A public warehouse in Sacramento, California, USA, on Monday, February 6, 2023.
David Paul Morris | Bloomberg | Getty Images
A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future issues straight to your inbox.
Self-storage, those nondescript, boxy buildings with hundreds of garage doors across the units, is a relatively low-risk and resilient investment, according to a new study by Heitman.
Unlike other sectors that are dependent on interest rates, job growth or income growth, self-storage is agnostic – people still have to store their trash.
Heitman is a global real estate investment and management company that has invested approximately $10.5 billion in self-storage in more than 140 markets.
According to the Heitman report, self-storage has outperformed the industrial, multifamily, office and retail industries in net operating income over the past 15 years. It also benefits from several drivers of customer demand, the biggest being a lack of space at home due to a growing family. This is followed by moving, death, downsizing and remodeling.
“The level of risk for storage is pretty low,” said Jeff Bingham, co-head of global investment research at Heitman. “We now have 30 years of annual data for publicly traded REITs, these storage REITs [stock/bond] portfolio for a private investor, the correlation is pretty close to zero.
Bingham said this means the sector is as close to a risk-free asset as possible. Stocks of REITs in this area, including public storage, Additional storage space And CubeSmartHowever, they have fallen by up to 16% since the beginning of the year. Slower home sales have weighed on investor sentiment in the sector, as has weaker sales growth.
But there is now a tailwind, which represents an attractive entry point.
“This demand for 'life events' is really what we believe is driving our forecast,” said Annie Trucco, senior associate of investment research at Heitman, pointing to the aging U.S. population, particularly growing millennial families and downsizing baby boomers.
Get Property Play straight to your inbox
CNBC's Property Play with Diana Olick covers new and evolving opportunities for real estate investors, delivered weekly to your inbox.
Sign up here to get access today.
Heitman's data shows that the number of these major life events is increasing over the next decade compared to the previous decade, which is a positive driver for the sector.
“Part of it is welcoming a child. You need to convert a room in your home into a child's room. What do you do with that furniture? Or maybe you have aging parents and they're downsizing,” Trucco said. “There are just these general life events, and they're going to happen regardless of what's going on in the economy.”
Self-storage not only enjoys consistent demand, but also has strong income growth, high operating margins and low investment requirements. Heitman said assets are down 11% from their peak and new development is limited.
As for inflation, month-to-month rental agreements can mitigate this depending on current supply and demand. Storage is also much cheaper than housing. So when potential buyers place less value on a new home, they tend to put things in storage.
Demand is also hyperlocal and the industry is quite fragmented. This means investors can acquire assets from small holders and improve operations through institutional platforms such as the large REITs.