Self-Storage – Growing Interest as an Investment Niche

2October, 2018

Self-Storage – Growing Interest as an Investment Niche

When people talk about commericl real estate, they immediately think about office building, retail shopping center, apartments. But there are another sectors in the commercial world that are not as glamours as the more popular ones but they are down right profitable. Self-storage is one of them. Their CCR (Cash on Cash Return) is higher due to the relatively low cost to operate these sites. That the future looked bright as the Nearly 1 in 10 Americans is using a self-storage facility today. The newer facilities are much more visible, clean looking, automated and professionally operated. Sure, the industry is still very fragmented, lots of mom and pop operations and still a lot of leftover, dingy, shed-type looking facilities scattered around, but the big players are taking the game to a new level. No, I have not used one yet but in my kids and my tenants are using them. My commercial garages are full and in high demand. During my research, I’m finding a lot more reasons why folks are using them. Demographic trends favor more folks renting and hence, needing places to store their stuff. With home price increases, millennials are renting longer and boomers are downsizing. Back in the 70s, first-time home buyers rented only 2.6 years before purchasing their first home, now it’s 6 years. But it goes beyond that.

add to this situation stricter rules from the HOAs, and folks can’t store their boat, RV, etc. at home. Many folks are forced to use self-storage beyond just storing excess stuff.

Businesses are also leveraging self-storage like never before. They are finding it cheaper to use self-storage to store offsite—versus taking space in a more expensive office setting—for files, records, equipment, etc.

Wayne Hughes,(foutune 400) who started a company called Public Storage and has a net worth of $2.8B. This industry is also a very recession resistant industry. In 2008 when the economy was getting crushed, the self-storage REITs (publicly traded companies that buy lots of self-storage properties) were the only real estate sector to generate a positive return at 5%. Over 5,15, 20 and 25 years, these REITs have outperformed the S&P 500 so they clearly have a solid and consistent track record of good performance.

Why is self-storage so attractive from a business model? The cost to build is much less expensive than your typical real estate property as we’re talking concrete, steel frames and garage doors. They’re also inexpensive to operate and maintain (maybe one on-site person, much is automated). Plus, turnover (makeover) costs that are one of the things in apartments that drive-up expenses are almost nil in storage; sweep out the unit, provide a new lock and it’s ready to re-rent. Hence, the breakeven on self-storage is around 45% occupancy level where apartments are about 65%. Tenants are relatively sticky as well, they often move in and never leave. Estimates are that one third of users have stored their stuff in one of these units for over 3 years. Also, the short-term nature of the rentals (month to month) enables owners to turn units quicker and raise rental rates more frequently. This, with the sheer number of units in these facilities, means the owner is not as subject to financial impacts from numerous vacancies hitting at one time. This is another business with scale like apartments that has a very attractive appeal.

Up to 80% of the industry is still in the hands of small independent operators. Its highly fragmented and ripe for consolidation. A savy syndicator could find a good deal and make great return for investors. Research shows that most users want a facility within 3 miles up to 5 miles of where they live. Most cities lack of modern storage facilities.

Institutional investor interest is growing towards this niche, as evidenced by a recent article last week in the WSJ that self-storage facilities are getting a serious look. With many real estate sectors seeing slower growth, brick and mortar retail with the online threat from Amazon like and concerns of rising interest rates, savvy institutional investors (pension and private equity funds) are more favor of stable and resilient niche markets like self-storage, mobile home park and value-add apartments.

Self-Storage – Growing Interest as an Investment Niche

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