Signature Associates

Why self-storage is one of the hottest sectors in real estate

Michael Berger didn’t get the amount he wanted for his self-storage portfolio when it sold last month.

The Southfield-based real estate investor got much more.

The $170 million sale of his 28 U-Store Management Co. properties to Colorado-based SpareBox Storage is proof positive that the self-storage industry, several decades ago just a blip on the commercial real estate radar and now a nearly $40 billion industry, has rebounded from the early uncertain days of the COVID-19 pandemic.

In some ways, the sector has capitalized from the global public health crisis as people make room in their homes for remote working environments, as the home sales market drives additional storage needs, as offices and restaurants search for ways to hang on to currently unneeded equipment and furniture to accommodate social distancing and other measures, experts said.

That increased demand, in turn, has driven up rents and driven down vacancies.

“It rebounded quickly and our occupancy hit record levels for the last 12 months,” Berger said, noting that he would entertain opportunities to re-enter the self-storage market in the future. “Every month was almost another record. We were almost 98 percent portfolio wide, which is unheard of in the industry.”

Maurice Pogoda, president of Farmington Hills-based Pogoda Cos., which has 58 properties owned and managed totaling about 3.9 million square feet with close to 34,000 units, echoed Berger, saying the industry has been thriving in the pandemic.

“We had no one moving out,” he said, adding that his company has five more properties in Indiana and Kentucky it anticipates adding to its portfolio by the end of the year. “We had more people moving in. Everything was topsy-turvy, and it’s been that way ever since … I’m not being hyperbolic when I tell that I’ve never seen anything like it in all my (34) years in business.”

Not all is rosy, though.

A February report from Marcus & Millichap Real Estate Investment Services Inc. says that the growth outlook for the Detroit market and others is dampened by lack of population growth. Berger said the industry standard if there is 7 square feet of self-storage space per capita in a three- to five-mile radius, that area can generally accommodate more product; if it has more than 7 square feet, it is considered overbuilt.

U.S. Census Bureau data says that there was $3.86 billion worth of self-storage construction taking place nationally as of August. At the start of the pandemic, there was close to $5 billion underway, and the all-time high was in September 2018, when there was $5.49 billion being built.

A report from Yardi Matrix says that 15 properties in the Detroit market have been completed in the last two years totaling 1.1 million square feet, representing about 6 percent of the Detroit market stock of 18 million square feet across 289 properties.

There are 18 developments in the pipeline plus another nine under construction, including Lavda’s Self Storage at 34244 Groesbeck Highway in Clinton Township; Centerpointe Self Storage at 3111 Centerpoint Parkway; U-Haul Moving & Storage at 2000 E. 10 Mile Road in Warren; an EZ Storage at 14415 Sheldon Road in Plymouth; and Livonia Budget Storage at 29150 W. 7 Mile Road

Nationally, according to a second-quarter report by New York City-based Reis Inc., the vacancy rate fell by 1.5 percent from the previous quarter, the largest quarterly decline in five years, and year-over-year, the vacancy rate fell by 0.7 percent, the largest year-over-year decline in two years.

In addition, rents for 10-foot by 10-foot units, which is the most popular size, saw rents increase by 5 percent quarterly for climate-controlled units — the largest since Reis began collecting data in the fourth quarter of 2011 — and 4 percent for non-climate-controlled units, the largest quarterly increase since the second quarter of 2015.

According to Reis, on a year-over-year basis, the 12.9 percent recent increase for climate-controlled 10-foot by 10-foot units is the largest to date, as was the 10.2 percent increase year-over-year for non-climate-controlled units.

“Generally, this sector does quite well in the second quarter as people relocate after the end of the school year and into the summer months,” the Reis report says.

“The remarkable exceptionality of this quarter’s numbers is thanks to a combination of the sector’s typical cyclicality, which favors the second quarter, as well as the pandemic-induced macroeconomic landscape which has propelled migration shifts to an extent not seen in decades. As much of the summer falls in the third quarter, we can expect to see continued strength in the sector as lifestyle and demographic changes brought on by the increased acceptance of remote work will continue to benefit this sector through the rest of the year as people have suddenly found themselves more mobile and with both a stronger desire and ability to relocate.”

DBRS Morningstar, a division of Chicago-based Morningstar Inc., said in a report from August that Michigan has some of the highest amount of commercial mortgage-backed securities debt secured by self-storage properties in the country, at $610 million. The only other states with more are California ($3.34 billion); Texas ($2.1 billion); Florida ($1.79 billion); New York ($1.32 billion); and New Jersey ($698 million).

Dennis Bernard, who heads up Southfield-based Bernard Financial Group, said lenders find self-storage an attractive investment.

“Once they are leased up, they rarely drop down in leasing because it shows the market supported it and there was enough demand there,” Bernard said.

In the last quarter century, several large real estate investment trusts have muscled into self-storage, making moves to consolidate ownership in the market that is dominated by small mom-and-pop owners and midsized companies, which control more than 80 percent of the storage facilities nationwide.

Among them: CubeSmart, based in Pennsylvania; Life Storage Inc., based in Buffalo, N.Y.; Extra Space Storage Inc. in Salt Lake City; National Storage Affiliates of Greenwood Village, Colo.; and Global Self Storage Inc., based in New York City.

“Even though REITs have bought up a bunch of properties, while all of this has been going on, the REITs for awhile, pre-pandemic, took a back seat because they thought pricing was getting a little out of hand,” Pogoda said.

But for all the activity in the sector the last couple decades, it remains a fragmented industry.

“It’s not like REITs now have 30 percent of the industry, not even close,” Pogoda said. “I don’t think even the top 100 operators have 30 percent.”

For Berger, who still has real estate holdings in the multifamily sphere, there is still room for the self-storage industry to grow, particularly in smaller markets.

“What we found is that these markets are mostly under built,” he said. “We still felt that these markets have room in them and that’s why buyers are attracted to a portfolio like ours.”

Posted By: Crain’s Detroit Business on October 12, 2021.  For more information, please click here to read the source article.

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