Why Self-Storage Outperforms the S&P 500: A Conversation with Marcus & Millichap’s Steven Weinstock

By Paul Bubny

Long the province of private capital and specialty REITs, self-storage has attracted more attention from institutional players in the past couple of years. Storage facilities don’t need the blessing of institutional investment to achieve credibility—for years, the sector has been performing “extremely well,” as Marcus & Millichap’s Steven Weinstock put it.

With the firm’s newly-issued report on the self-storage sector providing both a high-level and market-by-market view of the sector, Weinstock, who leads the Self-Storage Division of Marcus & Millichap, sat down with Connect Media to discuss what makes self-storage tick.

Q: What are some of the key drivers for demand in self-storage? Can these vary widely from market to market?

Steven Weinstock: Household formation is a key demand driver for self-storage. Any time you build a house, there is a potential for self-storage needs. As we continue to enjoy positive employment growth, this translates into household formation, and household formation translates into self-storage demand.

A good economy is another demand driver. During prosperous times, people spend more money on goods, and therefore need additional areas to store their “new stuff.” No longer is self-storage solely for intermittently used or “save-it-for-the children” items. With today’s active lifestyle, for example, seasonal and special-use items such as kayaks, camping gear and bicycles find their way into self-storage. Previously, these occupied space in a garage or backyard shed. Now, active people rent a self-storage unit and easily access them when needed.

Typically, change-of-life events also create demand for self-storage: death or divorce. More recently, empty-nesters are choosing to downsize and rent a self-storage unit rather than remain in a large house due to their “stuff.”

One driver not often mentioned is business demand. Twenty percent of all self-storage is used for commercial purposes. It makes a lot of sense as a cost-effective alternative to storing on location or leasing a warehouse.

While demand drivers play a role in every market, some may be stronger in specific markets. For example, consider the Sunbelt and Southwest. These areas are seeing more homes built, more employment growth, more household formation. Or, consider that as people move into senior living centers, they use self-storage to hold onto cherished heirlooms. Today’s seniors are thinking, “I don’t need my house but I don’t want to let go of my grandmother’s dining table, credenza, or bureau. I want to put it someplace hoping my kids someday want it.”

Q: How does growth in self-storage demand, supply and asking rent compare with the apartment sector post-recession?

Weinstock: There is a correlation, based on in-migration, based on household formation, based on lifestyle choices. The self-storage sector has grown more rapidly than the multifamily sector, partly because you can build and lease-up a self-storage facility much more quickly than an apartment building. In the 10-year period between 2009 and 2019, self-storage inventory increased by 21%, while multifamily inventory increased by 13%.

On the demand side, self-storage vacancy declined by 750 basis points since 2009, with occupied self-storage increasing by 32%. As for apartments in the same period, vacancy declined 370 bps, while occupied multifamily units increased by 17%.

There are counter-cyclical demand drivers for self-storage. In an economic downturn, people relocate into smaller spaces, take on roommates or move-in with family. All of this benefits self-storage.

Overall, self-storage REITs have done well as they outperformed both the S&P 500 and the NAREIT All-REITS index. The 10-year total return for self-storage since 2009 has been 392%, compared to 277% for the S&P and 242% for All-REITs.

Q: We’re seeing vacant retail repurposed for self-storage. While this obviously represents a savings in construction costs compared to ground-up development, does it work as well from a location standpoint as ground-up?

Weinstock: Retail space is often converted because of its location near residential and business, transportation and highways. Cost savings are beneficial. Conversions can be more complicated, especially when done in an urban setting where one must retrofit older buildings. The existing infrastructure was designed for something other than self-storage. For example, an old warehouse in the city of Chicago contains numerous pillars and nooks and crannies, thus conversion is going to be more expensive. Alternatively, a vacant big-box such as a Toys ‘R’ Us, is an easier and potentially less-expensive conversion given its open space with few support columns.

Q: The report provides both a comparison of supply growth, and supply risk, among U.S. markets, along with individual market reports. Should investors use this more as a guide to self-storage fundamentals in the markets where they’re already active, or as a guide to where to invest, or not invest, in self-storage nationally?

Weinstock: All of the above. It’s a great first place to look if you’re considering a self-storage investment. It provides market information and performance forecasts. For investors who are already active in different markets, the report provides a great opportunity to benchmark your property’s performance against a market into which you might be considering expanding. An investor who is successful in one market can transport that knowledge to another market, and this report offers owners the opportunity to understand what’s going on in the other marketplace. Finally, for the investor who is thinking of moving into self-storage from other asset classes, or moving out of self-storage into those asset classes, the report offers critical reference points to compare and contrast and make an informed decision.

For comments, questions or concerns, please contact Paul Bubny