Self-storage has long been lauded as a recession-resistant industry. A few years ago, conventional wisdom told us that a healthy supply of self-storage space lived at six net rentable square feet per capita. Today, most people in the industry will tell you that the number rests anywhere between 10 and 13 square feet per capita, depending on the region. As the market continues to reverberate from the economic impact of COVID-19, the self-storage industry is still experiencing meteoric growth.
That growth is projected to continue. While other real estate asset classes, even those previously considered stable, have taken heavy hits during the pandemic, self-storage has been insulated from the impact of broader market changes. In 2020, the global self-storage market was valued at $48.02 billion. It is expected to reach a value of $64.71 billion by 2026, registering a compound annual growth rate of 5.45% from 2021 to 2026.
When I joined Store Space two years ago, the company had 26 locations. Now, we have 119 locations with roughly 30% of those located in the Midwest. Why does the industry keep growing? While asset classes like office or retail tend to have a few significant customers in one location at any given time, self-storage has a broad customer base, which offers an unusual level of stability.
When a global event like the COVID-19 pandemic causes broad market shifts, retail and office customers re-evaluate their model—or are forced to move out. In an office or retail development, which may have three or four renters, the loss of one customer can cause significant financial instability. On the other hand, self-storage provides services to hundreds or thousands of customers from one location at any given time. As a result, the customer base is stable—and the demand is high.
Pandemic-driven demand
As more and more workers opt for remote or hybrid work, business owners are re-evaluating their office rentals. Having to shift to work-from-home for large portions of 2020 and 2021 drove up the demand for self-storage as business owners looked to cut costs on rental office spaces. Now, companies are considering a permanent shift to remote work. Office spaces, as a result, are being downsized or abandoned altogether, further increasing the need for storage.
On the residential side, self-storage is also booming. Today, 10.6% of households rent a self-storage facility. Whether times are good or bad, people always need storage. When the economy is healthy, people accumulate material goods and need space to store them. When times are tough, people and businesses downsize.
As families seek smaller and more affordable living spaces and businesses move out of their brick-and-mortar properties, self-storage proves to be an affordable alternative to residential or commercial rental space.
Spurring investment
Self-storage is unique as an asset class in that it has maintained steady growth throughout the Great Recession, COVID-19 and the Great Resignation. That stability spurs new investment in the industry, and as prices and inflation heat up, more and more money is rolling into storage.
Since joining the industry more than 20 years ago, I’ve seen the industry grow exponentially both in the level and diversity of investment. While traditionally, investors in self-storage have been REITs and high net-worth individuals, institutional money is now joining the scene. Large private equity firms are moving capital into the self-storage industry, fueling higher sales prices and elevated acquisition activity. Like housing, self-storage is considered a stable investment—indeed, many of the equity funds investing heavily in storage are also bulk buying housing.
These private equity firms are looking for steady growth and return on investment, and self-storage has a track record of delivering. From 2009 to 2018, self-storage facilities experienced an average annual ROI of 16.9%, outpacing office, industrial, retail and residential properties. With major investors here for the long haul, growth patterns will only continue.
Generational shifts
Generational shifts are also informing growth in the self-storage industry. As Baby Boomers permanently leave the workforce, they’ll navigate a fixed-income lifestyle against rapidly increasing housing costs. Increased living costs will drive up the demand for storage as more and more retirees choose to downsize.
Migration patterns are likely to be affected, too. Traditionally, the older generation has headed South for retirement, settling in states like Florida and Texas. However, as housing costs surge, retirees are more likely to take advantage of the high quality of life that affordable regions, like the Midwest, can offer.
Meanwhile, the millennial preference for urban living is driving self-storage demand up, too. As millennials flock to urban centers, they’ll be met with increasingly small, expensive living spaces and adopt a transient lifestyle, moving more frequently than previous generations. Self-storage is the obvious and economical alternative to larger, more expensive living spaces.
The Midwest stands to benefit from these trends. While increased housing costs have hit the region, the growth has been less dramatic. As a result, people are migrating inland in search of affordable housing. The Midwest also offers a viable choice for millennials looking to stretch their dollars and access enhanced affordability in the housing market. These shifts will feed the Midwestern real estate market and increase storage demand across the region.
New opportunities for innovation
As the millennial population grows as a customer base, new opportunities to disrupt the self-storage industry are emerging. Millennials typically expect a technology-rich and responsive experience, and self-storage businesses are evolving to meet the demand. At the beginning of the pandemic, Store Space started to test in-store kiosks to supplement in-person services. When the pandemic hit, what began as a test quickly became a more permanent business model.
While millennial customers typically embrace new technology, older generations can be harder to predict. Surprisingly, contactless methods of doing business proved popular across all customer bases. For example, in Bonita Springs, Florida, where the average age is 70, Store Space found that self-service kiosks were so popular that the local branch moved to a more technology-driven model. As a result, the facility has performed better in the last two years than ever before.
Self Storage is here to stay
Investors and consumers agree: Self-storage is on an upward curve. As the pandemic continues to impact migration patterns, the storage industry looks to cash in. These shifts are particularly good for under-saturated markets like the Midwest, which stand to benefit from pandemic-induced and generational population migration.
Today, the annual revenue of the self-storage industry is $39.5 billion. As Baby Boomers retire, the workforce shifts away from brick-and-mortar spaces and consumers swarm to urban areas, that revenue will only grow, paying dividends for those who choose to invest.
Michael Baillargeon is senior vice president of operations at Store Space, a self-storage operator and third-party management company. Located in Winter Garden, Florida, the company currently owns, has under purchase agreement and operates more than 100 properties in 20 states. Contact Store Space at inquiries@storespace.com, or visit the company at www.storespace.com.
