Following two solid years, the self storage sector has been cooling down. Street rates have been dropping in the past few months, according to Yardi Matrix data, but they continue to be high by historic standards. Firm demand is what is keeping the overall outlook for the sector positive. According to StorageCafe.com, roughly a fifth of Americans use self storage, with an additional 15 percent considering renting space in the future.
With a portfolio of more than 6 million square feet of storage space across 21 states, Rosewood Property Co. has long been pursuing both development and investment opportunities in the sector. Most recently, the company acquired a 66,429-rentable-square-foot facility in Tucson, Ariz., for $13.6 million.
To gain insight into what is driving growth in the sector today and how recession-resistant the storage industry is, Multi-Housing News reached out to President Rick Perdue. He talked about his company’s investment strategy, and pointed out what makes self storage a countercyclical investment opportunity.
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Looking in retrospect, how much has the sector changed in the past decade?
Perdue: Rosewood Property Co. launched into the self storage sector in 2012, seeing an emerging product type with a lot of opportunity. From the beginning, we utilized a long-term hold strategy with the ability to close quickly, due to our direct internal access to capital. In the past decade, this has proven to be a great decision, as we have grown our portfolio to nearly 80 assets in 21 states. In these 11 years, we’ve seen the sector evolve tremendously, with the primary change being a significant increase in institutional management and ownership.
Rosewood continues to grow its self storage portfolio primarily through the purchase of value-add properties. What are your tried-and-true strategies after closing on such investments? Can you provide an example of a successful, recent repositioning?
Perdue: The first and most critical step is identifying the acquired property’s relative position in the local market and what we can do to maximize that position. Another critical factor is aligning ourselves with the best property management company for that particular facility. We have deep relationships with industry-leading property management companies and focus on finding the best fit each time.
We are always looking at value-add opportunities in our existing facilities through conversions, expansions, additions, etc. A recent example is an expansion at our storage facility in Palm Desert, Calif., that added 30,000 net rentable square feet of climate-controlled space. We are now leasing up that additional space at a fast pace.
What would you say is Rosewood’s top performing market?
Perdue: Rosewood is currently in 21 states, and we don’t have a concentration in a specific market. In the last few years, we have continued to see rent growth in all of our markets—primary, secondary and tertiary. Regardless of which market, we have great management teams in place with a top-notch facility that is clean, secure and has state-of-the-art technology. We work with our management teams to find ways to streamline the entire process and make it as efficient as possible for our customers.
Are you considering entering new markets in the near future or has the current economic climate paused your expansion plans for the time being?
Perdue: Our strategy continues to be opportunity-driven with a specific focus on markets with a solid supply-demand balance without market over-saturation. Further, we are always evaluating new markets. We are excited to see what this year might bring in the way of new markets and opportunities.
With an imminent recession on the horizon, are there any specific challenges self storage investors should keep an eye on? Any opportunities?
Perdue: With the economic ups and downs of the last several decades, we have seen that self storage might not be recession-proof, but it is certainly recession-resistant, as people often still require storage regardless of market cycles. With that said, we are still sensitive to the recent inflation and corresponding rent increases. If we enter into a recession, the industry will be in good shape going in with historically high occupancy rates and no sign of massive oversupply.
In 2022, rent growth was positive in all major metros, with 25 percent of the top 31 metropolitan statistical areas recording rent growth at or above 10 percent, and 22 of the top 31 metros at 5 percent growth or more for non-climate controlled units, according to Real Capital Analytics data. For climate-controlled units, five of the top 31 metros had 10 percent rent growth, and 12 metros reported 5 percent growth or less year-over-year. We saw self storage sales volume almost quadruple from the average in the 2017 to 2019 time frame to 2021.
Rosewood also pursues opportunities for joint ventures in development. What makes for a fruitful partnership? Do you have any advice in what to avoid when it comes to working with a joint venture partner?
Perdue: As we continue to grow our self storage sector, we look at every opportunity, and many times, a ground-up, joint venture has been the best plan. When approaching a possible joint venture, we look for seasoned partners that have demonstrated success across multiple markets and across multiple cycles. Partner due diligence is crucial to understanding the company you are partnering with and how that company will complement your strengths. Aligning with the right partner is super important.
The current volatility forced investor to revise their outlooks. What is Rosewood’s forecast for the storage sector this year and beyond?
Perdue: Even in this current economic cycle, we are still bullish on the self storage sector. Of course, we are certainly moving forward in a cautious and judicious manner as we see how the next few months unfold, but we are optimistic. We expect some pockets of oversupply over the next few years, but generally, supply-demand should remain in balance.
