3 key reasons why self storage is on the move

While economic headwinds and a raft of market uncertainties have slowed wider real estate investment volumes, the self storage sector continues to buck the trend.

Investment in the self storage market across EMEA experienced a significant year-on-year increase, with levels now approaching €1 billion (US$1.07 bn) for the first time - in sharp contrast to other sectors where activity has in some cases halved.

In continental Europe, recent self storage transactions have been dominated by larger platform deals, such as Nuveen’s offer on The Self Storage Group. Yet only 20% of stock in this fragmented sector is considered institutional quality and barriers to entry remain high.

“There’s significant supply-demand imbalance across most of Europe, so while investor appetite is stronger than ever, the biggest challenge for those seeking to deploy capital continues to be investment at scale,” says Tom Caines, JLL’s Head of Self Storage Capital Markets, EMEA. “Liquidity is not an issue, there’s simply too few platform level opportunities to satisfy the weight of capital trying to enter the market.”

With rapidly increasing investor awareness and demand from end users showing no signs of waning, we unpack what’s next for the self-storage sector.

#1 A noticeable gap in quality is emerging

JLL data shows that institutional quality is key to new developments in cities and towns with high population density and affluence. In recent months, despite a dip in trading performance in many areas of Europe, prime location occupancy rates remain upwards of 85%.

“Investors used to snap up entry level first and second generation stock, but focus has recently shifted towards institutional grade assets where there’s a clear path to longevity,” explains Izeldi Loots, EMEA Head of Self Storage Valuation Advisory for JLL.

It’s no wonder as JLL figures show domestic users lacking storage space at home are willing to pay for local convenience.

“In London, one of the most established markets, we’ve seen operators successfully manage to demonstrate the value and flexibility provided by centrally located facilities, achieving prime rents up to 25% higher, when compared to other cities,” Loots confirms.

When it comes to prime supply, London, Stockholm and Berlin are leading the pack. But looking ahead, Paris stands out as a city where high quality supply relative to the population of the city, is currently lacking.

“There’s currently three times’ fewer stores per million people in Paris than London and four times fewer than Stockholm, which has some of the highest proportion of high-quality modern supply compared to other major European cities,” explains Robert Gwyther, Director in the Valuations Advisory team.

With a sharp rise in the number of purpose-built facilities opening, lower quality or poorly located assets could lose ground in the future. Gwyther says JLL benchmarks show the most visible locations outperform sites with lower prominence, especially in catchments with high levels of new supply.

#2 Conversions and repurposing are on the rise

The supply-demand imbalance, alongside higher construction costs, are driving landlords and developers to get creative.

“In areas with undersupply, we’ve seen retail, office and even car park facilities repurposed for self storage, as investors rebalance their portfolios for maximum returns,” says Penny Bell, Director in JLL’s EMEA Self Storage Capital Markets team.

Conversions can knock 12 to 18 months off comparative new build development timelines, thanks to speed of execution and lower planning risk – plus there’s the benefit of lower embodied carbon.

Yet while the wider real estate market now presents more conversion opportunities, it’s not always simple – or cheap.

“The right pre-existing floor loading is critical, otherwise more expensive structural alterations are needed, making many offices unsuitable for conversion,” says Bell. “Warehouses are the most straightforward asset to repurpose.”

#3 Operators are going back to basics

The self storage development pipeline is currently at a record high, says Loots, who believes that in the coming months, operators will focus on getting the basics right. Demonstrating value while seeking to reduce tenant churn, will be key to trading performance.

“As more units come to market, competition will increase, meaning operators must work harder to deliver great customer experience and maintain occupancy,” she says.

Bell points out that UK business rates have recently increased by between 20 and 50%. Meanwhile, the new Valuations Office “Duty to Notify” could further erode UK operator profits, as it’s now mandatory to declare any changes that might impact valuation - such as opening additional floors - within 60 days.

“Operators will be looking to offset these additional costs by making savings wherever possible,” says Bell.

Energy efficiency measures include LED lighting, motion sensors and optimised heating schedules. Technological advances such as integration between access control, operational software, marketing and accounting platforms may reduce staffing requirements and could help unlock further operating efficiencies.

The numbers stack up

Going forward, Caines believes the repurposing of underperforming assets from alternate sectors will fuel growth. Corrections in land values and re-pricing of offices in particular will present new and exciting opportunities for both investors and operators.

Loots agrees there’s plenty of reasons why future demand will remain in key cities, pointing to urbanisation which puts pressure on residential housing supply, in turn driving appetite for self storage.

“Operators who do their homework when it comes to planned expansion and investors who manage to secure the right locations, will be reaping the rewards for a long time to come,” Loots concludes.