Self-storage REITs: Play to your strengths to effectively tackle new competition has been added to Bookmarks.
Self-storage REITs: Play to your strengths to effectively tackle new competition
A self-storage service should aim to provide more than just the lock and key.
What goes up must come down
The subprime crisis and subsequent foreclosures displaced many families and boosted the demand for self-storage.1 As a result, the Financial Times Stock Exchange (FTSE) Nareit Equity Self-Storage Index recorded five-year average annual returns of 12 percent compared to 10 percent on the FTSE Nareit All Real Estate Investment Trusts (REITs) Index, as of March 31.2
However, today self-storage owners face challenges to their future growth and margins due to increased supply and competition from new players. There is substantial new development leading to oversupply. Incumbents face increased competition from startups. Startups such as Neighbor, a peer-to-peer marketplace, are amplifying the supply by getting underutilized real estate spaces available for self-storage leasing.3 This is providing more options to tenants at much lesser cost and increasing the competition for existing and new self-storage space coming into the market. Startups are also deploying digital platforms and providing pick-up and redelivery services for enhanced customer convenience.4 Incumbents are already feeling the pressure as the self-storage national vacancy rate rose 180 basis points to 13.4 percent in 4Q18, the highest since 4Q13.5 In addition, many incumbents have had to lower their rental rates to lease-up new properties or to retain tenants at existing properties.6
To stay competitive in today’s market, self-storage REITs need to leverage their strengths of a wide network and vast knowledge and experience to service the large retail customer base, grow different lines of business, and provide a more seamless experience to current and prospective tenants.
Three areas, in particular, require more attention:
- Retain large retail customer bases by providing a seamless experience.
Retail customers are increasingly comfortable using different communication channels like websites, phone calls, text/chat, and mobile apps for providing diverse services. This applies to both baby boomers and millennials, who are increasing the demand for self-storage facilities with their downsizing habits and preference for smaller apartments.7 Customers also want to improve ease of communication and service when dealing with their self-storage operators. This is something that new players and startups are doing well. It is important for self-storage REITs to regularly engage and service their large number of retail customers through preferred channels, such as mobile apps, to provide a seamless experience. Additional services such as pick-up and delivery can enhance the experience and further help in tenant retention.
- Use a wide relationship network to enhance commercial tenant business.
Self-storage REITs can leverage their existing relationship network to increase their revenue from commercial tenants and tackle competition from new players. Given the continued growth in e-commerce, self-storage REITs can target small-to-mid-size online vendors who are looking for flexible storage options and improved last mile deliveries. For instance, Life Storage REIT, with over 700 facilities across 28 states, recently started additional service for its commercial tenants through its third-party logistics subsidiary.8 With this service and its vast network, Life Storage aims to help its corporate tenants better track inventory movement, reduce logistics costs, and resolve last mile challenges by getting the goods closer to consumers.9
- Leverage knowledge and experience to boost third-party management services.
Self-storage REITs can rely on their knowledge and experience to help improve the performance of standalone properties while enhancing their third-party management business. These practices could be strategically important and bring competitive advantage for the REITs. Through this line of business, self-storage REITs can expand control and achieve better market penetration. This, among other things, could enable self-storage REITs to retain tenants moving from a location where they don’t have a property, but their partners do. Also, if there are synergies and it makes business sense, REITs have an opportunity to acquire the high performing assets as well.
To sum up, self-storage REITs need to play to their strengths and grow across strategic business segments while engaging and retaining existing tenants.
1 Stephen Gandel, “Where Does the Tidiness Craze Leave Self-Storage Stocks?,” National Real Estate Investor, March 4, 2019.
2 FTSE Nareit REIT Indices, Nareit, March 2019.
3 Stephen Gandel, “Where Does the Tidiness Craze Leave Self-Storage Stocks?,” National Real Estate Investor, March 4, 2019.
5 Shan Ahmed and Cody Bond, “Self Storage Quarterly View 2018 Q4,” REIS, accessed April 25, 2019.
6 John Egan, “Self-Storage REITs Anticipate Lower Rent Growth, but the Sector Continues to be a Good Bet,” National Real Estate Investor, October 5, 2018.
8 “Life Storage Expands its Warehouse Anywhere Last Mile Delivery Solution,” Business Wire, September 4, 2018.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.