Alternative Real Estate Investments: Multi-Family vs. Self-Storage—Which is the Better Bet Today?

The landscape of alternative real estate investments has evolved significantly over the last decade, with institutional and private investors increasingly exploring opportunities beyond traditional asset classes like office, retail, and hospitality. Two of the most attractive sectors in alternative real estate investments are multi-family and self-storage properties. While both offer compelling advantages, self-storage has emerged as the more resilient, risk-averse, and higher-performing asset class in today’s economic climate.

The Appeal of Multi-Family Investments

Multi-family properties have long been a staple in real estate investment portfolios due to their consistent rental income, appreciation potential, and demand driven by housing shortages. The following are key advantages of multi-family investments:

Pros:

Steady Demand: Housing is a necessity, making multi-family properties relatively stable in terms of occupancy and rental income.
Appreciation Potential: Well-located multi-family properties appreciate over time, providing long-term capital gains.
Tax Benefits: Investors can benefit from tax incentives, depreciation deductions, and 1031 exchanges to defer capital gains taxes.
Financing Availability: Lenders often favor multi-family properties, offering lower interest rates and better loan terms due to perceived stability.

However, multi-family real estate comes with several challenges, especially in today’s economic landscape:

Cons:

High Operating Costs: Maintenance, property management, tenant turnover, and compliance with housing regulations contribute to rising costs.
Regulatory Risks: Rent control laws, eviction moratoriums, and tenant-friendly policies can limit rent growth and cash flow.
Market Saturation: Many metro areas are experiencing an oversupply of multi-family units, leading to slower rent growth and higher vacancy rates.
Interest Rate Sensitivity: Rising interest rates impact financing costs, reducing cash-on-cash returns for investors who rely on leverage.

Asset Class Matters: Understanding Asset Quality in Down Markets

In many real estate asset classes, particularly multifamily and office, down markets reveal the strength and resilience of higher-quality assets in better locations. This is why investors should be cautious of Class B and Class C assets that were acquired before the recent spike in interest rates, especially those purchased with the expectation of achieving higher rent premiums.

During market downturns, areas dominated by lower-quality assets often face significant challenges, as their tenant base is typically the first to be impacted by affordability constraints. This severely restricts the ability of sponsors and operators to meet their projected financial performance.

With rising interest rates, assets financed with variable-rate debt have increasingly fallen into a negative equity position, forcing owners to negotiate with lenders to avoid foreclosure or seek loan modifications. This phenomenon, commonly referred to as “extend and pretend,” involves lenders extending loan terms or adjusting repayment structures to delay recognizing losses rather than foreclosing immediately. Additionally, some sponsors have launched new investment offerings to raise fresh equity and stabilize struggling assets, delaying an inevitable reckoning.

How This Applies to Self-Storage

Self-storage, while historically more resilient than other real estate sectors, is not immune to these challenges. The strength of a self-storage asset depends on its location, market saturation, and operator execution. Higher-quality, well-located facilities in markets with strong demand fundamentals tend to perform well even in downturns. However, Class B and C self-storage properties, particularly those in oversaturated markets or mismanaged facilities, may face distress as competition increases and pricing power weakens.

Unlike multifamily, where tenants must absorb rent increases, self-storage operates on a month-to-month basis, allowing for more frequent rate adjustments but also increasing sensitivity to market downturns. In markets where supply has outpaced demand, operators may be forced to cut rates aggressively to maintain occupancy, impacting revenue projections and the ability to service debt.

Although the extend-and-pretend dynamic exists in self-storage, particularly for new developments in certain markets, the rate and level of these situations are a small fraction of what is being experienced in multifamily. Over-leveraged self-storage facilities or those acquired with aggressive revenue growth assumptions may require loan modifications, capital injections, or even recapitalization efforts to avoid distress sales. However, the overall stability of the sector, coupled with its historically lower default rates, makes it far less susceptible to widespread financial distress compared to other real estate asset classes. Investors should prioritize assets with strong fundamentals, conservative financing, and experienced operators who understand market cycles.

The Case for Self-Storage as a Superior Alternative

Self-storage has steadily grown in popularity as an investment vehicle, largely due to its ability to generate strong, recession-resistant returns with lower operational complexity.

Pros:

Recession Resilience: Self-storage demand remains strong even during economic downturns, as people downsize, relocate, or require temporary storage solutions during transitional periods (e.g., divorce, job loss, or college moves).
Lower Operating Costs: Unlike multi-family, self-storage has minimal ongoing expenses, as there are no tenants requiring extensive property management or unit maintenance.
High Occupancy and Pricing Power: The self-storage industry has demonstrated an ability to sustain high occupancy rates while increasing rental rates. According to the 2023 National Self Storage Report by Yardi Matrix, the sector saw strong performance with rent growth outpacing inflation in many markets.
Flexible Lease Structures: Unlike multi-family, where leases are often locked in for a year or more, self-storage leases are typically month-to-month, allowing operators to adjust rents quickly based on market conditions.
Lower Delinquency Risk: Tenants in multi-family properties are protected by extensive landlord-tenant laws, making evictions costly and time-consuming. In contrast, self-storage facilities have a streamlined lien process, reducing losses from delinquent accounts.
Diversified Tenant Base: While multi-family properties rely on a limited number of tenants, self-storage facilities can have hundreds of customers, reducing risk associated with any single vacancy.

Despite its advantages, self-storage investments have their own considerations:

Cons:

Location Sensitivity: Success is highly dependent on site selection, population density, and local demand.
Market Competition: The increasing popularity of self-storage has led to more development, requiring investors to conduct thorough due diligence.
Zoning Challenges: Some municipalities impose restrictive zoning laws on self-storage development, limiting supply in certain areas.

At Hearthfire Holdings, our acquisition strategy is strengthened by our proprietary vetting formula developed by our Acquisitions team under Jeff White’s leadership. This formula, refined through our 90+ years of self-storage experience, carefully evaluates market demographics and competitive landscapes to ensure investments meet or exceed our risk mitigation thresholds. Our comprehensive approach leverages the deep knowledge of our construction and development teams, who maintain strong relationships with local municipalities and thoroughly understand regional zoning regulations. This expertise proves invaluable when navigating approval processes for new developments, property enhancements, or facility expansions, significantly reducing execution risk in our investment strategy.

Why Self-Storage is the Smarter Play in Today’s Economy

Given current economic uncertainties—rising interest rates, inflationary pressures, and housing affordability challenges—self-storage has proven to be a more adaptable and risk-averse investment. Historical data supports its resilience:

Recession Performance: During the 2008 financial crisis, self-storage REITs outperformed all other real estate sectors, delivering positive returns while multi-family and office assets saw declines (Source: NAREIT, 2009).
Occupancy Stability: The national average occupancy rate for self-storage facilities remains around 90%, even in economic downturns, according to the 2023 Self-Storage Almanac.
Rental Rate Growth: Despite economic volatility, self-storage rents increased by an average of 6% annually from 2015 to 2022 (Source: Yardi Matrix).

The theoretical advantages of self-storage investments are proven by Hearthfire Holdings’ track record of success. Our carefully curated portfolio of self-storage facilities has consistently delivered reliable returns to our investors through two primary channels:

Income Fund Performance: Our income is driven by financing programs tied to self-storage investments, leveraging a historically low-default asset class to deliver stable returns. Compared to other private debt offerings—such as multifamily bridge loans or fix-and-flip financing—self-storage boasts significantly lower default rates, enhancing capital preservation and risk-adjusted returns. This stability allows us to provide investors with consistent monthly income streams backed by a portfolio of well-structured, cash-flowing self-storage loans and assets.
Development Projects: New acquisition, expansion, and pure development opportunities, thoroughly vetted through our proprietary evaluation process, offer investors the potential for higher return on equity yields as we transform underperforming assets or develop new facilities in high-demand markets.

To learn more about our current investment offerings, explore our existing portfolio, and see the detailed performance metrics behind our success, we invite you to visit our investments page. There, you’ll find comprehensive information about our investment strategies, historical performance, and current opportunities to partner with us in the self-storage sector.

Conclusion

While multi-family investments remain an attractive long-term play, self-storage offers a superior risk-adjusted return profile in today’s economic climate. The combination of lower operational complexity, strong demand drivers, and historical recession resistance makes self-storage a compelling alternative investment. Investors seeking stable, inflation-resistant cash flow and capital appreciation should seriously consider self-storage as a strategic addition to their portfolios

Ready to Invest in Self-Storage?

Hearthfire Holdings specializes in self-storage investments that generate strong, reliable returns. Explore our current opportunities and see how you can grow your wealth with this resilient asset class.