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Investment Opportunities in Self Storage

Written by: Scott Meyers

Article Overview: Like all other real estate investments, self storage shares the same attractive qualities as residential rentals, apartments, retail strip centers, office buildings, and industrial properties. Those include leverage (borrowed money), tax advantages, passive income, personal control (being your own boss), and appreciation. However, self storage offers a number of benefits that make it such an attractive investment.

Investment Opportunities in Self Storage

Like all other real estate investments, self storage shares the same attractive qualities as residential rentals, apartments, retail strip centers, office buildings, and industrial properties. Those include leverage (borrowed money), tax advantages, passive income, personal control (being your own boss), and appreciation. However, self storage offers a number of benefits that make it such an attractive investment. Those include the following:

1. We are becoming a more transient society, moving around more and creating a greater need to store our stuff, thus the demand for self storage is increasing.
2. Americans tend to accumulate a great deal of possessions, and we don’t want to “weed out” those things we don’t use or are sentimental or have nostalgic value, which in turn, creates more demand.
3. Most new communities will not allow us to store our boats, jet skis, RV’s, or even multiple cars on the street or in front of our homes.
4. Many retirees downsize their homes which require additional storage space that their smaller homes don’t provide.
5. More and more Americans are buying second homes which increase the demand for storage space.
6. College students utilize storage space when moving back home for the summer.
7. Many businesses are downsizing and operating out of smaller offices that necessitate a need for storage space.
8. Many small distributors will utilize self storage to operate their business from.
9. Pharmaceutical reps will use climate controlled storage for samples and inventory.
10. The eBay® phenomenon has created a huge demand for space.
11. Other home based businesses are also creating demand for off-site storage.
12. Lower Development costs – self-storage facilities development costs are often 30 to 50 percent less than office, retail, and apartment buildings.
13. Lower Operating Costs – Operating costs for self-storage facilities are substantially less than office, retail, and apartment buildings. As a result, self storage owners are more isolated from large increases in utility and other variable costs that occur in the open market.
14. Lower development and operating costs make break-even occupancy ranges lower than other forms of real estate.
15. Occupancy is generally more stable and therefore predictable as there are typically a greater number of units in which to “spread the risk” than in other forms of real estate.
16. Month-to-month leases mean that rental rates can be adjusted easily. When occupancy increases, I will adjust rates to compensate for the demand.
17. Demand for self-storage is not dependent upon the economy. When the economy is good, people buy more and store more. When the economy slows, people downsize, and require a cheaper alternative to store their extra belongings.
18. Low management overhead as customers typically only need the manager to move in or move out, compared to office or apartment complexes that requires a high number of customer contacts and constant and ongoing interaction.
19. A well-run, stabilized self storage in a good location is very desirable to other investors and institutions, making self storage a very liquid investment.
20. It’s No Wonder Self Storage has the lowest loan default rate of all commercial real estate property types!

DEBUNKING THE MYTHS

Now that we’ve discussed all the reasons that make self storage a fantastic investment, we should take some time to break down a few of the myths that have been floating around with regard to the industry. Like many other industries, self storage has been evolving for several decades now, and many of the general assumptions by outsiders surrounding this business simply do not apply. Some of the common myths are as follows:

1. “If you build it, they will come”.

In the early years, this was somewhat true. But in today’s competitive landscape an owner/investor must perform very careful analysis and/or feasibility studies to determine whether a potential development site or an existing facility is a wise investment. In addition, there are many areas that are, or are becoming overbuilt, which drastically changes the projected lease up and overall occupancy potential for a facility.

1. “Self-storage is an easy business”.

This may have been somewhat true in the past as well, but like any business, if it were easy, everybody would be doing it. Far too many real estate investors treat their business as a hobby rather than what it truly is; an asset with many moving parts that must be managed from day to day as opposed to a stock or a mutual fund that you purchase and only infrequently check on its performance. Today’s self storage arena is very competitive, and successful owners are always thinking of ways to increase income, decrease expenses, and strive for operational efficiencies across all facets of their operation.

1. “All self storage properties are cash cows”

As we discussed earlier, self storage facilities have the lowest default rate of all property types, but it doesn’t mean that owners don’t default and that many others are struggling. Generally this is due to poor planning before acquiring or developing a facility. An owner/investor must perform thorough due diligence when it comes to competition, population growth, land costs, construction costs, market rental rates, and the management of the facility before purchasing or developing a facility. If you do not have the time nor the expertise, a feasibility study should be conducted by an experienced individual within the industry to avoid buyers or developers remorse.

1. “this is a cheap business to get into”

Again, this may have been somewhat true in the past, but not any longer. Today’s customer is demanding a higher quality facility than what the industry provided in the beginning. Today’s facilities possess a higher quality construction, are fully paved, fully fenced with security gates, typically have state of the art digital video surveillance and recording systems, and are considerably larger than in the past, which necessitates an office with a part-time or full-time manager. Land costs are higher as most developers prefer to locate in high traffic locations as opposed to the hard to find or industrial park sites of yesteryear. In addition, construction materials have been on the rise recently due to fast developing foreign nations which affect development costs, and good existing facilities are being sold at record high prices as the word is out on what a great investment self storage has become.

The Future of Self Storage

As we look to the future of self storage, it’s very clear that the future looks bright. There are a few trends afoot backed by solid industry data that justify my positive outlook on this high growth industry. These trends are as follows:

Increasing Demand

The U.S. Population is predicted to reach 400 million by the year 2050. All indicators show that Americans continue to be a highly mobile society with a high propensity to accumulate “stuff”. This means that as of the time of this publication, we stand to add 150 million potential customers to our prospect list who are searching for somewhere to store their belongings.

High Tech Facilities

As our customers become more selective in where to store their belongings, owners of older facilities will need to make necessary improvements to remain competitive. This will ultimately result in more sophisticated and higher tech facilities offering more user friendly layouts, larger offices, flexible unit mixes, kiosks, high security, and more climate control units. In addition, we can expect to see self storage investors competing for the premier parcels located in the high traffic retail areas of town. As a result, municipalities are beginning to require that these facilities have a retail component in order to increase the amount of sales tax generated and paid to those local governments. They are also requiring that the facilities have a certain “look and feel” that blend in with the surrounding businesses. Nicer fencing, or split block security walls, paved drives, certain architectural features, and an attractive landscape package will be mandatory and made part of the architectural permit prior to construction, and strictly monitored for compliance.

More Products and Services

As self storage moves closer to Main Street, we will begin to see an increase in the number of customized services available for its customers. We have already seen some partnerships being formed that provide complementary products and services. Of course the most common example is truck rental, but we are now seeing pack and ship businesses, EBAY® add-it stores, Kinko’s®, or co-locating with retail stores such as Starbucks® or Subway® on the ground floor with storage above in multi-story facilities.

Focus on Customer Service

As more and more people frequent our self storage facilities, they will begin to expect more from our facilities and the face behind the counter. These sophisticated customers are demanding excellence and consumer loyalty will quickly go out the door, along with their stuff, if they have a bad experience. Conversely, when customers are satisfied with the service they receive, they will stay, and hopefully will tell their friends about the good experience they have had. This provides an excellent opportunity for us to exceed their expectations, and provide a substantially better experience than our less educated, less professional competitors in our chosen markets. My goal is to be my customer’s LAST storage provider by never giving them a reason to look anywhere else, for any reason!

Industry Consolidation

As the larger public companies and REIT’s are pressured by Wall Street to produce results, we will surely see more consolidation of the mid to large size companies. Those same mid to large companies can’t meet their growth deadlines by developing their own facilities from the ground up. The 3 years it takes to choose a plot of land, apply for zoning, permits, and then build and stabilize a property simply isn’t fast enough for them to meet their goals. Don’t misunderstand me however, the mid to large companies ARE still active developers, but their appetite for growth will fuel a surge in acquisitions and mergers for years to come.

Increased Competition

As all eyes are now on Self Storage, we are sure to see a number of new entrants into this facet of commercial real estate. Unfortunately, this will lead to overbuilding in some areas as many newer developers will ignore the feasibility criteria for developing a facility in a given market. Therefore, it will be imperative for owners and developers to work more efficiently to attract and retain customers in this new environment.

Increase in Value

In the future, the upward value trend in self storage will continue for a number of reasons: Predictably low interest rates will push cap rates low, and net larger profits for those who choose to sell. For that reason, self storage continues to rise in popularity as one of the commercial real estate assets of choice, and will ultimately attract more investors. There are still a number of individuals and investment firms that are stinging from the recent stock market corrections. These investors are now searching for a more stable investment that they can “touch and feel” as opposed to investing in a company that they have never heard of, run by people they have never met, in an industry they know nothing about. There is a lot of money chasing a few deals. Many investors have created a great deal of value in their existing portfolios, and they are selling off these properties and are looking for places to spend their 1031 tax deferred exchange dollars without paying taxes. Self storage has continued to be a great investment to exchange into and more and more investors are choosing to park their dollars here before their tax deferred status expires.

As the saying goes, the only thing we know for sure is that things are going to change. I do subscribe to that line of thinking, but I also believe that self storage will remain a reasonably predictable, stable, low maintenance, high cash flow investment for professional investors for years to come.

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Article Tags: commercial real estate, investing, real estate, self storage



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