Written by John McGhee
From the Desk of an Intern
The last couple of years has greatly affected the real estate market through COVID lockdowns and economic crises. Through all this change and uncertainty, an unlikely asset class rose from the ashes, self-storage. While many of the other real estate asset classes, such as office and lodging struggled over the pandemic, self-storage benefited from it.
Over the last twenty-eight years, self-storage has been the highest-return asset class tracked by the National Association of Real Estate Investment Trust. It boasts an average annualized return of 17.9%, followed closely by infrastructure with 15.1%, though infrastructure has only been tracked for eleven of the twenty-eight years self-storage has been. This is surprising as self-storage is not as frequently discussed as other asset classes.
Over the last five years, self-storage comes in second with 16.5% average annualized returns, losing out to industrial with 18.2%. Unsurprisingly, both office (-3.4%) and lodging (-3.6%) were the two worst performers during this time frame, as they were the industries most affected by recent events, including rising interest rates, decrease in travel to downtown areas, and lockdowns throughout COVID.
Self-storage, unlike many other real estate asset classes, can benefit from economic downturns. People moving to smaller, more affordable homes will cause an increased demand for storage. One in five Americans use self-storage, according to a survey by “storage cafe”, and 40% use it because they simply didn’t have enough space at home. Renters also tend to stick with the same facility, despite price increases, solving the issue of long-time renters paying below-market rates. Self-storage also stands to gain from urbanization, the process of population shifting to more urban areas, putting more people in less space, and thus causing them to need a place to store their extra belongings.
On the flip side, the lodging and resort industry has seen a challenging few years. The cruise ship industry was particularly hit hard by the pandemic, as they rely on scheduled cruises to cover the millions they spend on maintenance and operation to keep their companies afloat. This sudden drop in demand ultimately caused eighteen cruise ships to be scrapped. Given that ships typically cost upwards of 500 million to build, this was a major hit to the industry. As travel and tourism pick up again, lodging should see much higher demand.
Office, another industry hit hard by COVID lockdowns and an increase in remote work, has been slowly regaining its footing. VTS, a company that tracks office demand and compares it to pre-covid office numbers, found that the office market, especially in Seattle, is still significantly lower in demand than the pre-covid market. The national office demand is down 37% and Seattle is down 51% from the 2018-19 average. Additionally, the office has had the lowest returns of 2022 from the Nareits database with a -37.6% return. As more companies shift their workforce back to the office, the market should rise to near pre-pandemic levels.
The St Louis Federal Reserve’s commercial real estate consumer price index tracks the price growth of commercial real estate on the consumer side. The cost of self-storage and mini warehouses has increased more than double any of the other tracked asset classes, with a 72.4% price increase since 2010. With its high user base and rising price paired with recent demand spikes, it is clear why this asset class is performing so well.
Although not the most glamorous of real estate asset classes, self-storage is one of the more interesting ones to look at at this moment in time. Its position in the market is different from many other types of real estate as it is not intended to be used by people regularly, and thus is not affected by many of the factors that affect offices, residential, and retail. Self-storage is often referred to as recession-proof as it’s very resilient to outside influence, which is demonstrated by its performance over the past three years.
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