Why The Time is Right for Self-Storage Investing
In the 1850’s, Martin Bekins, the son of a Dutch immigrant, established perhaps the first self-storage facilities in America, in Los Angeles and San Francisco, recognizing opportunity as Americans (and all their stuff) flocked to the west. During the Great Earthquake of 1906, Bekins’ reinforced steel and concrete storage facility was one of the few structures that didn’t collapse.
Since that time, the U.S. self-storage industry has blossomed into a $40B industry, with approximately 50 thousand facilities and 1.9B rentable square feet. Through our analysis, we believe the appeal of self-storage investing remains much the same: self-storage businesses tend to perform well during good times and, if managed well, show remarkable durability during hard times.
The Case for Self-Storage Investments
The self-storage sector continues to perform well through business cycles for the following reasons:
- Less overhead: self-storage investments generally involve no plumbing, minimal electricity, minimal insulation, and less vigilant management. Many facilities do not even entail heating or air conditioning. Operating cost and complexity tend to be much less than other real estate sectors.
- Simplified tenant management: leases are typically month-to-month, tenant needs are typically minimal (since only their possessions occupy the space) and transitioning between tenants tends to be simpler. Because of this, self-storage investments tend to entail less vacancy risk than other asset classes. Eviction laws are also friendlier to self-storage operators than they are to multifamily or even office landlords.
- Diversified tenant base: because self-storage properties are structurally less complex than other real estate, even smaller facilities often have more than 100 units. As such, the potential for positive cash flows at any moment is strong. For a typical storage facility, the breakeven occupancy rate to service standard debt is roughly 45%. That percentage for retail, office and commercial spaces can be 65% or more.
Are Self-Storage Investments Recession Proof?
The self-storage market has acquired a reputation for resilience even during downturns. Economic pessimism or aggregate job losses may result in renters downsizing, or putting off home purchases. With less demand for living space, the demand for lower-cost storage space may go up in a given market. In recent decades, performance data has borne this out. Self-storage real estate investment trusts (REITs) produced an annualized return of 16.54% between 1994 and 2020, the highest return on average of all REIT sectors during that period and an over 6% higher rate of return than the S&P 500. This 26-year period included three recessions, including the prolonged Great Recession. In fact, self-storage was the only REIT sector that yielded a positive return on investment during the Great Recession.
Self-storage investments may carry the potential for strong returns during boom cycles as well. Buyers of second homes invest in self-storage space to house possessions during transitional periods; entrepreneurial or artistic tenants may use self-storage space for creative endeavors, or for product warehousing. A booming single-family market may coax more well-off homeowners into selling larger homes, increasing demand for storage space.
The bottom line: Americans have lots of stuff, and move a lot, during good times and bad.
The Particulars of Self-Storage Investing
While self-storage investments hold a few advantages that may help mitigate downside risks, success in self-storage investing is hardly guaranteed. As such, we encourage potential investors to do their own due diligence prior to investing. Here are some factors that experienced self-storage investors and operators pay close attention to:
- Location: particular regions may necessitate certain operational measures for self-storage operators. More humid climates may require climate-control systems to satisfy renter needs. Colder areas may require heating, depending on the typical uses of the tenant base. Areas with higher rates of crime may necessitate security cameras, even security personnel. Knowledge of the local renter pool, and suppliers of operational features, could mean the difference between a profitable self-storage investment and a flop.
- Rental market dynamics: self-storage facilities may serve a broad set of tenants across market cycles, but like any real estate sector, a healthy rent roll will depend on the specific demand drivers. Population trends in a local market or submarket, movement of individuals between single-family homes and apartments, and price per rental square foot in the multifamily market will all potentially impact demand for self-storage space. Presence of growing industries — like biomedical, e-commerce logistics, or pharmaceuticals — may also drive high demand for flexible utility space, and hence for self-storage.
- Marketing and lease-up challenges: retaining and replacing tenants at an existing self-storage facility may be relatively straightforward. Finding tenants for a new facility with dozens or hundreds of units may be more challenging. Prospective apartment and office tenants are typically proactive in seeking out space. Would-be self-storage tenants may be less aware of particular areas or facilities that may be a good fit for them, or may not even be aware of their need for self-storage space. Leasing up a new facility may require nuanced marketing strategies and engineering a variety of unit sizes and amenities to accommodate a diversity of uses and tenants.
Self-Storage Market Dynamics
Present market dynamics are highly favorable to self-storage investing, for both novel and well-established reasons.
- Movement between metros: even before the pandemic, a broad contingent of Americans was moving between metros, generally adding net population to “sunshine” metros like Nashville and Phoenix. While individuals are moving between metros at an increasing rate, the general trend remains increased urbanization. Both factors contribute to increased demand for self-storage units.
- Demographic trends: the U.S. population is rapidly aging. As of 2015, there were more than 46 million older adults aged 65 and older living in the U.S.; by 2050, that number is expected to grow to 98 million. The aging of the country means more Americans moving out of larger homes, downsizing or relocating to assisted living. This, too, should continue to drive self-storage demand.
- Shifts in the makeup of the economy: well beyond the initial economic shock of COVID-19, many sectors of the economy are operating differently. Retailers big and small are shifting more resources to e-commerce. Office space is becoming more diffuse and flexible. Both factors should continue to drive the need for flexible storage space to host inventory, office furniture, and other hard inputs.
Self-Storage Investing: The Bottom Line
We believe self-storage investing is an established way to tap into predictable cash flow. Due to generally low cap ex requirements, operational simplicity, and a counter-cyclical investment thesis, we think self-storage investing offers the potential for strong downside protection as well.
Like any more niche commercial real estate asset class, self-storage investing requires specific knowledge, operational expertise, and scale. EquityMultiple’s syndication platform offers investors the opportunity to access professionally managed self-storage investment opportunities at a low barrier to entry.
Ready to start your passive investing journey? Learn how modern real estate investors can generate passive income through EquityMultiple. Contact our Investor Relations Team or create your free account today.
1 Source: The SpareFoot Storage Beat, January 27, 2022: https://www.sparefoot.com/self-storage/news/1432-self-storage-industry-statistics/
2 Source: The Motley Fool, December 21, 2021: https://www.fool.com/real-estate/2021/12/21/why-self-storage-is-a-smart-buy-in-2022/
3 Source: Population Reference Bureau, December 2015: https://assets.prb.org/pdf11/aging-in-america.pdf
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Originally published at https://www.equitymultiple.com on February 19, 2022.