Since self storage emerged as a business model in the 1960s, its use has steadily risen. In 1988, 2.7 per cent of American households rented a storage unit. By 2024, that figure had reached 11.1 per cent. Buoyed by macro trends such as population growth and urbanization, storage has quickly become a staple for individuals, families, and businesses. 

This article, which examines how family offices are allocating their assets to alternative investments, is written by Ryan Gibson, the chief investment officer of Colorado-based Spartan Investment Group, a privately held real estate investment firm specializing in the self-storage industry.

Those who wish to respond with comments can email: tom.burroughes@wealthbriefing.com. Comments of guest contributors are not necessarily endorsed by the editorial team.

A recent report from JP Morgan found that, on average, family offices are allocating 45 per cent of their assets to alternative investments[1]. This shift from the traditional stock and bond portfolio reflects a greater tolerance for illiquidity risk and correlates with a growing appetite for alternatives among younger generations of investors. It also makes sense in light of broader market trends. 

The global financial crisis of 2020 sent the S&P 500 into flux and saw inflation reach record highs. Unsurprisingly, this prompted investors to embrace alternatives that have historically demonstrated low correlation with the market – such as real estate, commodities, and private debt – in larger volumes. 

Commercial real estate has proven particularly popular. As of 2024, 77 per cent of family offices included real estate in their portfolios. Within this asset class, one of the best-performing sectors is self-storage. Stable, resilient, and consistently in demand, storage offers an avenue to build wealth while safeguarding against economic downturns.

The evolution of a high-growth asset class
Since self storage emerged as a business model in the 1960s, its use has steadily risen. In 1988, 2.7 per cent of American households rented a storage unit. By 2024, that figure had reached 11.1 per cent. Buoyed by macro trends such as population growth and urbanization, storage has quickly become a staple for individuals, families, and businesses. 

Individuals and families turn to self storage when navigating life events such as moving, downsizing, divorce, or death – all of which continue regardless of market conditions. Meanwhile, business owners rely on storage to warehouse their inventory, especially since the pandemic, when many companies reduced their physical footprints. 

This enduring popularity has made self storage a remarkably resilient asset class. It performed well during the 1987, 2000, and 2008 recessions and occupancy and returns increased during Covid-19. In fact, self storage outperforms most asset classes in terms of both stability and return on investment (ROI). According to NAREIT, self storage has netted an average annual return of 17.26 per cent over the past 28 years. That exceeds returns from apartments, retail, office, and the S&P 500 during that same period. 

Even as the industry returns to more familiar, seasonal patterns post-pandemic, it's clear that any headwinds exist within the context of an overarching pattern of growth. Mordor Intelligence Research valued the self-storage market at $87.65 billion in 2019 and estimates it will reach $115.62 billion by 2025, a compound annual growth rate (CAGR) of 134.79 per cent.

A hedge against inflation
With annual rent growth largely outpacing the consumer price index (CPI), storage has proven to be an effective hedge against inflation. Because storage is such a staple for Americans, facilities have an average occupancy rate of 96.5 per cent, and according to Yardi Matrix, rents have risen by an average of 5.8 per cent over the past five years. 

Unlike office, retail, and multi-family, self storage utilizes short-term, 30-day leases, making it easier for operators to adjust their financial models to keep pace with operating costs. This results in reliable, inflation-adjusted revenue, a benefit that is passed onto investors via their returns. 

Investors who choose to participate in self storage through syndications can also realize significant tax advantages. Depreciation allows investors to deduct the cost basis of a property over its useful life – even if its market value increases. Cost segregation can accelerate this by categorizing certain assets within a shorter depreciation schedule, thus frontloading deductions in the first five and 15 years of property ownership. Together, these benefits can result in thousands of dollars of annual tax write-offs, enabling investors to reduce their tax burden and maximize their returns.

Selecting the right partner
As with any alternative asset class, self-storage is best deployed as part of a diversified portfolio. In contrast to stocks and bonds, commercial real estate tends to entail a longer transaction cycle, and some deals include lock-up periods where investments cannot be redeemed. As such, family offices should invest in a balance of higher- and lower-liquidity holdings to mitigate risk and achieve a well-balanced asset mix.

In addition, self-storage requires considerable operational expertise. A facility's location and quality can significantly impact its outlook. Today's customers favor modern facilities with amenities that align with the local market. For instance, urban apartment dwellers tend to opt for smaller, climate-controlled units, while businesses may prefer the convenience of drive-up units. An experienced operator will have the know-how to judge where a facility will succeed and have the necessary tools and team in place to optimize its performance.

That makes due diligence an important factor when considering a partner. Because the operator or sponsor will be responsible for vetting individual deals, investors must employ a rigorous process to ensure that the company they invest with has the knowledge and resources to steward their funds effectively.

Stable, consistent, and in-demand
Family offices seeking to expand their alternative allocations to include self-storage have several options. Real estate investment trusts (REITs) provide a low barrier-to-entry approach while offering the benefits of professional management. However, investors looking for more control and potentially higher returns may prefer the syndication model. 

Syndications allow investors to pool resources to participate in self-storage deals, providing them with more oversight into the locations, markets, and types of projects they target. For example, depending on their risk tolerance and investment goals, investors may focus on ground-up development, value-add, or core-plus properties or portfolios. However, given the key role that a sponsor will play, it is vital that investors choose a partner they trust. Family offices should take the time to select a sponsor who reflects their values and offers a risk-return profile that aligns with their strategic objectives. 

PwC estimates that, by 2025, alternative assets under management (AUM) will have climbed to $145.4 trillion. Self-storage presents family offices with an opportunity to keep pace with this pattern by rounding out their real estate allocations with a stable, in-demand asset class. By taking advantage of the self-storage sector's significant growth now, investors can position their portfolios to reap the long-term benefits of a high-performing and recession-resistant investment.

[1] JP Morgan Private Bank US (2024). 2024 Global Family Office Report. 2024 Global Family Office Report | JP Morgan Private Bank US. https://privatebank.jpmorgan.com/nam/en/services/wealth-planning-and-advice/family-office-services/2024-global-family-office-report