Where to Invest in Self-Storage: Primary Vs. Secondary Markets
Here are some of the key trends driving investment in primary and secondary self-storage markets.
Image by Lia Trevarthen from Unsplash.
Thanks to its proven resilience in the face of uncertainties, self-storage has become one of the favored niche real estate sectors in the past couple of years. Nationwide, around 95 million square feet of storage space changed hands in 2021, for a total of $9.9 billion, up 137% compared to 2020, when the investment volume amounted to $4.1 billion, Multi-Housing News reported.
What’s Driving Investment in Self-Storage?
The uptick in investment is due to the sector’s strong fundamentals and efforts led by major REITs to consolidate the industry, as a large part of self-storage is still owned by mom-and-pop operators. However, competition has also increased as more and more commercial real estate investors flock to the sector to diversify their portfolios, forcing the market to expand to secondary and tertiary markets.
Heightened domestic migration underscored by the pandemic has also fueled the popularity of secondary and tertiary markets across the nation, as people left major gateway markets in search of more affordable and less densely populated cities. Markets in the Southeast and the Southwest were the primary leaders of this expansion, with the self-storage sector registering major gains throughout the region.
Primary Vs. Next-Tier Self-Storage Markets
According to a Yardi Matrix report, the same five Southeast markets continue to lead street-rate growth for the average 10x10 climate- and non-climate-controlled units across the country. Atlanta, Charleston, S.C., Charlotte, Miami, and Tampa recorded annual rate increases above the 4.8% national average in April.
Meanwhile, gateway cities continue to underperform compared to next-tier markets due to significant outmigration, Yardi Matrix revealed. Los Angeles was the only market with a more significant uptick in rent growth. The market saw self-storage rates increase by 5.1% for 10x10 non-climate-controlled units year-over-year in April.
Although secondary and tertiary markets are gaining momentum, supported by strong population growth and a diversifying employment base, self-storage remains a micro-location-oriented sector, with demand generators concentrated in the immediate trade area. Therefore, despite cooling overall fundamentals, primary markets can also provide favorable investment opportunities.
Additionally, as the sector is becoming increasingly competitive, some buyers have begun to acquire older facilities to implement value-add strategies through renovation and technological upgrades, a Marcus & Millichap mid-year outlook noted. Some of the oldest self-storage inventory is in primary gateway markets, such as New York City.
Different Product Types
It is also important to consider that primary and secondary or tertiary markets usually provide different product types. Due to limited available land, the need to maximize site utility, and high land prices, primary markets tend to have multi-story products and the so-called mini storage units instead of the traditional drive-up products with various unit mixes.
Thanks to more developable land, next-tier markets tend to have more traditional products, providing RV and boat parking options, for which there’s a growing demand across the country. A facility with various unit sizes can accommodate different types of renters, including individuals, families, or even businesses.
Final Thoughts
While some markets showcase exceptional growth, the self-storage sector is registering positive market fundamentals across the entire U.S. Heightened demand, fueled by continued relocation and the hybrid work strategies implemented by employers, will continue to positively impact investment in the sector. According to Marcus & Millichap, the sector is also well-positioned to withstand inflationary pressures. As most self-storage units are rented on a monthly basis, operators can adjust rents to market trends, including inflation.
Related Questions
What are the advantages of investing in a primary self-storage market?
Investing in a primary self-storage market has several advantages. Firstly, primary markets tend to have higher demand for self-storage units, which can lead to higher occupancy rates and higher rental rates. Secondly, primary markets tend to have more stable economic conditions, which can lead to more reliable cash flow and higher returns on investment. Finally, primary markets tend to have more established self-storage operators, which can provide investors with more options when it comes to financing and management.
For more information on investing in self-storage, check out this guide.
What are the advantages of investing in a secondary self-storage market?
Investing in a secondary self-storage market can be a great way to get into the self-storage industry without having to compete with larger, more established players. Secondary markets often have lower entry costs, less competition, and more potential for growth. Additionally, secondary markets may offer more flexible financing options, such as bridge loans, which can help investors acquire properties quickly and with less risk. Finally, secondary markets may offer more opportunities for value-add investments, such as renovating existing facilities or adding additional units to increase revenue.
For more information on investing in self-storage, check out Commercial Real Estate Loans' Beginner's Guide to Self-Storage Investing.
What are the risks associated with investing in a primary self-storage market?
When investing in a primary self-storage market, there are a few risks to consider. The first is the risk of oversupply. If the market is already saturated with self-storage facilities, it may be difficult to attract new tenants. It's important to analyze the competition within the market radius and look at the saturation level of the area. The saturation level of an area is measured by the gross square feet of storage space available per person. Currently, the average self-storage inventory per capita across the country is around 7 to 8 net square feet. A market with a per-capita inventory above the U.S. average is usually considered oversupplied, whereas anything below is undersupplied.
Another risk to consider is the risk of changing market conditions. It's important to look at the surrounding market conditions when considering investing in self storage. Is the population and job growth steady? Are there more homeowners or renters in the area? Is the location close to university campuses, residential areas, or businesses? By doing your research on the local market conditions, you can get a better understanding of whether or not buying a particular property would make sense.
What are the risks associated with investing in a secondary self-storage market?
Investing in a secondary self-storage market can be risky, as there is often less demand for storage units in these markets. Additionally, there may be fewer resources available to help you manage the property, such as property management companies or financing options. It is also important to consider the competition within the market radius, as a high level of competition can make it difficult to attract new tenants. Lastly, it is important to look at the saturation level of the market, as a market with a per-capita inventory above the U.S. average is usually considered oversupplied, whereas anything below is undersupplied. (https://www.multihousingnews.com/top-5-emerging-self-storage-markets/)
What are the best strategies for investing in a primary self-storage market?
When investing in a primary self-storage market, it's important to consider the local market conditions, competition within the market radius, and the saturation level of the market. It's best to look at these metrics within a 3- to 5-mile radius of a facility. Analyzing the competition in the area can also be helpful to look at the saturation level of the market. The saturation level of an area is measured by the gross square feet of storage space available per person. Currently, the average self-storage inventory per capita across the country is around 7 to 8 net square feet. A market with a per-capita inventory above the U.S. average is usually considered oversupplied, whereas anything below is undersupplied.
It's also important to consider the potential for growth in the area. Look for areas with a growing population and job growth, as well as areas close to university campuses, residential areas, or businesses. These areas are more likely to have a higher demand for self-storage facilities.
Finally, it's important to consider the financing options available for self-storage investments. Many lenders offer loan products specifically designed for self-storage investments, such as bridge loans, permanent loans, and mezzanine loans. These loan products can provide the capital needed to purchase and/or renovate a self-storage facility.
What are the best strategies for investing in a secondary self-storage market?
When investing in a secondary self-storage market, it's important to consider the local market conditions, competition, and saturation level. It's best to look at these metrics within a 3- to 5-mile radius of a facility. Analyzing the competition in the area can also be helpful to look at the saturation level of the market. The saturation level of an area is measured by the gross square feet of storage space available per person. Currently, the average self-storage inventory per capita across the country is around 7 to 8 net square feet.
When investing in a secondary self-storage market, it's important to look for properties that are in an undersupplied market. This means that there is less competition and more potential for growth. Additionally, it's important to look for properties that are in an area with a growing population and job growth. This will help ensure that there is a steady demand for self-storage units.
It's also important to consider the potential for future development in the area. If there are any facilities under construction or in the planning stages, this could affect the value of your property in the future. Lastly, it's important to consider the cost of the property and the potential return on investment. By doing your research and analyzing the market conditions, you can get a better understanding of whether or not buying a particular property would make sense.