Investing in Self-Storage
Investing in self-storage has emerged as a lucrative opportunity in the commercial real estate market, offering numerous advantages and attractive returns. Self-storage facilities allow individuals to securely store their belongings during relocations, educational pursuits, home staging, travel, downsizing, etc. – making it a steady sector that will be in constant demand. With its absence of tenant-related concerns that come hand in hand with multifamily investments, the self-storage market offers investors a streamlined avenue to attain profitable returns on their investments.
Is Self-Storage a Good Investment?
The self-storage industry has experienced steady growth fueled by changing consumer behaviors and evolving market demands. Below are additional reasons why self-storage is an appealing choice for CRE investors.
Consistent Demand
Traditionally, the peak period for self-storage activity spans from April to September. Regardless of the season, people and businesses will need extra storage space for their goods due to downsizing, moving, or simply a desire for more storage. This inherent demand ensures a consistent flow of clients and lowers the risk of vacancies, making self-storage a stable investment option. The self-storage industry also boasted an impressive average occupancy rate of 92 percent nationwide in 2022.
Limited Competition
Unlike some other CRE sectors, self-storage remains a fragmented industry with low competition in many places. While there are significant participants, smaller investors also have opportunities to enter the market and develop lucrative storage facilities. Currently, it is estimated that there are over 51,000 storage facilities actively running in the U.S., according to the SelfStorage Almanac of 2023. The ownership within the industry is divided. Data provided by SpareFoot states that six public companies own approximately 36.6 percent of the self-storage space based on rentable square footage. The remaining percent of self-storage space is owned by operators (22.4 percent) and private investors (41 percent).
Strong Cash Flow
Due to monthly payments collected from tenants, along with relatively low operating expense ratios, self-storage assets often provide significant cash flow. Month-to-month leases allow for owners to periodically increase rental rates on existing tenants, providing an opportunity to continuously grow top line revenue.
Average Monthly Cost for a 10′ x 10′ Storage Unit
- Standard Unit: $116.46
- Climate Controlled: $134.20
Source: Life Storage Blog
Lower Operating Costs
Operating a facility is relatively straightforward compared to other real estate ventures. Investors can benefit from self-storage as it provides a hassle-free means of generating investment returns.
The expenses associated with operating these facilities typically range from 30% to 40% of Effective Gross Income, depending on the size and location of the facility. These costs primarily include utilities, payroll, site maintenance, and marketing.
Recession-Resistant Investment
During economic downturns, when other industries may experience increased vacancies or lower rental rates, self-storage has historically remained consistent. In fact, as individuals and organizations downsize or suffer temporary financial restraints, the demand for storage space can even increase during difficult times.
Market Data
According to Storeganise, the average cap rate for self-storage facilities is 6.5 percent. At the same time, the overall revenue for the sector reached over $39 billion in 2022. Additionally, the use of self-storage increased to 14.5 million customers in 2022, up by 970,000 since 2020, according to YardiMatrix.
As of March 2023, there were 4,735 self-storage properties in various stages of development, according to Yardi Matrix. This included 656 properties that were being considered for development, 1,896 facilities in the planning phase, and 817 properties currently under construction. There was a noticeable increase in construction activity, with the percentage of projects under construction rising to 3.7 percent of the total inventory. This represented a 10-basis-point increase compared to the figure reported in February.
12-Month Sales Data
- Transactions: 5,449
- Sales Volume: $28.2B
- Properties Sold: 4,985
- Sold SF: 254M
- Average SF: 46.5K
Source: CoStar Group
Takeaways
As the storage sector grows and evolves, investing in self-storage facilities can be wise for individuals looking for a steady and profitable addition to their real estate portfolio. However, rigorous study, cautious due diligence, and consultation with financial professionals are required to make informed judgments and optimize possible profits.
