Video: Self-Storage Investing
The DI Wire’s publisher, Damon Elder, sat down with John Good, chief executive officer of NexPoint Storage Partners, to discuss self-storage investing in the latest video from ADISA’s Focus on Alternatives, an educational series that covers key topics in alternative investing.
Good opines on what has propelled self-storage facilities to become one of the country’s most predictable and best performing asset classes. With dramatic increases in self-storage property values and occupancy rates, combined with low operating and maintenance costs, Good explains the demand drivers, the current construction pipeline, and why he remains bullish on the sector for the foreseeable future.
Video Transcript
Damon Elder 00:08
Hello and welcome to another edition of Focus on Alternative sponsored by ADISA, I’m Damon Elder the publisher of The DI Wire.com. Today we’re joined by John Good, CEO of NexPoint Storage Partners. And as you probably can guess we’re going talk a bit about storage investing. So, John why don’t we start in the last decade or so we’ve really seen the emergence of storage preferred real estate asset class both among institutional and retail investors. You know, what has led to its emergence, and you know where do you see it going from here?
John Good 00:37
I think there are several things that work, number one Americans can’t get over their insatiable desire to keep things forever.
Damon Elder 00:47
Oh, you’ve met my wife.
John Good 00:49
So… and mine also. So, I think that as we keep accumulating as houses get smaller there is a need for a place to keep those important things whether it be records whether it be antiques art wine, wines are a new area. And I think that has driven a large part of the demand. The other thing is the other thing that’s driven demand is just familiarity with this as an alternative way for people to to keep things, kind of out of sight out of mind phenomenon. You can go rent a storage unit and give them a credit card never have to think about it again until you get tired of paying the bill. So, I think I think that awareness of self storage has increased dramatically over.. over the years as well as we just accumulated a lot more stuff in the last number of years.
Damon Elder 01:46
Plus, from a certainly in a retail investor perspective they tend to like the things that they know and understand and an awful lot of us rent storage facilities.
John Good 01:55
That’s right, it’s stable for an investor whether it be an institutional investor or a retail investor. You have an element of very stable cash flow. Storage facilities lease up and they tend to stay leased up. Even though you have high tenant turnover, there’s always somebody else to rent a storage unit when one person moves out. The other the other thing that you’ve seen particularly over the last three or four years has been dramatic appreciation and value of storage facilities. Yes storage at one point in time was a stepchild if you will of the main food groups of real estate and as this awareness has has evolved and as people have begun to utilize storage more and more and occupancy rates have gone from what traditionally was a low 80s occupancy rate up into the 90s. Institutional investors view that as as stable as multifamily or single family rental or other types of real estate, and the cash flows are very predictable.
Damon Elder 03:02
And the other side of the equation you know you really don’t have excessive costs to operate these facilities, right I mean there’s no T Is, no leasing commissions.
John Good 03:11
It’s very much like, if you go back 27 years or so point in time where Nareit started keeping records of institutional real estate performance. Self-storage is very closely correlated to multifamily, and if you think about it and compare it to things like office retail in some respects hotel, CapEx is dramatically lower in the shorter-term rental property types. And in storage it’s arguably the lowest I think maybe certain industrial warehouse could be a little lower. But for the most part you don’t have any CapEx other than roofs and roofs and parking lots and it casually occasionally in the newer product elevator maintenance.
Damon Elder 04:01
Well let’s talk a little bit about newer developments, the need for these elevators. One of the things we’re really seeing in more modern development with self storage facilities as vertical development. Why are we seeing this? what are the benefits?
John Good 04:15
Well, I think there are two things at work here. Number one, people who own and operate storage facilities have realized after a number of years of doing the opposite, that locating your facilities close to population density is important. So, facilities have tended to be built in in more urban core locations than they used to be. And the other factor at work in that dynamic is just absence of land. Land in top 25 Top 40 MSA’s in the United States is scarce, particularly in the urban core. And so, the only way to be able to deliver the amount of square footage that the market needs is to go vertical.
Damon Elder 05:01
The more densely populated areas will require more densely populated storage, right?
John Good 05:04
That’s correct.
Damon Elder 05:06
How would you describe, what are we seeing from a performance perspective in the sector right now? What’s the health of the storage sector?
John Good 05:12
So, storage sector along with possibly multifamily and single family rental and data centers has been one of the top four best performing sectors over the last 18 months really since COVID began. Interestingly April of 2020 was the worst month that the storage sector has ever had. People were at home they were frozen in their tracks nobody was moving nobody was was comfortable leaving their homes. And we saw rentals drop off the map. Since that point in time since probably the 1st of June of 2020 self storage has had the best run it’s ever had. Occupancies have gone from pre COVID you know 92% on average up to 96 to 97%. Over the last over the last 18 months our rental rates which were very soft going into 2020 due to new development have gone through the roof. Development has largely stopped because of COVID and people are filling up the vacant space absorbing the space that was available from the last development cycle. And rent growth now is stronger than it’s been in any period except the period immediately following the Great Recession.
Damon Elder 06:37
That was something that’s interesting something I wanted to bring up that I know there’s been a lot of development as you said a lot of over development in this storage space. So COVID really kind of cured that and now, we’ve gotten more to an equilibrium?
John Good 06:49
I think we are we are at a much more equilibrium point that we were at the beginning of 2020. The beginning of 2020 in a number of U.S. markets we were oversupplied. Since that point in time construction has largely stopped on self storage facilities. Now there’s a pipeline out there and I guess there’s a chance that that pipeline will be built in 2020 three 24 and 25, so we could see supply pressure again in the next five years. But for the next 18 months or so everybody in the space feels pretty comfortable that occupancy levels are going to stay at their current high levels, and we’re going to and will continue to have pricing power and the ability to push rental rates.
Damon Elder 07:39
Well Speaking of COVID and its impact on the sector, you know we’ve seen during COVID housing values across the country really just surged. What kind of impact does that having on the storage space?
John Good 07:51
So, in the storage space pre COVID there was a little very little transaction volume because the only thing that was for sale was lease up inventory properties that were newly developed. People were afraid that they might not lease up that they might not hit pro forma. So there was very little trading and that trading was trading at cap rates generally 5 ½ to 6%. Recently we have seen Lisa portfolios cell at sub 4%…
Damon Elder 08:26
Oh, wow. Big difference.
John Good 08:28
Cap rates… so you’ve seen it you’ve seen 150 to 250 basis point compression over the last 19 months.
Damon Elder 08:35
Wow, significant. So, looking ahead starting to emerge it seems hopefully from COVID we’re getting back hopefully soon into a post COVID environment things seem to have settled down quite a bit and hopefully will continue to do so. Long term, mid term to long term you know how do you see the space what’s what’s storage going to do in the next three to five years?
John Good 08:58
If you if you look at storage historically over that 27 year that I referred to a while ago, it has been the best performing real estate sector over that 27 years. There’s a reason for that, predictability of the customers low CapEx predictable cash flow and now acceptance by the institutional marketplace. So there’s no reason to believe that as an investment type as an investment real estate type that self storage is not going to continue to lead the pack relative to all other property types.
Damon Elder 09:34
So, it’s safe to say you’re bullish on storage.
John Good 09:35
Very bullish on storage.
Damon Elder 09:37
It’s a good thing because you specialize the storage.
John Good 09:39
I specialize in it and hope hopefully we’ll be doing it for a lot of years to come.
Damon Elder 09:46
Well like you said the numbers don’t lie and it’s certainly been an extraordinary asset class for investors over a pretty long period of time now.
Well John thanks so much for joining us today and for sharing your wisdom and insights. And thank you for watching. For all things alternative investing please remember to visit www.adisa.org
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