The lockdown-induced demand for space shows little sign of abating, as Greg Pitcher reports.

Big Yellow chief executive Jim Gibson recounts a conversation with an investor towards the end of last year, the outcome of which was not what you might expect. It was some throwaway small talk that highlighted the self-storage sector’s ability to ride out the gathering economic storm.

“He was in a three-bed rented house about to move to a five-bed place in Wandsworth,” recalls Gibson. “He brought his gran’s stuff in when she downsized and it was all over his house, in the lounge, everywhere.

“He decided to stay in the rented home for another 18 months, because he thinks the cost of the five-bed will come down, and to put that furniture into storage. He might pay us £250 per month and save £200,000 on the house.”

Gibson’s anecdote illustrates the self-storage sector’s ability to remain resilient in difficult times. When the UK was first plunged into lockdown in March 2020, it triggered a surge in demand for storage space that boosted occupancy levels from 76.2% in 2019 to 82.3% just a year later.

This rise, revealed by data from the Self-Storage Association and property agent Cushman & Wakefield, represented a greater hike in take-up of storage space in 12 months than in the previous five years.

No surprise then that average rent per square foot rose 3.7% in 2020 – with an even greater leap in certain locations.

Any thoughts that the impact of the pandemic on the sector would be short-lived were dismissed when the latest Self-Storage Annual Report was published in May last year. It showed a further rise in occupancy levels in 2021, despite Covid restrictions easing and many lives returning to something like previous patterns.

Furthermore, a 9% jump in average rents was recorded as operators became more confident in their popularity – with London facilities charging an average of £36.38/sq ft, more than double their counterparts in the East Midlands.

Continued rise

Philip Macauley, UK head of self-storage at Cushman & Wakefield, says occupation levels and rents continued to rise after the latest report was published. “Trading data to the end of October suggests occupation and rental rates have not fallen away yet.”

So, has the sector settled into a happy new normal, with demand permanently higher than before and space more profitable? An influx of investment in self-storage property would suggest many think so.

Notable self-storage investment deals in 2022 included Legal & General acquiring four Sure Store sites; Storage King buying four facilities from Leeds-based McCarthy’s Storage World; and Padlock Partners UK Fund III purchasing a former Mothercare warehouse in Watford for operating partner Cinch Self Storage.

However, a certain level of nervousness started to creep in as the year progressed, leading to fears that the cost-of-living crisis, supply-chain disruption caused by the ongoing war in Ukraine and predictions of recession could dampen interest in the sector.

Macauley expects the curve of the self-storage sector performance graph to change direction at some point but isn’t confident in saying when.

“Affordability comes into it – people start looking more closely at their monthly bills in a recession,” he says. “That will have an impact on occupation levels and then rates.”

Angus Burnett, director at Metro Storage, has started to see the impact of rampant inflation and economic uncertainty on his customers.

“There is no doubt the market is hardening amid the cost-of-living situation,” he says. “There is going to be belt tightening. People are not staying as long as they used to. We are constantly trying to feed in new customers to replace those leaving.”

Burnett predicts that the self-storage property market will slow down in 2023 after the rush of excitement during the pandemic-led boom.

“I expect less opening up of new space,” he says. “Big operators will sit on their portfolios to see what happens.”

‘Overheated’ market

Merger and acquisition activity could also quieten, he adds – although there could be some good opportunities arising for the brave.“I don’t expect many deals over the next year. It got overheated last year with some very high numbers being paid. We will see a calming down of purchasing of competitors.

“But there will be assets at reduced prices due to the economic situation, so people with deep pockets and an appetite for risk could come in and build up a presence. It could be a good time to pick up self-storage space.”

Rents could be affected by dropping demand for space, Burnett forecasts, but the picture could be quite fragmented geographically.

“Each market is so independent,” he says. “And it would not surprise me that new sites offer tasty discounts while more established buildings may not need to.”

With availability of storage space per head way behind the level seen in bigger countries such as Australia and the US, the right facility can still command a premium, he stresses.

“Getting market engagement right is more important than ever. It’s a fine line between making sure you are front and centre when people need storage and being close enough to the market, and not being excessively expensive.

“The main barrier for growth is finding the right locations at the right price. Other uses can often achieve more per square foot, so it is a bun fight to find the right location – or any location.”

Big Yellow last year declared a pause in building out its significant pipeline of sites. But Gibson points out this was due to conditions in the construction market, rather than the fundamentals affecting supply and demand for storage.

“It was all becoming febrile in terms of material and labour prices,” he says. “We will review this year because we see it softening.”

Going back to his conversation with the investor inundated with his grandmother’s furniture, Gibson stresses there are many reasons to believe the sector will stay robust despite the economic gloom this year.

“We started our business in 1998 and had the mother of all corrections from 2007 to 2009,” he says. “We proved to be pretty resilient.”

A key strength of the storage industry during a downturn is the breadth of sources it draws demand from, says Gibson. All manner of business, societal and personal shifts can lead people to keep their stuff locked away for a while.

Status quo disruption

From business launches and closures to marriages and divorces, disruption to the status quo is not just inevitable but often lucrative for those that have low-maintenance space to let. Hence Gibson’s relaxed attitude to the predicted fall in residential property values and gradual return to the office.

“In self-storage, we don’t care about house prices – we just care that people do deals,” he says. “Even if chains break down, it causes dislocation and disruption. And as businesses try to get staff back into the office, they have to sort out their environment, declutter offices and store what they need.”

In some ways – as the pandemic and the great financial crisis before it highlighted – self-storage is immune to the mood music of the day.

“We opened three sites in 2020 that have occupancy rates in the high-70% range, as well as two centres last September amid all the political fallout of that period, and they are filling up,” says Gibson.

The openings included a 57,000 sq ft replacement of an office block on Richmond Road in Kingston, south-west London, which had a development cost of £15m. “Each centre is at least a seven-year project including planning, build and filling it,” says Gibson.

Cushman & Wakefield’s Macauley also looks at the underlying fundamentals for self-storage.

“The market is desperately undersupplied and investors have seen how resilient the sector has been through a crisis, which is very attractive compared with investing in offices or retail,” he says.

“There are a lot of people trying to get into the market and new entrants who remain very acquisitive.”

Interest has been strong in those self-storage properties that have come on to the market recently, and is likely to remain so, says Macauley. “Existing operators will be interested in expanding their portfolios, and there will be investors including institutions who want to buy shiny new boxes.”

He adds that the South East remains the strongest area for self-storage operators, with modern buildings – particularly with zero-carbon credentials – in high demand.

Availability of property and land throws up a major challenge for the sector, says Macauley.“We are seeing a lot of investors and operators trying to repurpose other buildings such as industrial properties, retail warehouses [and] car showrooms – we’ve even seen underground car parks converted to self-storage.”

Whatever the short-term impact of the current economic downturn, pent-up desire to enter the sector is likely to keep it buoyant in the longer term.

“The cost of debt is going through the roof,” points out Macauley. “But we still get a lot of phone calls from overseas private equity firms that are desperately trying to get into the UK market.”

Real estate fund manager Moorfield has been investing in the self-storage sector via its joint venture with operator Storage King.

The duo acquired a series of warehouses from Storagebase from March to October last year before beginning to convert them for use.

As well as 302,000 sq ft of properties across Oxfordshire, the West Midlands, Somerset and Wiltshire, the joint venture is targeting completion of centres in west London, Bath and Canterbury.

Moorfield and Storage King have indicated that they will target further UK investments in “modern, tech-enabled, high-profile self-storage assets”.

Chris Perera, senior investment manager at Moorfield, says: “This was a rare opportunity to acquire a portfolio of assets in a high-barrier-to-entry and fast-growing sector, which has demonstrated its resilience versus almost all other real estate sectors over the past two years and which is ideally placed to benefit from a number of favourable structural trends.”