While not the sexiest asset class in commercial real estate, self-storage has seen strong growth over the past several years. Although many feel that we are nearing the end of a historically-long bull run in real estate, self-storage has proven to be the most recession-resistant sector in commercial real estate. During the Great Recession, all commercial real estate segments experienced a net annual loss of anywhere between 25 to 67% except self-storage, which actually posted a gain of 5% in 2008.
Why does self-storage perform so well? Americans accumulate a lot of stuff and they don't want to let go of it. With millennials being priced out of owning a home and baby boomers downsizing, many are opting to rent and live in apartments and smaller rental homes, which have much less storage space than larger houses. The biggest demand driver for self-storage is created by people moving from one place to another. Since renters move more often than homeowners and they're moving into increasingly smaller spaces, the need for self-storage continues to increase. This phenomenon is only exacerbated during a recession, as job loss often forces homeowners to either sell their homes or they loose their homes through foreclosure. Changing jobs, divorce, death, and other life-changing events also create strong demand for self-storage.
And for those who like to hedge their bets on lower vacancies during a recession, self-storage has the distinction of having one of the lowest break-even occupancies in commercial real estate, often as low as 60%. It also has a relatively quick eviction process for non-paying tenants. Property managers typically auction off the storage unit's contents to cover the unpaid rent.
This asset class is not without its risks. Increasing supply and competition is putting pressure on occupancies and rents in certain areas. Saavy buyers are doing their homework to ensure that a target micro-area isn't saturated before making an offer on a property.
Despite its risks, the self-storage business is unlikely to face a recession. The sector has been recession-resistant precisely because its demand is created by changes in living situations, which only increase during a recession. In fact, during the Great Recession, self storage was one of the asset classes with the least amount of foreclosures. As we have likely reached the top the current market cycle, self-storage is becoming more and more attractive as a recession-resistant investment.
