A Once Placid Self-Storage Sector Is Making Public Noise While Some Investors Shun Established Properties To Build Their Own

It wasn't more than a year ago that commercial real estate investors found a quiet and underpublicized sector they could buy into with little risk and little churn. But today, quiet is not an adjective for the self-storage investment market. 

A combination of huge transactions and dropping rent prices in the sector have upended what was considered an easy and tranquil alternative investment to troubled office space and multifamily housing. 

This month, the sector's fireworks reached maximum visibility when it was announced that the publicly-traded real estate investment trust (REIT) Public Storage acquired Simply Self Storage from Blackstone Real Estate Income Trust Inc. for $2.2 billion. The portfolio includes 127 properties totaling 9 million square feet in 18 states. 

Privately held Spartan Investment Group CEO Ryan Gibson says there was more to that purchase than reported. 

"It's important to first look at the hostile bid Public Storage first made of Life Storage and got outbid for by Extra Space," he told Benzinga. "Then Blackstone had a ton of redemption calls, and they were cited as wanting to sell that arm (self-storage) to satisfy those calls. They made a $600 million profit from an investment they made only three years ago." 

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Gibson and Colorado-based Spartan recently launched a new tax-differed investment vehicle for 1031 exchange investors to invest in self-storage. But some investors looking at self-storage real estate are wondering whether the once-red-hot sector needs more room for growth with occupancy declines and new customer discounts on rent. 

Chris Marr, president and CEO of publicly-traded self-storage REIT CubeSmart, said his group is slowing down. 

"Currently, many of the acquisition opportunities available in the market are of inferior quality and would be dilutive to our current portfolio quality," he said. "As a result, we are being patient and disciplined, waiting to deploy capital until we are confident in the ability to realize attractive risk-adjusted returns. As buyer and seller expectations adjust, there will be attractive opportunities to deploy capital, and we will be ready." 

Spartan's Gibson has similar sentiments and said his group, as well as being more cautious, is shunning acquisition investment and finding building from scratch a better alternative. 

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"Right now, we are looking at our fund and have found that we can build for less than we can buy," he said. From an investor standpoint, he says that whether building or buying active properties, you need to be wary of the units' condition and the local economy. 

"If I'm an investor, the long-term fundamentals in the space are good, but you have to give a critical eye to the demographics of about three miles around the property. Where you build and buy is where your customers are going to be. I'd want to make sure the market is strong in that area. From our standpoint, we do our homework, and we know the markets we're investing in." In its July report, Yardi Matrix said the national rent in June for a 10×10 non-climate-controlled storage unit declined by 1.5% year over year to $129. The average rent on similar-sized climate-controlled units also declined by 2.4% to $145. Yardi blamed some of those declines on over-supplied self-storage operations in cities, including Las Vegas, Phoenix and Philadelphia.

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