BY ALEJANDRA ZILAK

riginally viewed as something less desirable than retail or commercial high rises in midtown Manhattan, self-storage eventually became known as a sound investment with excellent returns. However, after years of notable success in major MSAs across the country, as well as shifts in supply and demand, many investors are now moving into secondary and tertiary markets to increase their portfolios.

What’s driving them? Some experts point out that even though there’s an increase in interest in these smaller markets, this activity is not so new. “Investor appetite for these markets has always been strong,” says Kenneth Cox, vice chairman at Newmark Capital Markets, “but it became especially aggressive during the COVID years, when pricing in major metropolitan statistical areas (MSAs) became extremely aggressive, which encouraged institutional groups to look at smaller markets, even though cap rates were sometimes very close to primary markets.”

Today, investors are still finding opportunities to acquire mom-and-pop or under-managed assets and implement institutional best practices around revenue management, marketing, operations, and expense controls, especially since these types of markets tend to offer better relative yields, less competition, and a more attractive basis compared to many primary markets.

Andrew Capranos, president of 10 Federal Group, shares that the bar has gone up when it comes to zeroing in on the right markets. “A few years ago, it was enough to have a per-capita supply number against the national average. Today, you have to underwrite at the trade area level, which is where storage demand actually lives. On the demand side, we model population growth, household formation, housing turnover, and the local economic base. On the supply side, we look beyond what’s already built to what’s entitled and what’s planning, because timing matters as much as inventory.”

Capranos cautions to have a long-term strategy too. “We also overlay job diversification, because the durability of a market depends on whether the demand drivers will still be there at the end of a long hold.”

This brings us to a conversation about metrics. What should investors pay attention to when evaluating a smaller market? Capranos explains that there are three buckets, and they all must work together. “Demand and supply are incredibly important—arguably the most important thing to get right, because that’s what determines whether you’re buying at the right basis. Getting the basis right on the acquisition upfront sets the entire property up for success. Couple that with a really strong operating model, and that’s the formula.”

Breaking it down further, Capranos says, “On demand, population growth gets most of the attention, but household formation, housing turnover, and the underlying demographics are doing the real work in predicting storage usage. On supply, you can’t evaluate it on its own—it has to be weighed against demand, and the trajectory matters as much as the level. A market at the national average with a heavy pipeline coming can be challenging, and a market above average where development has slowed can be attractive.”

The third bucket is the operating economics, particularly what the typical customer in that trade area can actually afford. “You can have a strong supply-demand picture and still miss if the underlying demographics don’t support the rent levels your model needs,” says Capranos. “The metric we care most about is trade area absorption capacity over a long horizon, filtered through what the customer base can realistically pay.”

Cox adds that it’s also crucial to look beyond traditional data. “Investors need to evaluate whether the market has stable long-term demand drivers such as universities, health care systems, military presence, or steady residential growth.”

Then there are operational hurdles that may surprise investors when first entering smaller markets. “I think the biggest surprise in this industry is the new supply,” says Scott Levy, president and CIO at Highline Storage Partners. “A lot of these smaller markets sometimes don’t have a good way to truly learn about what’s in the pipeline other than boots on the ground research. Many times, you have to go see for yourself.”

Levy recommends being as thorough as possible with this type of research. “I map out all the competitors, drive by them, shop at a few of them, look at new housing developments and multifamily projects. I check if there are new grocery stores or shopping anchor centers, looking for new supply coming into the market that I otherwise may not have been aware of.”

When conducting due diligence, Cox warns that what may make an investment attractive to one investor may also make it easier for extra competition to pop up. “It may be easier to develop competing facilities due to lower land costs, less restrictive zoning, or a simpler entitlement process,” he says. “Because of that, investors are spending a significant amount of time evaluating barriers to entry and the likelihood of future competitive supply.”

Capranos mentions challenges he’s seen come up consistently. “The first one is labor. In smaller markets, the bench of experienced operators and vendors is thinner, which is one of the reasons we’ve invested heavily in technology and remote operations. It allows you to deliver a consistent customer experience at scale without relying on a traditional staffing model,” Cox says, bringing up competitive dynamics. “With fewer competitors, pricing moves carry more weight. This makes real revenue management capability more important. Marketing also looks different. Demand in smaller markets comes through a mix of channels, so the playbook from primary markets don’t always translate directly.”

Another aspect to consider is how investors enter the market. Are they finding more success through acquisitions or ground-up developments? Capranos is clear. “Acquisitions are where the most opportunity is right now,” he says categorically. “New development has gotten harder—costs are elevated, the spread between build cost and stabilized value has compressed, and lease-up timelines are longer than they were a few years ago.”

Levy agrees. “Given the current pressures on rates and financing costs, developments and conversions are extremely difficult, so the highest probability of success is through acquisitions. I’m sure it’s possible to do it through new developments, but it’s becoming more difficult.”

Capranos adds that conversions can work in the right situation, but they require a specific alignment of building, location, and demand that isn’t always available. “Acquisitions are attractive because there’s a large universe of well-located facilities owned by long-time operators who never invested in an institutional-quality operating platform. With the right team, technology, and platform, you can meaningfully improve these assets’ performance.”

The challenge remains sourcing and execution, and that’s where long-term relationships matter, whether with owners, brokers, or other key partners. “We leverage our data to identify the best investment opportunities and then work with our market relationships we’ve built over the years, where there’s trust on both sides of the table,” says Capranos.

For him, the biggest takeaway is that this is increasingly a platform business. “The asset class has still been one of the best performing over the long run, arguably one of the best when compared to other investment asset classes,” Capranos says. “Over the last few years, it’s been a more difficult operating environment, but we’re starting to see the fundamentals build, and we think we’re in the early innings of a much more favorable operating environment going forward. The fundamentals are one of the core drivers of long-term value creation, but execution is what separates outcomes. The macro landscape isn’t always as well understood as it applies to specific asset classes, but understanding who your sponsor/operator is and what sets them apart is just as important. The technology, data, and operating capabilities of a specific operator are what will define the next decade of returns.”

Challenges aside, Levy is steadfast in his belief that investing in self-storage remains a good idea, regardless of the market. “I continue to be long-term bullish on the industry. Compared to many other sectors within commercial real estate, the industry tends to be far more relationship-driven with a noticeably less cut-throat competitive dynamic. This applies to REITs, all the way down to the small operators. Everyone plays nice in the sandbox, which is one of the reasons why I’ve been in the industry for 20 years, and why I continue to enjoy it.”