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Why Self-Storage Is a Smart Buy in 2022

By Liz Brumer – Dec 21, 2021 at 5:00AM

Key Points

  • Self-storage REITs have outperformed the S&P 500 and all other REIT sectors for over 26 years.
  • Even with economic downturns, self-storage has proven its resiliency.
  • Despite demand normalizing in the near future, it's still a smart buy for 2022.

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Self-storage is a dream sector for long-term growth investors.

Over the last decade, the self-storage industry went through a construction boom, with record-breaking construction activity year after year until peaking in 2019. During that time, it made a name for itself as one of the top-performing commercial sectors in the industry today.

2021 was a great year for self-storage, and it appears 2022 will be another strong year for investors. While there may be some setbacks in 2023 and beyond to consider, here's a closer look at why self-storage is a smart buy for long-term growth investors.

Self-storage has been the top-performing CRE sector for over 26 years

Ease of trading and the access real estate investment trusts (REITs) give investors to high-quality, institutional-grade assets make REITs one of the most popular ways for investors to diversify into real estate. Within the REIT industry, the self-storage sector has produced an annualized return of 16.54% since 1994, the highest return on average of all REIT sectors during that period and an over 6% higher return than the S&P 500. And that performance includes several notable downturns, including the dot-com bubble, the Great Recession, and most recently, the global pandemic.

Person loading boxes into self-storage unit.

Image source: Getty Images.

Storage is having a "moment"

Outperforming all other commercial real estate (CRE) sectors for over two decades is impressive by any measure, but year to date, self-storage's 2021 performance has blown all other years out of the water. Self-storage REIT returns, as tracked by Nareit, have produced an impressive 57.63% return, once again outpacing all other REIT sectors.

Of the five major publicly traded self-storage REITs in the market today, all achieved stellar growth in 2021. Year to date, revenues for all national self-storage REITs jumped 15.8%, net operating income (NOI) grew 22.9%, and expenses decreased 2.3%. However, several REITs had noteworthy achievements.

Extra Space Storage performed the best, with revenues increasing 18.4% and NOI growing 27.8%. Business from new customers was 43% higher than Q3 2020 and 41% higher than Q3 2019.

Public Storage, the largest self-storage operator and one of the largest REITs by market cap, went on a buying spree, completing an acquisition of the $1.5 billion All Storage portfolio. Public Storage alone closed $5.1 billion of deals in 2021 so far, which is helping 2021 shape up to likely be a record year for transaction volume, at an estimated $18 billion.

Finally, Cubesmart is also having a good year. It's seeing asking rates up 29% over 2020 and 55% over 2019.

Why storage is still a smart buy in 2022

There's no denying 2021 was an impressive year for this industry, but it's important investors don't jump into self-storage expecting performance to keep pace with this year. Self-storage, which is known for its somewhat recession-proof business model, isn't immune to negative economic impacts.

After years of development in 2019, many markets became oversaturated with storage space, which led to a retraction in rental rates and higher vacancies. This pressure negatively impacted the industry at the start of 2020, but things took a major, and positive, turn after the start of the pandemic. Increased moves and downsizing among families over the last year and a half have caused a resurgence in storage demand and helped the industry recover quickly from its slow but steady decline. But when things start to normalize again, demand and risk of oversupply will likely resurface. However, this isn't a deal breaker.

Self-storage has proven to be extremely resilient, something that shouldn't be overlooked as we head into a somewhat uncertain year. But investors should keep in mind that these vulnerabilities, particularly overdevelopment, still pose a notable risk to investors when demand cools. Given self-storage's stellar historical performance, it still remains a smart buy and a clear winner for long-term buy-and-hold investors in 2022.

Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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