Self-storage is considered one of the newest and hottest asset classes in commercial real estate. Self-storage has seen tremendous growth over the last many years and has proven to be a recession resilient asset class.
All commercial real estate sectors reported a negative growth during the great recession in 2008, anywhere between -25% or worse, self-storage posted a gain of 5% during the same time period.
Types of Self-Storage Facilities
Self-storage facilities come in various styles, shapes and sizes. They can vary anywhere from ground up storage construction to conversions of existing industrial or retail centers for the purpose of storage.
In general, the most common types are as follows:
1. Drive-Up/ Non-Climate storage
Drive-up outdoor storage is the most common type of storage that people are most familiar with. It typically includes small buildings with roll up doors to store your stuff. The units come in various sizes and are cheaper than the climate controlled units.
2. Climate-Controlled Storage
Heat, cold, and extreme humidity can harm certain good and sensitive furniture, documents etc., especially in some states. The best way to protect it is with climate-controlled storage units, which can be a good solution. These storage centers are rapidly growing across the U.S.
3. Boat, Vehicle and RV Storage
The storage industry seems to be ever evolving and there has been a tremendous growth of Boat and RV storage in recent years, partly due to HOA restrictions regarding boat and RV parking in many communities.
Certain storage facilities are providing solutions for people who have an extra vehicle such as a car, boat, or RV. Safety is of utmost importance for vehicle parking location.
On top of that, certain Class A RV and boat parking sites have options of canopy covered parking, climate-controlled units, washing stations and dump stations.
Pros of self-storage investing
1. Recession resilient
This asset class by far has historically outperformed other CRE asset classes during recession.
It is partially due to 4 D’s that lead to the growth in self-storage industry, that get exacerbated during recessionary environment: Displacement, Divorce, Downsizing and Death.
2. Less maintenance & operational expenses
Apartment complexes and offices, like many other real estate classes, require intensive management and operating costs, which can be very capital intensive and can hurt the business plan in the long run.
On the contrary, self-storage units require less ongoing capital expenses and recurring costs to maintain or upgrade the facility.
3. Diversification
For a buyer, Self-storage units offer the benefit of diversifying between number and type of units, non-climate controlled and temperature-controlled units, adding boat or RV storage, which gives flexibility to have different streams of income within an asset class.
4. Frequent price upgrades
Unlike retail, office or apartments, in most cases, self-storage allows an owner to adjust or raise rents on a monthly basis. Terms of lease contracts can be updated every month.
5. Less liability
Multifamily apartments, office buildings can carry substantial liability for the landlords. In self-storage, tenants do not reside on your property, and there are a lot fewer reasons to worry.
6. Multiple income streams
Besides renting storage units, income can be increased by selling retail storage supplies, offering tenant insurance or truck rentals amongst others.
Cons of self-storage investing
1. Struggle to find good staff
Finding a good staff and a good manager can be tricky. It is very important to have a good team and great employees to make investment successful.
Since your staff is boots on the ground for your property, they carry a lot of responsibility and play a major role in day to day operations of the facility. So choosing the right team may take some time.
2. Tenant problems
Sometimes the tenants can be unreasonable and demanding that may cause unforeseen challenges.
Delinquency, living in the storage units, non-payment, or just bad tenant behaviors can cause some roadblocks in the smooth operations of a facility. So make sure you are ready to face such challenges if you decide to dive into the world of self-storage.
3. Location, location, location
The age old saying holds true for storage facilities, as it is with some of the real estate classes. A great location for self-storage includes high visibility on a busy street, densely populated area or next to a freeway.
In case of a new construction or buying an existing facility, a poor location or one with a low traffic count can have an adverse effect on the investment and may be enough to derail the business plan. Having a good location is of paramount importance.
4. Risk of oversupply and competition
Self-storage is a growing asset class and the cost to construct a new facility is cheaper as compared to say apartments or office buildings. Therefore, if multiple new storage units are planned in a submarket in the near future, occupancy can dip and you may have to offer discounts or concessions such as first month free rent etc.
Most experienced storage owners will tell you that an occupancy rate in a self-storage business varies and is not guaranteed.
With big life changes like moving, divorce or downsizing, occupancy rates at storage facilities can vary month to month, since renters are on short term leases. Nearby competition can affect occupancy rates as well.
5. Security Expense
It is very important to provide a clean and safe place for people’s belongings that they cherish and have an emotional attachment with. A storage facility should have strong security protocols in place.
Storage equipment’s range anywhere from security cameras monitoring gate access and individual units to ensuring adequate lighting after hours as well as individual unit locks.
Technology has come a long way in terms of storage units’ security. Security systems can be expensive but it is a necessary expense to ensure growth of your business and customer retention and also to avoid break ins and other unforeseen circumstances.
Self-storage investing – Key points
Self-storage is a very dynamic asset class which is rapidly evolving and profiting from New World Order.
Remote work lifestyle: With more and more businesses adapting work from home culture, the need for home office and home gym is more now than ever, making self-storage an ideal place to store that extra stuff to make room for the equipment.
Downsizing retail space: Business owners are evaluating the need for downsizing retail space, creating the need for extra storage space for the inventory. Many retailers and local businesses store their extra inventory in the storage units.
Trend towards being a renter nation: Due to increasing costs of living and construction, people are turning to more affordable lifestyles, prefer to stay as an apartment renter as well as the increasing average age of first-time home buyers favor the growing demand for self-storage space.
Baby Boomers retire and many downsize to smaller houses or apartments due to maintenance costs of a large home, further fueling the demand for self-storage.
Technological advances: Self storage is quick to incorporate and embrace new technologies. Retail kiosks, self-service kiosks, online unit rentals, digital or smart unit entry as well as online automated payments make the experience not just pleasant, but also stress and hassle free for the customers.
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