American culture is, in part, defined by our consumerism. The stereotype dates back to our conspicuous consumption of the 1950s, and even in the present, retail sales and other purchasing data help economists analyze the strength of our financial state.
And when it’s time for retirees to downsize, jobseekers
to rent a small apartment in the city, or a suburbanite wants to free up garage space to park their new Harley-Davidson, those extra possessions must go somewhere.
This is, in part, why public storage units have grown into a big business and are more popular than ever. Storage units are so common in the United States that, as of 2015, America had more self-storage facilities than it did McDonald’s restaurants.
With all this income potential, institutional investors are getting involved. What was once the territory of active investors and mom-and-pop operators, the storage unit sector is drawing in major real estate players, opening opportunities for passive investors to share in the profits.
Like multifamily real estate, investing in self-storage facilities provides a unique combination of benefits and brings exceptional potential for cash-flowing properties.
In this article, we’ll outline the reasons why you should invest in self-storage units as well as shed some light on any potential drawbacks.
Benefits of Investing in Storage Units
Phenomenal Rate of Return
The recent rate of return on self-storage units has been head-turning, the type of figure that makes the data look like a misprint.
According to Yardi Matrix in their 2017 Self-Storage Seasonal Report, titled Self Storage Industry Overview and Analysis, “During the last decade, self-storage investment returns for both private assets and public owners such as REITs have outpaced most property types. Cash yields in self-storage can be strong, and rent growth in recent years has outpaced most commercial real estate.”
And to dig into the figures, the National Association of REIT, in their breakdown of annual price and total returns by property sector from 1994-2019, reported that self-storage managed an average return of 16.73%, outpacing heavy-hitters like the 12.89% of office real estate and 13.69% of residential REITs (real estate investment trusts).
While REIT returns do not reflect any individual self-storage facility’s performance, they are an effective barometer that demonstrates that this industry has been a top producer.
The storage unit business is remarkably sustainable. Bear or bull market, public storage facilities are in demand.
When markets are up and wages are strong, consumers tend to spend their disposable income, leading to more possessions. When they need a place to keep those excess possessions, they turn to self-storage options.
In rocky economic conditions, people move out of luxury apartments or may be forced to downsize. As storage space tends to be cheaper per square foot than residential space, once again, they turn to storage facilities to store their excess belongings.
Rent Increase Potential
Landlords can incrementally raise prices for storage unit rentals with little tenant blowback or turnover.
This is because, once they’ve leased a unit, tenants are unlikely to move their items out due to small rent increases.
For example, let’s assume a tenant is paying $150/month for their storage unit. If the amount goes up to $158/month, that tenant is unlikely to spend the money renting a moving truck and taking the time to take their items elsewhere to save $8 a month.
This potential for regular price increases, multiplied across potentially hundreds of units per facility, can help add up to significant investor profits.
While institutional investors and large, sophisticated REITs are active in the self-storage sector, most of these operations are still run by mom-n-pop operators.
In their same report, Yardi Matrix estimated that there are approximately 50,000 self-storage properties in the U.S., with half held by owners with only a single location. They also pointed out the six largest REITs and corporations in the sector own or manage just 20% of U.S. Property.
This could mean significant revenue opportunities are being left on the table.
It’s rare to find small-scale managers operating with the efficiency and sophistication of a large company. With every task in one or a few employees’ hands, they may be underpricing their rentals, underinvesting in marketing, missing out on partnerships with truck rental companies, etc.
The potential for institutional investors to swoop in, buy up smaller operations, and implement cost-effective improvements through sophistication at scale is enormous. And this, of course, all leads back to higher yields for you, the investor.
Possessions, Not Tenants
Operating storage facilities, compared with other real estate, can be a neat and tidy business.
While there are rental agreements, storage units don’t house tenants. This means you can avoid evictions and bad debt, which can drive down investor profits in other types of real estate.
You’ll have some maintenance costs and compliance requirements, but since you don’t have tenants, the average storage facility structure has fewer types of maintenance issues to contend with than some other classes of real estate.
Each structure is made (mostly) of concrete or steel walls and floors, which are cheaper to maintain than wood, glass, or stucco. And you won’t need to replace things like water heaters, toilets, or sinks.
Downsides of Public Storage Investment
As with any real estate investment, public storage units come with some risks. Here are the factors that can affect your profits.
Turnover and Vacancies
As part of the natural course of the business, each month many customers will end their lease and move their possessions out, leading to vacancies.
However, with many units within just one property, several move-outs in a short period doesn’t necessarily cripple your profits. For example, losing a few units out of hundreds available in a storage facility isn’t like a massive commercial tenant moving out of an office building with just a few rental units total.
Thieves can be drawn to storage units. Hiring security crews and buying expensive cameras, locking mechanisms, etc. may be required, all of which can add to operating costs and subtract from your profits.
As with any piece of real estate, location is still an important consideration, as occupancy is a strong factor in whether a storage unit business will succeed or fail. If the facility is away from multifamily housing, military housing, or colleges, all of which generate demand for storage, the unit could struggle to fill its spaces.
And if a storage facility is in a highly desirable market, it may be saturated with competitors, forcing your operator to lower prices or offer incentives to fill spaces.
Ease of Use
Any facility must be easy for its tenants to use. If it’s hard to get a delivery truck in and out of the spaces, like a steep driveway, this can hurt occupancy rates.
Strength of Competition
As more competitors enter this market, it may be more difficult to separate one storage unit from another in the mind of the consumer, forcing lower prices.
Offering features like apps to pay bills or climate control can make a difference, but these features come at an added cost.
Stability and High-Profit Potential
Like it or not, the United States economy is, in large part, based on consumption; and storage units feel almost as American as McDonald’s famous Golden Arches, blue jeans, or Coca-Cola.
And all those goods we buy need a place to park.
Once the territory of mom-and-pop operators, corporations and syndicators are taking notice of the profit potential in self-storage real estate investments, bringing savvy passive investors along for the ride.
But with new construction and more investors entering this market, our recommendation is to get in on the action before this window of opportunity narrows.
At Birchstone Investments, we help investors create passive income streams and grow long-term wealth through strategic commercial real estate investments. If you’re interested in learning more about investment opportunities, join our investor community today.