By Steve Williams on January 3rd, 2018
Like a good wine, the U.S. self storage sector has enjoyed a long maturation.
The concept of having your own storage unit began in the 1960s. Families moving to the newly air-conditioned sunshine states of Florida, Texas and California needed interim storage for their “stuff”. Over the next fifty years, rows of tin-roofed sheds full of this same “stuff” (safe behind the perceived security of a padlocked, roll-shutter door) had spread into every business park in the country. Self storage had become a visible emblem of consumerism.
As with many industries, the 21st century brought great change to the sector. The largest self storage developers, many now national in scope, seized on new technologies to effect long-awaited efficiencies to their marketing, leasing, and management systems. Streamlined operations brought increased revenues and for the first time the “big names” in self storage were able to move off cheap business park lots onto prime, high visibility sites on busy urban corridors.
Suddenly this new generation of self storage developers were competing for prime sites with their office, retail and multifamily neighbors on Main Street. Improvements in scale and construction quality quickly followed. Elegant two and three-story structures could offer tenants a safe, clean, storage environment with indoor corridor access and climate control.
Not surprisingly tenant profiles began to improve. While conventional household and business users expanded into bigger and better units, a significant jump in revenue came from specialty units catering to tenants wanting space for high-value items such as fine art and automobiles. In addition, this new tenant class paid fees for such ancillary services as packing and moving, insurance, cleaning and movable pods.
A decade of change had seen self storage transition from lowly caterpillar to elegant butterfly. Most importantly, in doing so it had begun to attract institutional investors. Suddenly, the sector was respected as an investible asset class. Currently US REIT money funds eight of the ten largest self storage operators.
So where is the market at today? To track the changes in the self storage sector statistically, we looked at RCA transaction data for U.S. core stabilized properties by project age, comparing the spread between the transaction cap rate and the 10yr UST. The chart shows a smooth upward trajectory confirming the expectation that newer self-storage properties have the tightest spreads to the 10yr UST, a reflection of investor interest in new assets. In any sector, investors tend to pay a premium for newer assets.
As for recent activity, self storage has not been immune to the trend across all major property types for stronger pricing tempered to be by a sharp double-digit decline in deal volumes. Investors appear reluctant to dispose of properties when attractive reinvestment opportunities are scarce.
Haley Crimmins contributed to this article.