Hedging Inflation with Self-Storage

With inflation running rampant, people are searching for ways to place capital to outpace inflation. Real estate is, historically, a solid hedge against inflation, as discussed here, and the self-storage industry, specifically, is one of the best real estate asset classes to do so.

Among the many benefits of self-storage investing is that self-storage leases are generally month-to-month. In an inflationary climate, having the ability to keep pace with inflation by implementing a dynamic pricing model and raising rates on a monthly basis is a tremendous benefit. Though raising rates every single month is likely not the best business strategy, a self-storage operator can assess the market every month and raise rates every few months to outperform the market.

Few other asset classes have the flexibility that self-storage offers. For example, office and retail typically have long-term 5-15 year leases with modest – say, 2% – annual increases, and apartment complexes have 1-2 year leases, with no annual increases. In these scenarios, an operator has limited ways to pace with inflation during a lease period, and only has the flexibility to change prices at the end of lease term, whereas a self-storage operator can shift with the market.

On the expense side, self-storage will be less impacted by rising costs. Self-storage expenses generally account for 30-35% of gross revenue, while other asset classes are closer to 50% and above. The lower expense ratio – by itself – results in less unaccounted for rising expenses. Additionally, the largest expense for a self-storage facility is generally real estate taxes, and taxes are not directly tied to inflation, and oftentimes lag years behind inflation. Finally, because self-storage facilities typically require less maintenance than other asset classes, increased labor costs will impact facilities less drastically. Put simply, as expenses rise, self-storage facilities are less impacted than other asset classes.

Self-storage has historically performed well during recessions, and is a stable asset class even during inflationary periods. With our cash becoming less valuable by the day, and our buying power is decreasing, it is important to identify assets to invest and protect our capital, and self-storage is a proven asset.