supply. However, recent capital influxes could spark a new wave of inventory once market uncertainty dissipates.
By early 2023, two private groups announced about $4 billion raised for self-storage facilities. Transaction volume was $6.2 billion in 2020, outpacing the historical average annual transaction volume of $4.4 billion from 2010 to 2021, according to Real Capital Analytics and CBRE Investment Management. While the amount of significant capital inflow indicates confidence in the sector, it also raises concerns about potential oversupply if not managed prudently. As the industry rebounds from muted demand and high interest rates, the delicate balance of supply and demand becomes paramount, underlining the importance of prudent supply management.
In conclusion, the self-storage sector’s recession resilience is inarguably true. However, the challenges of oversupply pose a constant threat, even during periods of economic growth. The lessons from the past emphasize the need for caution as we cycle out of the current downturn in order to maintain the equilibrium that has defined the industry’s success over the years.
–
Armand Aghadjanians joined RHW Capital as their Director of Acquisitions in 2019. RHW Capital operates Store Here Self Storage and has been recognized as a top operator for the past decade, with experience in over 80 markets across the country. Prior to joining RHW Capital, Armand was a commercial real estate broker for five years, advising office and retail clients with dozens of sales and leasing assignments throughout Los Angeles.