Guest Contributor: As Rates Stabilize, Self-Storage Remains Hot

By: Ryan Gibson, chief investment officer, Spartan Investment Group

After historic rent growth during the pandemic, the self-storage industry is showing signs of stabilizing. However, the popularity of the asset class is by no means declining.

Last month, Public Storage announced an unsolicited bid to acquire competitor Life Storage at a 19% stock premium. Had the bid been successful, the $11 billion transaction would have represented one of the most significant corporate deals of the year to date and would have been the latest in a series of major acquisitions chronicling the industry’s rapid consolidation.

In 2020, Blackstone Real Estate purchased Simply Self Storage for $1.2 billion. The same year, Bill Gates became a part owner of one of the country’s biggest operators. In 2021, Public Storage paid $1.5 billion for a 56-property All Storage Products Inc. portfolio. And just weeks ago, the Prime Group Holdings LLC closed the largest self-storage fund in the industry after a $2.5 billion raise.

Institutional backers clearly remain bullish on the trajectory of self-storage. But what does that mean for individual investors?

A Normalizing Industry

Demand for self-storage is tied to personal milestones: death, divorce, relocation and downsizing. All of these increase during economic disruption. That leads to higher occupancy, pushing up rates and returns. As a result, self-storage typically performs well during recessionary periods when other investment vehicles, like the stock market, falter.

This trend was particularly prevalent during the pandemic. As more Americans relied on storage to help them navigate life events, including moving out of major cities, rates and rental income soared.

Self-storage generally follows a seasonal cycle, with occupancy spiking in summer and tapering off in winter. During the pandemic, demand was so steep that seasonality all but disappeared. The latest data shows rates mellowing, suggesting a return to the traditional cycle.

Despite this, self-storage continues to deliver. Rents are still well above pre-2021 asking prices. Since millennials represent the majority of tenants, the future of the asset class looks promising, too. As this generation, the largest in the U.S., ages into more life events, household utilization will only climb.

A Low-Touch Approach

In part because it experiences such stable demand, self-storage is a low-maintenance asset, boasting ease of management, maintenance and monetization.

While multifamily properties require a much higher-touch approach, self-storage tenants often only visit a couple of times during their lease. Because units are relatively simple to construct, upkeep is minimal and the likelihood of needing to perform costly and extensive repairs is low.

Most states don’t have the same restrictions on rental increases or eviction moratoriums for self-storage as they do for multifamily tenants, making facilities much simpler to monetize. If a tenant reneges on the lease, operators can quickly rebound and get the unit back on the market. Lastly, although storage typically offers a shorter lease cycle, the average rental duration is 14 months, with 25% of tenants staying for more than three years.

These factors combine to reduce risk and overheads, increasing the chances of realizing solid and consistent returns.

A Tax-Efficient Asset

Investing in self-storage also carries substantial tax benefits. As with other commercial real estate asset classes, self-storage investors can usually expect losses in the first year, effectively creating a tax shield for their rental income.

Cost segregation, an advanced form of depreciation, breaks the property into components based on useful life, allowing self-storage investors to frontload deductions into the early years of ownership.

Bonus depreciation, introduced under the Tax Cuts and Jobs Act of 2017, takes this concept further. Through bonus depreciation, investors can claim 100% of deductions for components depreciating on a faster schedule in year one. This benefit is in the process of phasing out since 2022 was the last year investors could claim 100% depreciation. That said, those funding deals in 2023 will still enjoy 80% bonus depreciation, and the remaining 20% will be segmented into the facility’s useful life depreciation schedule.

Regardless of the evolution of depreciation deductions, self-storage investors are well-positioned to protect their income from an excessive tax burden. This maximizes the revenue that investors can retain and roll into further deals.

Continued Resiliency

For investors looking to safeguard their portfolio against a volatile market, self-storage can provide some stability. Since it has a low correlation with the stock market, it is a powerful vessel through which to diversify investments, particularly as the S&P 500 persists in delivering disappointing results.

Over the past 20 years, self-storage occupancy has remained strong, even when gross domestic product has declined. Today, as rates soften, utilization continues to grow. Currently, 11.1% of U.S. households rent a storage unit, an increase from 10.6% in 2022.

With occupancy on the rise, and usage concentrated within the country’s largest demographic, storage promises a level of resiliency that few asset classes can match.

Ryan Gibson is chief investment officer of Colorado-based Spartan Investment Group, a privately held real estate investment firm specializing in the self-storage industry.

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The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.