In an unpredictable economic climate, savvy investors seek out opportunities that can weather financial storms. Here's why self-storage is a resilient and rewarding investment during economic uncertainty, covering the '4 Ds' of self-storage, the recent trends in remote work, and the sector's historical performance in bear markets.
Understanding the 4 Ds of Self-Storage
The demand for self-storage units often remains strong in uncertain economies due to what industry professionals call the '4 Ds': Death, Divorce, Displacement, and Downsizing. These are events that frequently occur, regardless of economic conditions, and they all create a need for storage space.
Death: When a loved one passes away, their belongings often end up in storage during the probate process or as families decide what to keep.
Divorce: Similarly, divorce often results in one or both parties needing temporary storage for their belongings.
Displacement: Economic uncertainty can lead to job losses or transfers, causing individuals to move, often across country lines. In these situations, a storage unit provides an interim solution for belongings during the transition.
Downsizing: In uncertain times, people often cut back and downsize their living situations to save money, leading to an increase in demand for storage space.
The Remote Work Trend and Self-Storage
The Covid-19 pandemic led to a significant shift towards remote work. As of December 2021, a much larger percentage of American workers were doing their job from home most or all of the time. Many people have had to reconfigure their living spaces into home offices, leading to an increased demand for storage to clear space.
Self-Storage in Bear Markets
Historically, self-storage has shown resilience in bear markets. During the 2007-2009 financial crisis, while the FTSE NAREIT All Equity REITs Index fell by 37.73%, the self-storage sector only dropped by 3.86%.
Similarly, in the face of the Covid-19 pandemic, the self-storage sector proved its resilience once again. A study by Green Street Advisors found that self-storage facilities' net operating income dipped by only 1.2% in 2020, a minor decline compared to other real estate sectors.
How Inflation Affects Self-Storage
During periods of inflation, self-storage assets can be particularly resilient. Firstly, a significant portion of self-storage customers, typically around 70%, are set up on auto-pay and month-to-month leases. This arrangement allows facility owners to adjust rents periodically, ensuring that revenues keep pace with inflation. Additionally, as inflation causes general price levels to rise, the value of physical assets like self-storage facilities tend to increase correspondingly. This appreciation in asset value can contribute to higher equity for owners over time. Simultaneously, the real burden of debt decreases as a percentage of the asset's value because the nominal amount of the debt remains constant while the value of the property increases. Furthermore, self-storage facilities continue to generate steady cash flow through rental income, even during economic downturns. This dependable income stream provides a buffer against market volatility and enables these assets to weather both up and down markets effectively.
In conclusion, the self-storage sector's resilience is deeply rooted in societal trends that persist through economic ups and downs. From the 4 Ds to the remote work trend, these forces generate a consistent demand for storage space. Coupled with the sector's historically robust performance in bear markets, self-storage presents a compelling investment opportunity in an uncertain economy.