Overflow...the growth of self-storage
It’s a familiar problem: overflowing closets, packed garages and bedrooms transforming into home offices. Where do we put all that extra stuff? No wonder self-storage has been one of the best performing real estate sectors over the past several decades.
As one of the world’s largest private owners of self-storage facilities, Nuveen has acquired more than $1 billion of self-storage assets across the firm since the beginning of 2020 alone.
Why do we like the sector?
Uncorrelated to economic cycles
Consumer demand for self-storage has never been higher. The sector’s income growth is quite resilient, in part because its demand drivers are non-cyclical and uncorrelated to the economy. Sector performance has remained strong throughout market cycles, even performing exceptionally well during the pandemic.
Going forward, the sector is projected to continue outperforming due to its favorable growth forecast and low cap-ex profile relative to traditional sectors.
Benefits from economies of scale
Self-storage is one of the few property types that takes advantage of real economies of scale. Institutional managers have a considerable edge over their smaller peers because they:
- Operate sophisticated revenue management systems that drive revenue
- Market at scale to save costs and increase tenant traffic
- Use capital to maintain high-quality facilities
Monthly leases create an inflation hedge, as management groups can adjust rents more frequently than other tenant contracts. Additionally, self-storage facilities require limited ongoing capital expenditure to maintain. This is attractive, as cap-ex is one of the biggest drags on prospective returns.
64% of the self-storage currently under construction is concentrated in the top 50 U.S. markets1
Opportunities arise in smaller, overlooked markets
Institutional managers are continually challenged to find new opportunities at a reasonable price. Secondary and tertiary markets, like smaller cities in the Sun Belt and Midwest, may offer opportunities because they benefit from:
- Less operating competition from large national players
- More opportunities to buy from mom-and-pop sellers
- Less expected future supply
The large public REITs are concentrated in the top 25 markets, and most new developments nationally target primary markets.
However, half of the self-storage industry is still owned and operated by smaller groups. The average individual self-storage asset is relatively small, at about $10 million. It takes a great deal of work to acquire assets on a one-off basis, so many institutional managers are willing to pay a premium for larger, multi-building portfolios.
We are working to build value for shareholders by aggregating smaller assets into regional or national portfolios that take advantage of economies of scale. Market data has shown that such portfolios may trade 20% to 25% higher versus assets transacted on an individual basis.2
Nuveen remains focused on accessing the sector in a way that drives investor value and acquires high-quality, long-term assets. We believe self-storage has the potential to help drive performance and income for our real estate investors for years to come.
In this issue
1Data source: Radius+, July 2022.
2Data source: CoStar, July 2022.
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