Five Reasons We Love Investing in the Self Storage Business

May 8, 2019

 

I've always been pretty excited about self-storage investments. How many of us have driven by a self storage facility and wondered, "How can I get a piece of that business?" Intuitively we know that it's a great business model, and the trend for easy storage is not going away anytime soon.  Most investors in the real estate space are familiar with the economics of housing and multifamily assets. Self-Storage is a close cousin to multifamily apartments that I think deserves merit as a part of an investment strategy.  There are 5 main reasons why I love the self storage business.

 

Durable Rent Revenue

 

Simply put, the revenue from self storage businesses is consistent, durable and increasing. Well located, well run self storage properties are doing well all over the United States. The "downsize" culture has created a demand for storage, oddly enough. Even though homeowners are choosing to live in smaller homes and apartments, there are always excess storage items and keepsakes that need a place to live. It's not a bad deal to trade a $2500 per month mortgage for a home for a $1500 payment. If you need a place to put your stuff, what's $89/month for a storage space? 

 

The bottom line is that in a good economy or bad, there will always be a strong demand for a repository of the clutter and the stuff we can't let go of. Kudos to those who can get rid of everything and move into a tiny home. That's great for them and it makes a great tv show, but they aren't the majority of people out there.

 

The data show that the demand for self storage is increasing in the United States as our population in urban areas continues to grow. New facilities will need to be built, and older, well located properties will continue to perform well if maintained. The Self Storage Association reports that the national average for units per facility is about 540 units, and that facilities nationwide are about 90 percent occupied. It's clear self storage isn't going away. 

 

Low Development Costs

 

Compared to other commercial real estate, self-storage properties cost less to build and maintain. This means the finance costs and occupancy break-even point is lower, thus lowering the risk for the investor. The typical self storage development cost ranges from $34 to $42 per gross building square foot according to the Parham Group, a builder in storage facilities. Commercial properties have a much higher build cost. 

 

Fewer Headaches on Tenant Turnovers

 

Maintenance costs are lower with self storage and that's easy to understand. When a tenant vacates a storage space, there are no fixtures, walls, and flooring to repair, the manager simply blows out the unit and it's ready to go for the next tenant. The turnover time is reduced as well. A storage space can be turned over in a matter of hours whereas apartments and commercial leases might take weeks to fill.

 

Downside Protection

 

Unlike a residential lease, if a tenant doesn't pay, the content of the storage can be seized according to the state lien laws and auctioned off. There are no foreclosures to deal with and the manager will be not spending any time in housing court. But what about the economy? What if we hit a recession? In the recession period from 2007-2009, self storage as an asset class returned an average of -3.80%, this performance is better than its real estate peers, (source: NARIET).

 

Office:          -8.16%

Retail            -12.31%

Industrial      -18.31%

Residential   -6.43%

Apartments   -6.43%

Healthcare     4.92%

Mortgage     -19.54%

S&P 500       -22.03

 

Bottom Line: Stellar Returns

 

The low development costs, maintenance costs, and the increasing demand for storage space by American households offer great returns for investors. NAREIT states that in the period from 1994-2017 the self storage sector has achieved an average return of 17.43%. See the peer comparisons below:

 

Office               13.26%

Retail               12.75%

Industrial          13.36%

Residential       13.42%

Apartments      13.32%

Healthcare       13.35%

Mortgage         11.18%

S&P 500            7.54%

 

There is no silver bullet in the real estate world, but the numbers for self storage are compelling. When you consider the historical performance of storage as an asset class, and the  low risk profile it makes for an attractive asset. Self storage is a great way to diversify a real estate portfolio and an asset worth holding for the long term. But as always, diligence is required.

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