The Primer Series #6: Self-Storage

Self-Storage

 Part 6 in a Series by Denis Shapiro

WHAT IS THE ASSET?

Also known as self-service storage, self-storage consists of physical space (such as rooms, lockers, containers, or garages) that can be rented out to individuals or businesses on a month-to-month basis.

I was born in 1987. During my lifetime, the percentage of the U.S. population that uses self-storage has grown from less than 3% to 8%[1]. That’s a 166.67% increase! This is a mind-blowing number when you consider that according to the U.S. Census, the population in the United States increased only 35%—from 242.3 million to 327.2 million—during the same time period. Can you imagine the sheer volume of “stuff” that is being stored to justify these numbers?

Now look at those numbers in a different way: How would you like to profit from a customer base that totals over 26 million people? If that was the population of a state, it would be right behind Texas as the third largest in the United States!

When I first started doing my due diligence about investing in self-storage, the one thing that I found fascinating is how complementary storage space is to commercial real estate. Everything that can be a negative for an apartment building operator is somewhat of a positive for self-storage.

This is illustrated by what is commonly known in the self-storage industry as the “4 D’s of life”: death, divorce, downsizing, and dislocation.

As an apartment building operator, those are words you rarely want to hear from your tenants, but they are music to the ears of a self-storage operator because they all cause a huge surge in demand for the asset. It’s no wonder that self-storage has performed extremely well during the tumultuous times caused by the last two economic recessions.

The self-storage industry is in a very transitional time period with new specialty applications—including climate-controlled lockers and wine storage space—being developed on a continuous basis. Here are a few other unorthodox examples that come to mind; they illustrate how operators whose background is not in self-storage have added complementary storage space to their other investments, increasing NOI and investor returns substantially:

  • An operator converted old, abandoned malls into huge, profitable self-storage facilities.
  • A residential operator retrofitted unlivable basement space across 20 apartment buildings with rentable storage lockers.
  • A retail strip operator converted half of his storage into one self-storage facility. His occupancy increased to over 90%.
  • A mobile home park operator added a mini self-storage site on empty land in the park that would not have been able to support additional homes due to zoning laws.

I’m sure this is just the start of the offshoots that will be developed in this explosive industry. At the end of the day, all you need for a self-storage facility is empty land or a vacant building that can be retrofitted.

The cost to build a new self-storage facility is considerably less per square foot than other real estate asset classes because it requires less infrastructure, such as plumbing, electric, and other systems and fixtures that are not required. In general, most other expenses are fixed, and only a small staff is required to run an individual facility, keeping operational expenses low. This model lends itself well to producing a heavy cash flow stream for its investors.

The self-storage model offers opportunities to cross market similar high-profit margin items, such as packaging supplies, insurance, and moving trucks. In fact, you almost always see a few U-Hauls® in every self-storage facility you drive by. If you don’t, you may have just identified an easy way to bring up the NOI for the facility. In my neighborhood, there are actually U-Haul® self-storage facilities going up. I guess everyone wants to get in on the action.

The units themselves are usually secured by the tenants’ own locks, but the facility may provide additional security in the form of gated entries and cameras. The storage facility is typically not liable for any theft or damage of the items in storage, but as mentioned previously, operators usually offer insurance to tenants to cover the contents of their unit.

In the case of tenant delinquencies, an operator can place a lien on the stored goods and retain a third-party auctioneer to sell the items and recoup past-due rent. The time frame for this is dictated by the terms of the lease and the lien laws in the state in which the unit is located.

From an operator’s perspective, self-storage is very much a micro market game. The thing that matters most is looking at the 1-, 3-, and 5-mile radius demographics; roughly 70% of your customers will come from between 3–5 miles from your facility.

This is in contrast to other commercial real estate, where the demographics of the entire market plays a major role. One reason for this is because of how saturated most markets typically are for new self-storage. Most likely, if your radius is too large, you will have encroached on a competitor’s facility.

From an acquisition perspective, over 52% of facilities are owned by “mom and pop” operators.[2] In fact, besides mobile home parks, there are very few asset classes that still have such a large number of small-scale operators—many of which are looking to retire and avoid big overhauls of systems and property renovations. There may also be an opportunity to obtain owner financing since most retiring owners are looking for a steady cash flow in their retirement. Besides owner financing, self-storage facilities are one of the real estate plays that qualify for SBA loans, which allows them to be purchased for as little as 10% down.

From an investor’s perspective, most operators in this space offer opportunities to invest in a fund or individual deals, but they do require accredited status.

It’s worth noting that through diligent networking, you may be able to find joint venture deals where accreditation is not needed, but they would require you to have an active role in the project, which might be too much of a time commitment when starting out. As a general rule, you should be familiar with the space and possibly have already invested in a few deals as a limited partner before entertaining joint ventures.

[1] Self-Storage Almanac. Phoenix, AZ: MiniCo, 2020-2021.

 

[2] Self-Storage Almanac. Phoenix, AZ: MiniCo, 2020-2021.

The Pros and Cons of Self-Storage Investing

 

PROS

  • Asset class performed extremely well in the last two recessions
  • Demand statistics are trending upward
  • Over 52% of self-storage facilities are still owned by mom-and-pop sellers
  • Month-to-month leases allow for quicker rent increases
  • SBA loans make it possible to purchase a self-storage facility with as little at 10% down
  • Low maintenance
  • Healthy cash flow business
  • Construction cost per square foot is lower than other real estate
  • Lower operational expenses
  • Can be added on to other business models, such as mobile home parks or apartment buildings, to increase NOI
  • High-profit auxiliary items, like moving trucks and packaging supplies, are easy upsells
  • Very complementary to other asset classes in commercial real estate

 

CONS

  • More supply in the last five years than in the entire history of the asset
  • Very low barriers for competitors in your geographic area
  • Your competition might be a well-funded REIT
  • Month-to-month leases lead to high turnover
  • Intense marketing and operational requirements

 

 

If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my bookThe Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways

Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.

 

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