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Self-Storage -- Location and the Pandemic

Like most businesses, the self-storage industry was affected by the pandemic.  The headline numbers, however, tend to make the industry appear healthier than it actually is.

 

Occupancy levels, for example, appear to be stronger than they really are.  In the Midwest, the 2019 (Q2) occupancy level was 91.0% which declined only slightly to 90.4% for Q2 2020 (Source Radius+).   MJ Partners 2Q Self-Storage Market Overview reported REIT occupancy levels near all-time highs from 91.1% to 94.5%.  This was due, however, to pausing auction activity and limiting stringent move-out procedures.  Many states have declared a state of emergency, restricting rental increases and evictions that also covers self-storage. Auctions to sell off abandoned storage rental belongings cannot occur during a pandemic. If you cannot evict people, your occupancy can be very high for the wrong reasons! 

 

MJ Partners further stated that all the REITS reported negative same-store revenue growth ranging from negative 3.1% to negative 1.1%; the first time this has happened since the last recession.  The 2021 Self-Storage Almanac indicated that, “with the exception of 5X5 non-climate-controlled units, all unit sizes and types posted their lowest rates in nearly a decade in 2Q, 2020.

 

Occupancy and absorption levels are of even greater concern going forward.  There are 1,900 facilities planned and permitted in the U.S. heading into 2021, versus 1,055 deliveries in 2018 and 1,098 facilities in 2019 (Radius+).  New facilities are also taking longer to achieve stabilized occupancy.  In the Extra Space Franchises, they typically stabilized new facilities to 80% occupancy within two years of opening in 2016 and 2017.  In 2018, however, their facilities experienced an average 10-15% lower occupancy.  For facilities that opened in 2019, occupancy was growing even slower.

 

Location is also a critically important issue in the self-storage market.  Originally self-storage facilities were largely constructed in industrial parks. Modern facilities are more frequently located on major commercial arterials.   This is a critical locational advantage for two reasons.  First, 27.7% of tenants first learned about the facility when driving by (Self Storage Almanac 2019 Demand Study).  Second, many women do not feel comfortable driving to a remote or isolated dark location to get to their storage unit.  The same 2019 Demand study found that approximately 58.8% of self-storage renters are women.  It is women who make the decisions when it comes to renting.  Therefore, if you have an older, poorly lit facility, on a secondary street or industrial park, your long-term prospects are certainly less favorable.

 

Finally, in the 2019 U-Haul State growth report (more one-way rentals in than out of the State), Illinois ranked last at 50th place.

 

All is not gloom and doom, however.  Demand for self-storage remains strong as 10.6% of household used self-storage in 2019 (SSA 2019 Demand Study).  At a macro level, the Chicago-Naperville-Elgin IL-IN-WI market is near equilibrium for supply demand (Radkus+ & NFK).  Individual locations, however, could be over or underserved.

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