For years, institutional investors and equity funds mostly shied away from the self-storage sector. In 2015, they represented just 5 percent of self-storage acquisitions of at least $2.5 million, data from Marcus & Millichap Research Services and Real Capital Analytics shows.

But the institutional tide keeps turning in self-storage. Through August of this year, institutional investors and equity funds accounted for 16 percent of self-storage acquisitions of $2.5 million or more, according to the Marcus & Millichap/Real Capital Analytics data, compiled for the SpareFoot Storage Beat.

Private investors make up the lion’s share of self-storage acquisitions — 63 percent through the first eight months of 2018, according to the data.

Filling the void

The rise of institutional investors and equity funds has come as publicly traded REITs have retreated considerably from self-storage acquisitions. According to the Marcus & Millichap/Real Capital Analytics data, those REITs represented 19 percent of self-storage acquisitions during the first eight months of this year, a sharp drop from 31 percent in all of 2017 and 53 percent in all of 2016.

Michael Mele, executive managing director at Marcus & Millichap, said institutional investment in self-storage has been on the upswing for at least seven years, and he doesn’t see this trend ending anytime soon. In part, he said, that’s because of the opportunity for more consolidation and operational improvements in the sector.

“Early institutional investors saw how well self-storage performed during the recession and decided to enter the sector as a hedge against volatility of product types like retail, office and industrial,” Mele says. “Since then, investors have also taken notice of the continued big returns by the REITs and some extremely profitable transactions made by private equity players.”

‘Viable’ asset class

This year, the highest-profile example of that is the $1.3 billion deal struck by real estate investment manager Heitman Capital Management LLC, in a joint venture with self-storage REIT National Storage Affiliates Trust, to buy a portfolio of 112 Simply Self Storage facilities.

“The institutional community considers self-storage a viable commercial real estate class, and institutional investors should see both short and long-term value as they continue to grow through acquisitions and joint ventures,” said Brian Somoza, managing director and co-leader of JLL’s self-storage investment sales team.

In most cases, institutional investors and equity funds will sell their self-storage stakes sometime over a 10-year span, he said.

“Storage rental rates are constantly moving up and down and, with the current threat of new supply in most major markets, I believe institutional investors will continue to be more selective in oversupplied markets,” Somoza said.

Elevated pricing and supply

In a midyear investment outlook, JLL subsidiary LaSalle Investment Management said it continues to see more investor interest in niche sectors like self-storage that boast core-like cash flows and “manageable” operating risks.

But, the LaSalle report noted, self-storage “is starting to show the effects of the weight of capital that has come into that segment in the last several years, as pricing is up and new supply is elevated. We think this segment will continue to deliver stability, but expected growth is reduced and the pricing premium it enjoyed several years ago has diminished.”

Jacques Gordon, global head of research and strategy at LaSalle, said reports about a glut of new self-storage supply and prospects for self-driving cars cutting into the self-storage market are important considerations, but they don’t diminish demographic drivers for self-storage.  Space- and cost-squeezed millennials along with downsizing baby boomers will contribute to escalating self-storage demand for at least the next decade, he said.

“The sector might have been a bit over-hyped as an investment vehicle when institutions first started moving in,” Gordon said, “and certainly some of the most successful REITs tended to describe self-storage as an outsized cash-flow-generating sector.”

A top performer

But the self-storage sector’s evolution from a mom-and-pop business to a professionally run industry has helped emphasize that it “really is an excellent income generator,” he said.

Indeed, the potential for that income generation is being buoyed by increases in consumer spending, household formation — especially among apartment dwellers — and job relocations, according to a recent report from Marcus & Millichap. Even in the event of an economic downturn, the possibility of households merging to save money could spur more demand for self-storage, the report said.

In addition, Byron Carlock, leader of the U.S. real estate practice at professional services firm PricewaterhouseCoopers (PwC), pointed out that some self-storage facilities are serving as “last mile” fulfillment centers for sales professionals in pharmaceuticals and other industries.

“There’s nothing sexy about the self-storage industry. However, it has proven to absorb economic fluctuations, maintaining value during good and challenging times,” Somoza said. “Based on risk-adjusted returns and consumer demand, self-storage competes — and usually outperforms most other asset classes.”

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