Institutional investors are opening the door to the self-storage category to find some relief from a turbulent year in real estate.
According to data published in July by the National Association of Real Estate Investment Trusts, self-storage is leading a pack of real estate categories disrupting the balance from traditional options in real estate investments like residential, office, retail and industrial. There has been a significant increase in the need for alternative real estate investment opportunities following the start of the coronavirus pandemic, with commercial real estate options facing an uphill climb to regain a footing in the eyes of investors.
The Nareit data found the self-storage category has provided stability to real estate investment trusts, averaging between seven and 10 per cent in assets held between 2010 and 2023. John Worth, the association’s executive vice-president of research and investment outreach, says the stability offered by self-storage is pushing institutional investors to review their standard approach to real estate.
“The conversations among institutional investors that we’re hearing about self-storage now really fall into kind of a bucket of conversations, which are about broadening their real estate portfolios.”
Similarly, a 2023 report on real estate trends from PricewaterhouseCoopers Canada showed an optimistic future for self-storage despite pressure points from rising inflation, since the category has historically “weathered economic headwinds well.” Due to rising living expenses, it noted, more households will consider relocations and consolidation strategies by adding roommates, leading to an increased need for self-storage options.
Ed Pierzak, senior vice-president of research at Nareit, says self-storage investments have kept up with inflation thanks to a balance sheet that doesn’t rely on the mortgage market. He says the U.S. has seen mortgage market turmoil from increased rates and stricter underwriting standards affecting the entire real estate space, except for self-storage, which uses more than 92 per cent in unsecured debt.
“What that really tells us is that they don’t have to go to the mortgage market, rather it’s the company debt. . . . And that debt, not only can you get it in significant amounts, but typically it’s much better priced than traditional mortgages.”
It’s easy to identify these alternative opportunities within real estate, says Worth, noting the challenge for institutional investors lies in the availability of the desired assets. “Even if you put money into a private fund, it could take quite some time for that money [to] be deployed. When you’re talking about trying to get best quality assets in data centres, self-storage and cell phone towers a lot of those assets are already held.”