The self storage investing is not a new venture; it has been around for several decades already. But over the last few years, especially in 2020 after the onset of the pandemic, it has shown a meteoric rise in popularity. It’s estimated that there’s now over 1.7 billion square feet of self-storage capacity offered by an estimated 45,000-65,000 facilities around the country. The industry was also worth a whopping $39 billion last year, which makes it a very attractive venture for fledgling entrepreneurs.
The Self-Storage Industry in a Nutshell
For most real estate investors, investing in a self-storage business is very appealing. It has a significant potential to rake in large income while having low overhead and construction costs and fairly low management requirements. A small to medium-sized self-storage facility can be as sustainable as other real estate investments while only requiring part-time management.
Also, since customers do not live on the property, there are fewer buildings that can pose issues and maintenance. Leases are also per month, allowing self-storage investors to adjust their rates to the current market trends more readily.
If you don’t want to establish your facility from the ground up, there is a vast pool of self-storage facilities for sale that you can purchase. In their research, Neighbor found that around 73% of self-storage businesses are owned by small entrepreneurs who often have one or two facilities or family-run businesses.
This year, even with the pandemic’s onslaught, the industry logged an annual revenue of $39 billion (as of March 2020). Around 9.4% of all households in the US avail of the services of self-storage businesses. So, it’s an understatement to say that there is a massive demand for storage space, which will likely grow well into the future as newer generations move on to adulthood.
To sum it all up, self-storage investing is an attractive asset because of the following:
- Large potential for income and consistent cash flow
- Low construction and maintenance costs
- Low overhead cost and expenses
- The facilities can be self-sufficient and only require part-time supervision
- Month-to-month payment can allow you to adjust rental rates sooner
- Growing demand for the foreseeable future
Self-Storage and the Pandemic
All industries have been impacted by the pandemic and the decline of the economy somehow. But the self-storage industry is a very noticeable outlier as it has remained strong and even seen some gains. The industry maintains its resilience and sees steady growth since the number of people who want to avail of its service is still growing.
Aside from that, its operations’ unique fundamentals make it a desirable investment option during these uncertain times.
Operating Performance
Although self-storage investment opportunities aren’t immune to the economic downturn brought about by the pandemic, the industry is adjusting. Before the pandemic started, the whole industry was poised to grow tremendously. The US’s construction glut had hit its peak while the development cycle was on a plateau since mid-2019.
Also, by the end of 2020’s first quarter, the absorption of new real estate supply increased demand, which led to an increase in rental rates and occupancy.
The self-storage rates may have declined this year compared to 2019, but there was still growth from July to August. Ever since the rates dropped at the start of the pandemic, the whole industry is stabilizing. Also, since perceptions of the economy and the entire market are still shifting, so will opinion on capital gains and the subsequent structure.
The occupancy levels of self-storage businesses have also remained broadly consistent this year because of the lower than expected move-in and move-out activity. There’s also been a slight increase in demand due to the decline in rates. However, there have been a few move-outs of clients that under normal circ*mstances might have had to lien sale.
Development
Before the pandemic started, an all-time high in self-storage supply was recorded, and new construction drove rental prices downwards on almost all of the major markets. This peak in supply was observed in 2019 and has been plateauing since then.
So, it resulted in market uncertainty, which led to financing drying up and assumptions being adjusted. Due to this unforeseen issue, a lot of developments were put on pause or abandoned altogether.
The lack of new developments may be a blessing in disguise as it is seen to relieve markets with an oversupply of self-storage capacity.
Future prospects
It’s been proven time and time again that self-storage is a very resilient asset type that has withstood even the worst financial crisis since World War II. The decline in rental rates will continue until the oversupply is addressed.
But while construction has slowed significantly, it’s undoubtedly not halted. Investors should closely observe the new developments in their markets and avoid setting up shop in areas that already have robust supply.
Since self-storage has a healthy demographic and unique characteristics not found in other real estate investments, it will bounce back more quickly than others.
5 Reasons to Invest in Self-Storage Facilities
These are some of the reasons why you should invest in a self-storage facility:
Asset class returns
According to the data published by the National Association of REITs, the self-storage industry made an average return of 17.43% annually from 1994-2017. For comparison, residential investments only had a return of 13.42%, while office spaces only had 13.26%.
Resilience to recession
The self-storage industry also outperformed other real estate sectors during the Great Recession of 2008. During the economic downturn (2007-2009), the industry made an average of -3.8% return. The sector was the third least affected by the recession, which was only behind healthcare (4.92%) and manufactured homes (0.47%).
This resilience can be explained by the drive for most people to buy more products when the economy starts to recover. So, they need a place to store it.
Also, in times of economic crisis, many homeowners lose their homes due to foreclosure, while others downsize to save on expenses. These people need a place to store their belongings, which may not fit their new homes.
Aside from that, Americans have a penchant for buying too much stuff, and many people develop sentimentality over their belongings, which makes it very difficult to throw them away. This desire to keep everything makes the demand for self-storage seem inelastic, contributing to the sector’s resilience.
Rental rate growth
Self-storage clients are not very price-sensitive since the usual rental fee takes up only a small percentage of their monthly disposable income. So, operators can raise rents as the demand for it grows without significantly impacting occupancy rates.
There’s also a lack of communication between clients at the facility, allowing an operator to raise prices selectively. It enables most big self-storage companies to increase their rates by as much as 12% every year.
Tax perks and cash flow
One of the several benefits of investing in a self-storage business is cash flow. It is often sought by a lot of investors who want to live off of passive income. In the industry, a cash flow of 8-10% annually is normal.
But this income can be offset by taking advantage of property taxes, accelerated depreciation, and debt interest. So, this asset can become very tax-efficient when it is held in a taxable portfolio.
Fragmented market
Since small investors own most of the self-storage industry, and it has seen massive growth in the past few years, it has caught the attention of large companies. But only 18% of all the existing facilities are managed by public companies, and small businesses own around 82%.
This fragmentation can encourage well-funded and sophisticated investors to acquire individual assets and portfolios at reasonable cap rates and eventually gain scale. Once these portfolios stabilize, they become an attractive asset for REITs, making a good exit for you as an investor.
Financing self-storage investments
Finding ways to finance your self-storage facility is very important. So, you should avail of the loan programs offered by the Small Business Association (SBA), such as the SBA 504 (to develop your facility) or the SBA 7a (to acquire an existing business).
Although SBA loans are recourse loans, their rates are often very competitive and only require about 10% to 15% of down payment. You can also include working capital and capital improvement costs into the loan.
Aside from SBA loans, you can seek conventional financing, which will require around 20% down payment but will not include working capital or capital improvements into the loan itself. It will also have a balloon after some years.
Conclusion
Self-storage investing can give you an asset with property appreciation, stable cash flow, and proven resilience from recessions. On the broader level, the self-storage sector is growing exponentially, and it is still undergoing consolidation.
So, there are still many opportunities that haven’t been grabbed by the more prominent players. All of these factors make the self-storage business a very attractive addition to diversify your portfolio.
