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There are countless options for investors in the world of commercial real estate. Popular investment assets include retail, restaurant, and medical properties, to name a few. Today we are going to take a look at self storage facility investments, a quiet, growing sector in the commercial RE market that stands to benefit substantially from current demographic trends.
Self storage businesses create value for their customers by offering them a safe, secure place to store the possession they can't store in their home, for whatever reason. We live in a consumer culture, and as the average size of a home trends downward, and the average price of a home trends upward, people need a more affordable place to keep their stuff. According to Statistic Brain's study of self storage industry data, almost 10% of Americans use self storage facilities, and the sector generates more than 20 billion dollars in annual revenue.
When most people think of commercial real estate they think of gleaming skyscrapers or suburban office parks. What doesn't come to mind is an out of the way storage facility in a forgotten part of the city. Savvy investors may see self storage facilities in a different light. Instead of seeing a nondescript warehouse-type building, they see a growth opportunity in a sector that has experienced solid performance and year over year growth in good economic times and bad.
There are two main drivers of growth in the self storage industry. As we mentioned earlier, Americans are expert consumers, and many of us accumulate massive amounts of stuff over the course of our lives- from unused gym equipment to 1980s era televisions- if you can think of it, someone is storing it.
The second factor behind the growth of self storage demand is the fact that Americans have downsized their homes. According to the National Association of Home Builders, the average size of a new single-family home dropped from 2,700 feet in 2015, to under 2,600 in 2018. This means that people have the same amount of stuff, but less house to put it in. Hence the beneficial effect for self storage investments.
Consistent Cash Flow
Self storage clients are very diverse in their motives for renting a unit. Some rent the unit to store extra household stuff, some are moving to or from an area, still others need some extra space for their boat, RV or weekend car. The fact that there are so many different reasons for renting a storage unit provides the business with a buffer through tense economic times.
For example, during good times, you may have more clients storing their boats, and during bad times, you will have people who need to store their possessions after downsizing their home. Since storage facilities are necessary during these ups and downs, there is a counter-cyclical quality to the industry. The reduced turnover in self storage also improves your cash flow compared to other sectors, and the size and amount of spaces per storage facility insulate you from the highs and lows of vacancy rates.
Compared to other commercial properties like restaurants or retail outfits, the maintenance and care of self storage facilities is a walk in the park. Typically, the units only need to be swept out for the next tenant, and in worst-case scenarios, you are left with a bunch of stuff to auction off. Owner-investors generally do not pay leasing commissions to sales agents to fill up the facility, and there are no real tenant improvements required past the basics like lights, walkways, etc. Marketing expenses are significantly lower than other types of commercial properties, and a simple web presence and phone number will suffice in most markets.
Staff wise you may have part-time cleaning staff, a full or part-time manager, and security services. Labor is one of the highest costs for businesses, and the ability to run a self storage facility with minimal employees contributes to its attractiveness as an investment opportunity as well as its potential to be a relatively passive income stream.
Now let's examine what factors are driving the wider self storage market and how the sector may change in the years to come.
Unlike commercial retail and restaurant real estate, much of the self storage market remains fragmented, and small owner-investors serve the vast majority of tenants. Paradoxically enough, this has led to large corporations and Real Estate Investment Trusts giving the self storage market a second look. Institutional investors have begun to accumulate facilities, especially larger facilities in high-dollar markets like San Francisco and New York City, and Los Angeles. Despite the recent interest, 80% of the self storage market remains in the hands of individual investors.
Emerging Trends in the self storage Real Estate Market
As with many other sectors of the commercial RE world, self storage investors are embracing new trends to improve efficiencies, make the tenant experience better, and create value wherever they can. Electronic access control is becoming common, with keycard, biometric, and phone/app-based access to the facility. Specialized climate-controlled facilities are gaining steam, and are particularly popular with auto/boat/collectible enthusiasts who rent the units for their collections.
Data analytics are also driving changes in the self storage market. Collecting customer data to better serve their needs, marketing via the web, and digitizing reservation and payment systems are all becoming standard in many major self storage markets. Many owner-investors have also started offering advanced security systems that give tenants the ability to watch over their units via webcam. Tech is disrupting every industry, and the self storage sector is not immune to these changes.
Self storage properties have many things going for them. They provide stable, consistent income. Many facilities take advantage of counter-cyclical economic trends, thus making them more recession-proof than other commercial RE investments. There are no guarantees in life and investments, but in the right circumstances, self storage loans have the potential to be a fantastic addition to your commercial real estate portfolio.
Thumbnail: Original image by Leone Venter on Unsplash