When I started my appraisal career over 20 years ago, beside multi-family, office, retail and industrial, the asset class that real estate investors were most intrigued with was mobile home parks (now known as manufactured housing communities). They were (are) a great investment as you own the infrastructure but not the homes in the park. Over the last several years, due to limited new construction and high investor demand there has been a general grid-lock in the industry. You can’t find a MHC for sale and if someone does decide to list their park... a bidding war will ensue.
From there, investors with this appetite went searching for the next best thing and found self-storage to be intriguing, but questioned, “Will people really store their stuff?” Well based on returns over the last 20 years, the answer is “Yep.” Comparing overall average returns on a 5 to 20-year basis, self storage has outperformed the primary asset classes.
Some of the top performing REITs in the Bloomberg REIT Index are self storage companies (excluding firms with less than $100 million in market value). The following table represents the stock prices over the last several years for the five self storage REITs.
So why has the self storage industry done so well over the last several years? Here are a few reasons why this asset class stands out:
- Self storage development is driven by population (roof-tops). According to the Self Storage Almanac, the typical tenant mix for facilities is approximately 77% residential users, 19% commercial users, 2% military personnel and 2% students. There is a common matrix when determining saturation in a specific market, population versus NRSF. As communities continue to build out or become more diverse, there will be a continued need for self storage space. Over the several years we have seen a significant amount of new facilities break ground and open for business. Conversions of older industrial or retail buildings to self storage is also becoming a popular win/win scenario for investors looking to bring self-storage in built out areas and cities dealing with urban blight and decreased property tax revenue.
- There is still plenty of room for industry consolidation. The ten largest self storage operators control approximately 15% of facilities nationwide and 20% of rentable square feet. Out of the 52,000 or so self storage facilities in the market, only approximately 10,000, or approximately 20%, are owned and/or operated by larger companies. The biggest investors are showing an appetite for large facilities (which have been successful in the market) and for total store volume. Thanks to favorable financing conditions, large amounts of cash, and a race for a potential public offering, these players are competing for facilities and paying prices the local owners of one or two facilities never expected to get when they bought/built their facilities. With more sophisticated management and lower seller expectations, they are typically able to maintain high returns in spite of higher purchase prices. This consolidation will continue to fuel industry efficiency and competition in the years to come.
- Self storage facilities are not recession proof but recession resistant. When the market is strong people have the extra income to afford storing their stuff. When the market is struggling and people are moving around there is also a strong need to store their “valuables.” During 2008 and 2009 when the market was hit the hardest, overall physical occupancy only experienced a slight drop off of approximately 3%-8%, depending on the market. This is remarkable especially when compared to heavy vacancy increases in the retail, office, and industrial sectors during this same period.
- Self storage is easier and less risky to manage compared to many other asset classes. Low overhead costs are tempting for entrepreneurs who invest in storage. Typical expenses for facilities range from 30% to 40%, with the largest expenses being taxes and payroll. Self storage is an easy investment to oversee as an owner.
- Self storage facilities are adaptable. Due to the construction materials (typically metal) you can reconfigure units based on demand. In addition, the most successful operators in this industry have recognized that income is not limited to the monthly rent of their units. Additional income generators include tenant insurance, RV/boat storage, moving truck rentals, administration fees, late fees, merchandise sales, and auction services. Each market is unique!
These are just a couple of the reasons why this industry was once a best kept secret but is not much of a secret anymore.