Real estate has long been regarded as one of the most reliable and long-term lucrative investment options. Most individual investors have access to commercial real estate investing through multifamily real estate as it is the easiest real estate sector to understand. Luckily, multifamily has performed extremely well and individual investors did not feel a need to understand other real estate sectors.
Given the dramatic change in real estate investing since interest rates started their dramatic climb over 2 years ago, many investors have reallocated real estate investment dollars to self-storage as it is particularly attractive due to its dynamics in cap rates and growth rates in rents. The leading private equity firm, Blackstone acquired Simply Self Storage in 2021 for $1.2 billion and has continued to make acquisitions. Blackstone's rival, KKR, has also started acquiring self-storage properties.
If you haven't paid attention to the benefits and attraction of self-storage real estate assets, it's time you did. This article provides an understanding of self-storage real estate and seven compelling reasons to consider investing.
Understanding Self-Storage Real Estate Investing
There are over 50,000 self-storage facilities in the U.S. – that's more than the number of McDonalds and Starbucks in the U.S. combined. The average storage facility has an average of 550 units. Nearly 10% of all Americans rent a storage unit. The industry overall operates at over a 90% occupancy rate with an average storage unit costing $150 per month. The result is industry revenue of around $50 billion per year. The National Association of Real Estate Investment Trusts (Nareit) projects a 5.8% compound annual growth rate (CAGR) to 2027 (other reports project a 7.5% CAGR) resulting in a $64 billion revenue self-storage market.
According to Nareit, the self-storage asset class has achieved an average annual return of 18.83% over the past 28 years, outperforming apartments at 14.21%, retail at 13.53%, office at 12.10% and the S&P 500 at 8.04% over that same time period.
Is it still attractive to be investing in self-storage? Cushman & Wakefield's report titled "Market Trends and Sector Outlook – U.S. Self-Storage" states: "Self-storage has begun to demonstrate better risk-adjusted returns than typical multifamily. Relative to other commercial real estate property types, investors view self-storage—like a number of alternative real estate asset types—as a safe haven during economic downturns, buoyed by countercyclical demand drivers." Another national self-storage report from Yardi several months ago highlighted "Self-storage demand has historically been recession resilient, coming from a variety of sources, and growth rebounds quickly following a downturn due to month-to-month lease terms and flexible customer rate increase programs."
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Why Invest in Self-Storage Real Estate
1. Demand Stability
One of the most notable attributes of self-storage real estate is its remarkable stability in the face of economic volatility. During the recession of the Great Financial Crisis in 2007 and 2008, according to the Nareit database, self-storage only lost 3.86% in value versus other real estate types that were down much more significantly. Further, as the economy slowed during the pandemic in 2021, the storage REIT index was up an amazing 79.4% – higher than any other real estate sector. Self-storage occupancy rates nationwide have averaged above 90% since 2015. The saying in the self-storage industry is that the demand drivers are the 4 D’s: Death, Dislocation, Downsizing, and Divorce. So, whether we are in a good economy or a bad economy, self-storage seems to be always in demand and has proven to be recession-resistant.
2. High Margin Cash Flow
The subscription-based model of self-storage generates a consistent cash flow, a highly desirable characteristic for investors. Many self-storage leases are month-to-month, enabling facility owners to adjust rental rates frequently, reflecting market changes. Rental increases in self-storage are often tolerated because a 10% increase in storage cost may only be $15 per month (which automatically gets billed to a credit card), while a 10% increase in apartment rent may be $200. Moreover, the relatively low overhead costs associated with operating self-storage facilities of just $3 to $5 per sq ft contributes to a very high net operating income, ensuring a steady cash flow for investors. Tenant turnover in self-storage requires virtually no costs such as broker fees or tenant improvements to market empty units to new users. Self-storage units are immediately reusable, which is unmatched amongst other real estate asset classes.
3. Operational Simplicity
Unlike certain real estate sectors that demand complex tenant negotiations or extensive property renovations, self-storage facilities are celebrated for their operational simplicity. Daily management tasks typically involve customer inquiries, standard lease agreements, and routine maintenance. The absence of intricate buildouts or elaborate lease negotiations simplifies operations and minimizes potential disruptions. Self-storage is the only real estate investment that by many state statutes an owner can sell a tenant's goods if they don't pay rent within 57 days. To a certain extent, the maximum of 2 months’ arrears of rental income is mitigated by and collateralized by the renter's stored items. If you have an undesirable tenant it is much easier and quicker to vacate this tenant by sending the tenant a 30-day notice to vacate the premises as compared to the legal process that would be required in housing statutes.
4. Market Fragmentation = Consolidation Play
The self-storage industry is characterized by significant market fragmentation, with thousands of local and regional players dominating the landscape. According to the Self-Storage Almanac, the 5 huge publicly traded self-storage REITs own less than 30% of the self-storage market. Each public REIT is seeking to buy units in large blocks rather than make hundreds of small acquisitions. The self-storage industry provides a consolidation opportunity for private real estate funds to roll up numerous self-storage facilities and sell the consolidated assets at a premium price to large self-storage REITs and funds.
5. Adaptability and Technological Integration
Self-storage real estate investments have exhibited remarkable adaptability to evolving trends and technological advancements. Software, kiosks, online booking, surveillance systems and remote sign-ins can reduce the need for property management and personnel. With self-storage, you only need to keep the units clean and updated without worrying about things like renovating kitchens or the pool house. Investors who remain attuned to these trends and embrace technological innovations position themselves favorably for sustained success in the self-storage market.
6. Low Tenant Turnover
Compared to residential or commercial properties, self-storage units experience lower tenant turnover. Once tenants have committed to using a storage unit, they are likely to maintain the lease for an extended period, resulting in reduced vacancies and turnover-related expenses. Self-storage unit space, when vacated, has a faster turnaround time (usually in days) for the next customer as compared to the need to renovate multifamily, retail or office space. An indication of low tenant turnover is that self-storage occupancy rates nationwide have averaged above 90 percent since 2015.
7. Diversified Tenant Base
The average self-storage facility has 500 units so the tenant base is highly diversified. And there will only be a handful of empty units available at any one time. 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.
Conclusion
Self-storage real estate investing has proven to be an excellent niche real estate investment through recent economic market cycles. The foundation of its attractive investment position is built on demand stability, lucrative cash flow, operational simplicity, adaptability through economic environments, low tenant turnover and having a diversified tenant base. However, like any investment, self-storage real estate comes with its own set of pros and cons, necessitating professional investment managers with significant experience capable of thorough market research. By understanding the nuances of the market, embracing technological advancements, and maintaining an acute awareness of location dynamics, investors can position themselves favorably to reap the rewards of this compelling investment avenue.If you are interested in investing in a self-storage real estate investment fund, you may consider an opportunity through CityVest, with a much lower initial investment required than purchasing your own self-storage facility.
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