Investments in Delaware Statutory Trusts (DSTs) continue a surprisingly strong pace in 2020 even though many real estate sectors like hospitality and retail have been deeply impacted by the economic effects of COVID-19. One asset class, however, is proving to be particularly resistant to the current market downturn. Self-storage.
Small but Sturdy
Self-storage facilities, historically, have weathered market disruptions better than many other commercial real estate asset classes. Self-storage real estate investment trusts (REITs) were the only asset class to produce positive returns during the Great Recession of 20081. Also, during the same period, self-storage had the lowest default rate of CMBS loans of any product type2.
Of course, performing well during one crisis does not necessarily mean self-storage will do the same during this pandemic, but there are several reasons that suggest why self-storage may once again emerge at the top of real estate investment stack.
Now More Than Ever
COVID-19 concerns and safety precautions are causing individuals and families to make life changing decisions that could spur additional growth in self-storage. Displaced or unemployed workers may be opting to downsize and need storage space for furnishing a smaller dwelling which cannot accommodate everything they have. Similarly, college students in increasing numbers are choosing to stay at home and attend classes online, again creating the need to store furniture and other items previously earmarked for on-compass living.
If work-from-home trends continue, many businesses will likely downsize existing office space as leases come up for renewal and these businesses will also need storage for unused furniture and equipment. The economic slowdown, in fact, has forced many businesses to consolidate their footprints already.
Self-storage occupies that unusual sector in commercial real estate that enables it to often perform in both strong and weak economies. The life changes customers experience in good and bad times frequently spark a need for additional storage. Job changes, temporary relocations, death, divorce and even evictions can be cause for consumers to pursue self-storage options. And in brighter economic environments when consumers have more disposable income, new purchases can require more storage.
Like the multi-family housing sector of real estate, self-storage is well diversified by tenant type. So, while a certain segment of tenants may struggle more to meet rent payment requirements at this time, others may be in a much stronger position to continue renting. Evictions can be completed relatively faster for non-paying tenants as compared to residential properties. In addition, since most self-storage leases are month-to-month, rents can often be adjusted more frequently to meet current market conditions than other real estate assets that have longer-term leases in place.
Technology to the Rescue
Many self-storage facilities now have “touch-less entry” and incorporate kiosk technologies which limit human contact and help comply with new social distancing standards. Other self-storage assets can be adapted as well. Should the novel coronavirus remain with us for an extended period of time, any commercial real estate asset which has taken steps to be more protective of tenants catching or spreading COVID-19, will likely be supported and frequented more than other business which have not taken similar precautions.
As is the case with real estate sectors, not all storage properties are equally desirable as investments and care must be taken to evaluate self-storage investments. In many areas, there are relatively low barriers to entry and over-building and competition can result in declines in anticipated income and appreciation. Storage facilities are also not immune from technological obsolescence and must be upgraded over time to remain competitive. Finally, operations management must be closely scrutinized since poor management can negatively impact income.
Certainly, the self-storage sector has not completely avoided the effects of the economic slowdown. What had been a very robust and growing market for self-storage the past few years, has slowed down. Yet, according to industry organization NAREIT, which tracks the performance of REITs domestically and globally, through July 31, 2020, self-storage, data centers, infrastructure and industrial, accounted for the top performing asset classes out of the 14 most prominent3.
Delaware Statutory Trusts which own self-storage facilities, may be worth consideration if you are using a 1031 Exchange to sell investment property and reinvest. While many exchangers are wise to thoroughly evaluate and consider all their options for a replacement property, self-storage might be a sector that muscles through yet another challenging economic period.
2 Source: CMBS Default and Loss Study: Defaults Slow, Losses Grow. Kroll Bond Agency (2016).