There’s a commercial real estate specialty that’s gaining more and more ground (literally)—and it didn’t exist a few decades ago. It feels part retail, part industrial, but in reality it’s a sector all its own that’s performing quite well at the moment. Can you guess what it is?
If you said self-storage, you’d be right. This growing sector is so big that it could have every human being in America stand under its roofing at once.
Rents going up, vacancies going downAccording to a recent Marcus and Millichap report, demand for self-storage is strong. Rents are increasing nationwide, while the vacancy rate is at 10.1% overall (a decrease of more than one percent from last year) and 5.6% for the REITs that participate in the sector.
Prices for transactions have also jumped 8.9% in the last 12 months for assets on the West Coast, the highest since 2000. Not surprisingly, the best-performing market is in San Francisco’s Bay area, where all sectors of commercial real estate seem to be on fire.
The report attributes this to an overall improving economy. Job growth is on the rise, home ownership is creeping up, and people are spending more money at retail outlets. Plus, with much of the baby boomer generation downsizing and relocating to smaller homes in urban areas, the demand will only increase—and investors are taking note.
The REITs that specialize in this sector are doing extremely well, despite trepidation in the overall REIT market due to potential for higher interest rates and the uncertainty around the coming election.
Arguably, the largest player in this field is Public Storage, which has 142 million square feet of assets in North America and Europe. Its third-quarter report is coming out later this month, but the second quarter was a strong one. Revenues and net income all sharply increased, and its stock price is hovering close to $215 per share, an indicator of strong investment demand.
What brokers should know about this unique commercial real estate assetThough public-storage facilities are industrial in nature, there is also a lot of interaction with individual customers. There is an additional retail component as well, as self-storage companies sell products such as boxes, packing materials and insurance. In other words, the specialty is more high-maintenance than a corporation that just needs space.
What’s more, it’s similar to multifamily in the sense that operators are dealing with dozens or hundreds of tenants at once who may or may not pay their rent on time. In the case of Public Storage, if rent is delinquent for 60 days, the belongings of the customer are put up for auction (creating a forum for the television show Auction Hunters and others).
Because of an increasing—and increasingly mobile—population, it seems like the investment is worth the operational challenges. Whether someone is moving from a single-family property to an urban condo or buying a new house, the demand for self-storage is not likely to wane.