Self-storage has had a major boom over the past decade, but after years of heavy development, industry revenues were starting to slow as vacancy rates crept up across the country. However, it appears self-storage demand is making a big comeback in today's post-pandemic world.
According to Nareit data, self-storage real estate investment trusts (REITs) have achieved a 58.89% return year to date in 2021, the highest among all REIT sectors. It seems this recession-proof industry may be in store for a strong 2022. Here's what investors should expect from self-storage in the coming year.
The COVID-19 pandemic fueled the industry
The COVID-19 pandemic-related trend toward remote working prompted a number of families to relocate over the past year and a half, which in turn inadvertently created new demand for self-storage space in many major markets across the U.S. The national average for 10 x 10' climate-controlled unit rental rates increased 9.8% year over year in October 2021, with some markets in the U.S. Sun Belt seeing year-over-year rental rate increases closer to 15%.
While only a small pool of just five self-storage REITs to choose from, all have performed exceptionally well over the past year. Public Storage (PSA 1.75%), the largest self-storage operator and one of the largest REITs by market capitalization, saw a 14% increase in same-store revenues for the three months ended Sept. 30. Meanwhile, Extra Space Storage (EXR 1.88%) increased revenues by 18.6% year over year in the same time period, and Life Storage (LSI 1.99%) also saw revenues grow 17.4% over the past year.
Finally, National Storage Affiliates (NSA 3.08%) achieved 18.4% year-over-year growth in revenues, while CubeSmart (CUBE 2.21%) rose revenues by 15.6% as of the third quarter of 2021.
But will the momentum last?
During periods of transition or uncertainty, self-storage often sees a surge in demand, a testament to the resilience of the industry even during challenging economic times. But that demand isn't always substantiated over the long term.
A big part of what has driven this stellar performance over the past year and a half is that the sector's performance prior to the pandemic was lacking. It's easy to see huge gains when vacancy rates and asking rents were plummeting just prior to a surge in demand. When that demand slows, so will its incredible growth, and the industry will have to face the underlying issue of the current development pipeline.
2021 deliveries will be below 60 million square feet for the first time in three years, according to a report by Marcus & Millichap, but inventory is still growing by 3% on a national level. Joe Margolis, CEO of Extra Space Storage, believes supply pressure from the new surge in demand will moderate some in 2022 and likely return to more normalized levels in 2023.
Certain markets are seeing more demand than others and will likely be able to combat the headwinds facing overdevelopment when compared to more saturated markets. But eventually, supply will catch back up with demand. I see 2022 being another strong year for the self-storage industry, but investors shouldn't expect self-storage to dominate REIT returns as it has over the past year and a half. Given this sector's consistent returns, it's still a great play for conservative investors looking for reliable dividends in a resilient sector.