Self-Storage: Keep it to yourself
Specialist REITs in the US are carving out a new niche in the self-storage sector – and impressive returns, writes Christopher O’Dea
With core property values at or near post-crisis highs, institutional investors are taking care to allocate capital to niche assets.
Self-storage property is one sub-sector that is attracting attention – and capital – from institutional investors. A fund run by Brookfield Asset Management, for instance, in the first quarter completed the $830m (€733.2m) acquisition of Simply Self Storage. The search for attractive niches is becoming a key part of maintaining higher allocations to property.
Two main features make self-storage property an attractive place to place capital. The sector is highly fragmented and, despite the existence of numerous listed real estate investment trusts (REITs) focused on the sector, there are hundreds of local storage property owners across the US. From on-the-move Millennials to downsizing seniors, all Americans love their stuff. And, rather than part with it, many opt to pay for storage space.
While big players are getting involved, there are many independent brokers specialising in storage properties, and the industry’s annual conference and trade show includes session with metalworking experts about the latest storage facility designs.
In urban markets like New York City and hipster havens like Austin, Texas, facility design and customer-friendly features can be key differentiators. Many of the smaller owners operate less than 50 facilities, and some as few as a half-dozen. Even as institutional capital sources move in to the sector, the annual conference also features sessions on how to launch a self-storage start-up. There is even an Austin-based online marketplace for self-storage, SpareFoot.com, which lists available space and tracks development.
The industry’s trade journal often carries headlines of self-storage being built across the country – a five-story storage building has been proposed to replace a roller-skating rink in Albany, the upstate capital of New York, while commercial property firm NewQuest Properties, which specialises in Texas retail, has formed a self-storage development group and will break ground on two Houston projects this fall.
In New York City, Cushman & Wakefield estimates that 2-3m sqft of self-storage space is under development, even as Reis data show recent new supply in the city has pushed occupancy rates down from 88.2% in Q1 2015 to 85.7% in Q1 2016. And a recent zoning change in Charlotte sparked applications for new self-storage development in the North Carolina city’s urban core.
Americans want access to their stuff, so storage property is coming out of the shadows. New product increasingly resembles retail property or fast-food franchises, with strong visual imagery and physical presence.
CubeSmart, the fourth-largest self-storage operator in the US recently purchased All Stor Self Storage in Austin, a three-story building completed in April 2015 by Endeavor Real Estate Group, an Austin-based, privately owned business focused on the acquisition and development of self-storage facilities.
“Americans want access to their stuff, so storage property is coming out of the shadows. New product increasingly resembles retail property or fast-food franchises, with strong visual imagery and physical presence”
The three-story building has 583 units – all but seven of which offer climate control – and includes drive-up units and electronic access control, all fronted by a retail-oriented customer-service office.
The other key element for investors seeking income from self-storage property is location. All Stor sits alongside one of Austin’s most heavily used highways, adjacent to a major grocery-anchored shopping centre and Steiner Ranch, a 4,600-acre master-planned community, according to JLL, which represented the seller.
Those factors, JLL said, provide the facility with excellent exposure in an area that generates significant traffic from strong surrounding demographics. CubeSmart facilities in New York and Florida exhibit similar traits, looking more like retail outlets or hotel – the company even calls the stores, and offers advice and services on planning moves and logistics.
Grassroot interest in self-storage property has been strong enough that a direct lender specialising exclusively in self-storage property was able to conduct a $120m initial public offering as a NYSE-listed REIT. Jernigan Capital, based in Memphis, Tennessee, completed its IPO in March of 2015. The company provides debt and equity capital to private developers, owners, and operators of self-storage facilities.
The niche focus has attracted institutional capital. In April, Jernigan announced that a large public pension plan had made a $75m co-investment in Storage Lenders, Jernigan’s joint venture with an affiliate of Heitman Capital Management.
With that commitment, the SL1 Venture “has reached the $122.2m target capitalisation previously announced by the Company”, a statement from Jernigan said.
In its first-quarter 2016 results release, Jernigan noted that “sustained high occupancy, limited new supply and increasing rental rates for new generation class-A self-storage facilities, combined with limited competition from banks and other capital providers, continue to provide us with exceptional investment opportunities with best-of-class developers in some of the top self-storage markets in the United States”.
For the newly-listed REIT, the first year has been a good one: “Our strong asset appreciation has allowed us to increase our annual adjusted earnings guidance by an average of 34%,” the company said.
Founder Dean Jernigan would know. He sold his previous company, Storage USA to Security Capital/GE Capital in 2002 for $1.8bn, and was CEO of CubeSmart until retiring in 2013.
Jernigan told SmartFoot.com in 2015 that $25bn worth of storage facilities needs to be built in major metro markets for the industry to catch up to – and the keep pace with – population growth. That means developers should build 3,450 facilities by 2020 in the 50 largest metro areas; about 400 completions are expected this year.
Strong performance has been a hallmark of self-storage property. The self-storage REIT sector has produced the strongest performance of any property type accessible through exchange-traded REITS over long historical periods, according to the National Association of Real Estate Investment Trusts (NAREIT). Returns in the self-storage sector exceeded 40% in 2015, NAREIT says, reflecting the improving professionalism of the business.
Self-storage REITs also generally display the lowest correlations with the broader stock market among listed REITs, with a median of just 40.8%.
Although self-storage cannot always expect to post the sorts of returns it did in 2015, the sector has averaged 17.5% annually for the past 22 years, NAREIT says, compared to the 11% to 12% REITs overall typically provide through a property cycle.
“The best performance has been by self-storage REITs,” says NAREIT senior vice-president for research and industry information Brad Case in a recent overview of the sector. Despite that, self-storage REITS “are often overlooked by institutional investors”.