By the Numbers Niche properties

From Strength to Strength

Amid steadily increasing occupancy and rents, self-storage is primed for continued growth in the next year.

The past two years have been a rollercoaster for commercial real estate with different sectors experiencing a variety of outcomes. While some property types, like office and retail, have fought to stay afloat and continue to face tremendous uncertainty in 2022, others, such as multifamily and industrial, have flourished despite - or perhaps, in part, due to - the pandemic. Another property sector that falls into the latter category is self-storage, which has thrived amid the chaotic backdrop of COVID-19. The success of self-storage is largely predicated on household formation, which leads to the accumulation of possessions that need homes, as well as the desire among existing households to relocate. 

Self-storage had faced a sharp decline in occupancy for years. Over the past year, however, occupancy rates have steadily climbed in the sector, which includes both climate-controlled and non-climate-controlled units. The strong decline in vacancy rates in the Moody's Analytics Reis data is supported by multiple self-storage REITs that have reported record occupancies, irrespective of seasonality.

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Despite these stellar metrics for this niche sector, the one point of weakness in the self-storage sector, if it can even be called that, is in new completions as the supply of newly built facilities has progressively decreased over the past four quarters. However, this lack of new supply is likely a boon for rents because record quarterly absorption numbers indicate strong demand. 

Additionally, despite continued rising occupancy in this sector and the slower pace at which new inventory is coming online, current supply can meet the demand for space. Beyond the long-standing interaction between movement in the housing market and the health of self-storage, the ongoing uncertainty in the office and retail sectors also has benefited self-storage. Offices face a greater need for short-term storage for items such as furniture as they search for lower rents for more desirable properties and new space given increased work-from-home trends. Retail turned to self-storage to house inventory, particularly among smaller businesses who shifted to an e-commerce model in light of pandemic considerations, and either did not require or were priced out of traditional warehouse/distribution space. 

Beyond the long-standing interaction between movement in the housing market and the health of self-storage, the ongoing uncertainty in the office and retail sectors also has benefited self-storage.

Rents for both climate-controlled and non-climate-controlled 10-foot-by-10-foot units, the most popular storage unit size, have experienced healthy growth over the past several quarters. Although rent growth for these spaces has recently contracted from the stratospheric growth experienced earlier in 2021, performance in the self-storage sector is nevertheless robust. Comparing 3Q2020 to 3Q2021, 10-by-10 climate-controlled units saw their largest year-over-year rent increase to date, growing by 13.7 percent. Meanwhile, 10-by-10 non-climate-controlled year-over-year rent growth, which posted at 11.2 percent, was also the highest increase on record. Regionally, the self-storage sector reflects national trends in population movement - the largest vacancy declines and rent growth have been in the Southwest, home to many growth metros that have attracted new inhabitants during the pandemic.

Typically, this sector does quite well in the second quarter as people tend to relocate between the end of a school year and before the start of the next. The strong, albeit more modest, numbers are due to the sector's typical cyclicality, which favors the summer months. The pandemic-induced macroeconomic changes, which propelled migration shifts to an extent not seen in decades for much of 2020 and the first half of 2021, seem to have dissipated a bit. However, we can expect to see continued positive metrics as lifestyle and demographic changes brought on by the increased acceptance of remote work will continue to benefit this sector through 2022 because people are now more mobile and have both a stronger desire and ability to relocate. 

The supply of new properties is expected to increase as the year progresses. And despite strong projected inventory growth, the forecast for the vacancy rate in years to come is expected to remain well below the 2020 year-end rate of 14.6 percent. However, Reis forecasts the supply of new inventory will consistently decrease over the next 10 years and the vacancy rate will follow suit - expecting to reach a low of 10.1 percent, resulting in steady, positive rent growth. Undoubtedly, self-storage, much like other niche property sectors, has emerged as a clear winner in the pandemic real estate environment and will continue to perform robustly in the months and years to come. 

Ermengarde Jabir, Ph.D.

Economist with Moody's Analytics Reis.

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