Exploring Alternative Investment Opportunities
In recent years, alternative sectors have grown into a significant share of Commercial Real Estate (CRE) investment, totaling $289 billion in transaction volume from 2020 to 2023—a 79% increase. During that time period, 39% of capital raised has included alternatives as target sectors.
Self storage is driven by a variety of factors including migration (over short and long distances) home downsizing and crossing other life thresholds (college graduation, family formation, marriage and death). Exogenous events, such as the COVID-19 pandemic, can also spur substantial growth in the sector as migration was kickstarted to record levels temporarily and self storage became a necessity.
Transaction volume subsided in the first half of 2023 with the trailing 12-month volume down 57% year-over-year (YOY). While this decline is significant, self storage remains a top performer, with volume remaining above the 12-month levels leading up to the pandemic. Despite the rising cost of debt, capitalization rates for self storage remain relatively stable, averaging 5.1% in the second quarter of 2023, only up 10 bps from all-time lows.
Self storage continues to show resiliency as valuations remain intact, averaging $165 per square foot. Though down slightly from the 2022 peak, the average price per square foot marked a 2.5% increase YOY. As the self storage sector continues to mature as an asset class, while maintaining low operations costs, interest from institutional investors will increase.
Despite an overall economic slowdown affecting a wide variety of sectors, alternative assets maintain strong performance indicators, including national-level occupancies over 90%. Compared to traditional CRE asset classes, alternative sectors have shown proven resilience during the last three downturns and stand out as compelling arenas in the ever-evolving landscape of commercial real estate.
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