Since time immemorial, we have been bullish on self-storage as a commercial property type. Our good judgement is borne out with storage beating every other property type (senior living, industrial, multifamily, retail, etc.) in terms of 20 year average annualized total return at 16.80% (NACREIF).
It doesn’t appear to be slowing down either. Self-storage is “The pandemic’s hot property” (real estate 12/22/21). This is in large part due to the fact storage doesn’t need a good or bad economy to thrive, it simply needs change. Since the pandemic began nearly 2 years ago, it’s been all about change.
This has taken many forms. First there was change manifested in government mandated business closures. Workers went home and much of the stuff incumbent in the execution of their responsibilities went into storage.
Next up, it was the schools. Students in mass returned home, or in many cases never left. All their gear needed to be stored somewhere.
Let’s not forget mom and dad. After downsizing in anticipation of transitioning to senior living, it was all put on hold until things calmed down and the world started spinning again. Their kids don’t want their stuff and they’re still kicking, so into storage it went.
When we finally got the all clear from government to come out of hiding, 18 months worth of pent up consumer demand was unleashed. Aided and abetted by trillions in stimulus, shelves were cleared and car lots emptied out. All this had to be stored somewhere.
Despite this, we think storage still has plenty of room to run. The housing and rental markets remain strong which is a big plus. Tightness in the labor markets has also resulted in increased mobility as people go in search of better, higher paying jobs. Businesses may also continue to rent storage space to stash inventory as they attempt to bulk back up.
We are also convinced it’s one of the better inflation hedges available in the commercial real estate sector. This is because operational costs are paltry compared with other property types that are more labor intensive from a staffing and maintenance standpoint.
As importantly, its monthly lease structure offers more opportunities to raise rents than properties subject to multi year contracts, like retail and office.
Land & Buildings Investment Management LLC, a hedge fund that invests in real-estate stocks has a $41 million stake in Public Storage, the company that pioneered the self-storage business. “We decided self-storage is a great place to be in an inflationary environment,” said founder and Chief Investment Officer Jonathan Lit. We are glad he shares our views sees the light.
Finally, readers will recall that while the Fed was saying a tripling of inflation was “transitory,” it took no action to raise interest rates, adding to the risk of hyperinflation.
The market may force an interest rate increase sooner rather than later. Potentially, this may be very dislocating to the economy. This could mean more change which has the potential to be good for self-storage.