Over the past decade, the self-storage industry has grown in popularity and become a highly competitive sector. Thanks to its recession resilience, the appetite for self-storage has continued to grow during the pandemic. The storage industry has seen a lot Capital crossover from other real estate sectors, mainly by multi-family and small investors.
Jonathan Vollinger, Director of Acquisitions at HPI Real Estate, discusses the most influential trends and challenges shaping the self-storage industry in 2020 and shares his outlook for the year ahead. HPI’s self-storage portfolio spans three states including Texas, Florida and Nevada. The company plans to expand its presence in these markets and will invest more than $125 million in self-storage assets over the next 12 months.
What expectations did you have for the self-storage market at the beginning of the year? How has the coronavirus outbreak upset those expectations?
Vollinger: I think most in the industry were expecting a slowdown in 2020 as new supply continued to take its toll on rates. What we saw was a strong rental market and a still hot acquisition market. Self-storage once again demonstrated what has become wealth’s calling card, its tendency to outperform other real estate types during economic downturns. This drew increased attention from institutional investors looking for a safe haven in more stable cash flows.
What were the biggest challenges COVID-19 posed to the storage sector?
Vollinger: I would say the biggest challenge was the uncertainty. As the industry witnessed storage capacity exceeding expectations after the Great Recession of 2008-2009, it was nearly impossible to predict the impact of a global pandemic. Ultimately, we saw a knee-jerk reaction from most operators, who slashed prices from spring to maintain occupancy. By the summer it was evident that occupancy was not only stable but rising, at which point interest rates started to recover and operational fundamentals are now arguably stronger than a year ago.
What new trends have emerged in 2020?
Vollinger: technology and adaptability. Contactless rentals are becoming increasingly popular. I think the ability to provide these types of amenities will benefit the larger operators, which will give operators with scale an even greater competitive advantage.
HPI is based in Texas, where self storage was hit hard by the 2018 development wave, resulting in significant oversupply in most of the state’s markets. How has the coronavirus helped restore the balance between supply and demand?
Vollinger: I don’t think it’s necessarily correct to say that the coronavirus has done anything to restore the balance between supply and demand. At least not yet. We’re still working on that. It will take more than eight months to repair five to seven years of new deliveries. However, inevitably many new projects will be put on hold, so I think that in a few years most markets will regain equilibrium and we can look back and say that COVID-19 has certainly been a catalyst for the recovery.
What is your experience of supply and demand in other markets where you are present?
Vollinger: As a Texas company, HPI’s existing assets are focused on the Texas markets, including Houston and San Antonio. These markets were early in the last development cycle, particularly Houston due to the lack of zoning laws. Interest rates in these markets have fallen significantly in recent years, but we are starting to see rates recovering. With little development left in the pipeline in the Texas markets, I expect they will be among the first to return to healthy levels of supply and demand.
Self-storage has proven to be a recession-resistant asset class. Do you expect the sector’s resilience to continue in 2021?
Vollinger: i expect it It’s hard to bet against at this point. Self-storage has again proven itself to be good in most economic conditions. So I expect storage will maintain that reputation into 2021 and beyond, but I think we’ll continue to see owners and operators have to adapt in real-time.
What trends will define the self-storage industry in 2021? What about challenges?
Vollinger: In 2021, development pipelines should continue to shrink as owners and lenders get smarter. I think the biggest challenge in 2021 will be to exercise restraint – storage has performed relatively well in 2020, so some will be tempted to push new projects that should be abandoned. Although occupancy levels have held up during COVID-19, interest rates are still low in most markets and I expect another 18-24 months for markets to stabilize.
HPI recently acquired a South Florida facility that is part of the company’s new investment fund. Which markets are you targeting in 2021 and why?
Vollinger: In its second storage fund, which will focus on acquiring existing storage assets, HPI will target assets in Texas, Florida and Nevada. This strategy fits well with our first storage fund, through which HPI has developed 11 storage assets in these markets. We like these markets over the long term as they have historically proven to be strong storage markets. These markets are also recovering well from the supply shocks of the last wave of development and continue to be high growth markets benefiting from favorable population and labor migration trends.
What are your top three predictions for the future of self-storage investing?
Vollinger: Institutional investors will continue to allocate more capital to the asset class, and combined with low interest rates and other compelling debt terms, cap rates will remain at historic lows for the foreseeable future.
The largest operators will be best equipped to adapt and will therefore continue to gain market share and widen the gap between them and the mom and pop operators.
We will see more trade in residential entitlement certificates and rental properties than in recent years. With so many well-funded groups, these deals, while riskier, can be a good entry point and an opportunity to find value. Many owners have chosen not to sell in 2020 because leasing has been strong, but should leasing falter in 2021 I think many of these properties will become ripe for acquisition by well capitalized investors who are willing to take the long view to bet on these assets.