Are Storage Units a Good Investment During a Recession?

customer managing home goods in their own self-storage units

Are Storage Units a Good Investment During a Recession?

If you’re an investor searching for a port in a storm, you might have heard about a once-obscure sector of the real estate investment portfolio — self-storage. It doesn’t sound sexy. It isn’t sexy. But it’s solid.

Historically, self-storage investments have outperformed other real estate sectors, and even the stock market, through good times and bad. Yes, storage units have proved themselves to be a good investment during a recession, during a recovery, and during the good times.

Self-Storage Investments Weathered the Great Recession

You don’t have to look far back to see how the self-storage sector of real estate investments fared through the Great Recession starting back around 2007-08.

NAREIT, the National Association of Real Estate Investment Trusts, has been tracking real estate investments since 1994. They showed some eye-opening numbers for the strength of investments in storage units during the economic downturn. Actually, they show some surprising numbers for the storage sector overall.

But first, let’s look at how they fared in the Great Recession. The recession is commonly referred to as starting in 2008. But a look back at the numbers for real estate investments shows the damage actually began in 2007.

Across the board, real estate investments tumbled into red numbers in 2007. The one exception is healthcare, which fell precipitously but remained in the black. The dive went deeper in 2008, when even healthcare slid into the red.

The surprise element, though, was self-storage. After dropping about 24 percent in 2007, it rebounded with a 5 percent gain in 2008 and a continued rise in 2009. Self-storage was the only real estate sector to post in the black in 2008, when losses climbed above 60 percent for some sectors. By 2009, the economy in the infancy of what proved to be a slow recovery. But already, all real estate sectors were back in the black.

How Real Estate Sectors Performed During the Great Recession

What was the overall effect of the recession on real estate investments from 2007 to 2009? Below is the average annual total return for each real estate sector from 2007 to 2009, according to NAREIT:

  • Residential Investments: -6.53%
  • Office Investments: -8.16%
  • Retail Investments: -12.32%
  • Industrial Investments: -18.31%
  • Healthcare Investments: +4.92%
  • Lodging/Resorts Investments: -4.95%
  • Mortgage Investments: -16.34%
  • Self-Storage Investments: -3.80%

Though self-storage did take an early hit from the recession, the loss all occurred in the first year of the downturn for real estate investments. The storage sector was the only one to recover into black numbers in 2008. We’ll see if we might have a hint of a similar situation occurring in 2020; prices for storage REITs (real estate investment trusts) have fallen in the recent stock market volatility, if in a less dramatic fashion than the overall market.

General Performance in the Real Estate Industry

Now, let’s take a closer look at those overall numbers we mentioned earlier. During the duration of the data compiled by NAREIT, self-storage investments have had the highest total return and highest price increase on average. Self-storage averages a 16.73 percent total return since 1994 and an 11.72 percent annual increase in price. Both of those numbers are considerably higher than in the next sector, which is industrial real estate at 14.11 percent and 8.59 percent, respectively.

In case you’re curious, the remaining order, based on total return, is:

  • Residential (13.69)
  • Healthcare (13.43)
  • Office (12.89)
  • Retail (11.99)
  • Mortgage (11.05)
  • Lodging and resort (10.22)

This indicates that your self-storage investments could pay out well beyond the current recession.

What Makes Self-Storage Recession-Resistant?

row of storage units in a self-storage complex

What is it that makes the self-storage sector perform better in a recession? The simple answer is: we do. Americans love their stuff. We buy lots of it. Even if we have to downsize our homes, we don’t want to give up our stuff. And we don’t want to give up our parents’ stuff. And our grandparents’ stuff.

Self-storage occupancy rates have exceeded 90 percent nationwide historically. Those rates have slipped a bit in the past few years as builders and investors see the success of storage and add inventory. According to Statistica, vacancy rates for storage units were expected to climb to 10.3 percent in 2020 (though we all know that what was expected of 2020 and what’s actually happening differ).

That’s still not a bad figure when you consider storage businesses normally need to maintain 45 percent occupancy to break even. Low overhead is the key to strong profitability for self-storage.

The Low Overhead of Self-Storage Investments

Consider the difference compared to other types of real estate:

  • Appearance needs are minimal as you only need to meet municipal requirements for green space, signage, etc.
  • Maintenance is limited as traffic is lower. You also don’t need to have costly systems for heating and cooling. (However, climate control is now largely necessary for new and successful self-storage businesses.)
  • Staffing can be retained at minimal numbers to handle marketing, register new customers, collect rent, and manage the small amount of maintenance. For mom-and-pop operations (which account for about 80 percent of self-storage), the owners often handle all of these tasks.
  • Managing turnover is a challenge for all types of real estate, and turnover is high in the storage business. But these issues are less concerning in self-storage investments. You don’t have to deal with background checks, credit checks, etc. for new renters.
  • Security has become a greater concern in the storage business. But technology makes this easier to cope with. Cameras, sensors, and other devices can replace the need for 24-hour staff.

Will the COVID-19 Recession Affect Self-Storage Differently?

The million-dollar question for self-storage, along with every other business in the U.S. and across the globe, is: will the recession driven by the 2020 COVID-19 pandemic be different? Too many variables hang in the balance for even the most experienced experts to answer that question.

Economies have never fallen this much this quickly. Unemployment has not increased like this. Pandemics have never spread as widely and rapidly. Economies have never intentionally shut down to save lives.

States and localities are starting to dip their toes into restarting the economy. But health experts fear for the worst: a return to the economic shutdown if the virus begins its rapid spread again.

Yardi Matrix was reporting that even by mid-March, online searches for self-storage information had increased by 22 percent. Gigantic spikes in cities such as Boston (up 450 percent), Portland (up 300 percent), and Indianapolis and Jacksonville (both up 200 percent) bode well. Some of that spike may be attributed to college students looking for quick storage options as they suddenly were sent home.

Orders from governors and mayors to prevent evictions during stay-at-home orders could mask some of the potential changes in housing accommodations. But that would just push the need for storage down the road a bit.

One potential trouble spot for storage unit businesses is the increased reliance on storage businesses by other small businesses. Small businesses are being hit hard by the shutdown. About 5 to 10 percent of self-storage units are used by small businesses that outgrew their garages and other startup locations. However, small retailers may turn their attention to online sales and be forced from their high-priced retail storefronts. Then, more retailers could be looking for places to stash their inventory as they build up their online presence.

What Is the Potential for Investment in Self-Storage?

Investors feeling a little seasick from stock market gyrations and who are concerned about the longevity of the recession brought on by COVID-19 should consider the stability of a proven performer like the self-storage business.

Even two years ago, before market swings took the kind of crazy turns they do these days and before anyone was talking about a recession, Austin investor David Thompson was finding solace in self-storage.

National Real Estate Investor noted in early April that self-storage REITs had dropped about 11 percent in value in 2020. But that compared favorably to the Dow Industrial Average, which was down more than 16 percent at that time. It also outperformed the lodging/resort sector, which had shed 53 percent of its value. Remember that, in 2007, self-storage took its lumps early in the recession and recovered quickly.

The magazine also pointed out that many planned storage construction projects had been put on hold. This is decreasing the pressure on an overabundance of storage in some urban areas.

In the same video report where Yardi Matrix touted the increased inquiries into self-storage, the analysts also noted that many large corporate investors had halted all new investments until more stability returns to all markets.

This potentially creates opportunities for smaller investors who are looking to get into the market during this difficult time.

Consider Self-Storage REITs

Another avenue for smaller investors is the REITs that specialize in self-storage investments. For an investor looking for a passive approach (meaning you don’t have to go unlock storage room doors for clients), REITs offer a simpler approach to diving into the real estate market without the headaches of managing the properties.

Whichever self-storage investments strategy appeals to you, you’ll rest easier knowing your dollars are working for you during this recession — no matter how long it endures.

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