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Self-Storage DSTs May Prove to Be Resilient Through the Pandemic

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.

Recession Resistant

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.

Tenant Diversity

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. 

Risks

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.   

For more information, please contact us today. You can also schedule some time directly on my calendar, here.

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1https://info.trepp.com/trepptalk/is-self-storage-truly-recession-resistant-the-coronavirus-puts-the-industry-to-the-test

2 Source: CMBS Default and Loss Study: Defaults Slow, Losses Grow. Kroll Bond Agency (2016).

3 https://www.reit.com/news/blog/market-commentary/finding-opportunities-commercial-real-estate-during-covid-19-crisis

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing. Paul Getty’s transaction experience includes buy and sell side representation, sourcing, and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031, Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of the Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC.

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is the author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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