Self Storage is no longer a 2nd class sector when looking at real estate.
Did you know that nearly one out of every 10 U.S. households rents a self storage unit?(1) This figure is up from one in 17 in 1995. Self storage has risen from relatively modest beginnings to become one of the fastest growing sectors of the U.S. commercial real estate industry over the last 35 years.(1) Once viewed as merely a tool to generate enough revenue to offset carrying costs on parcels of land held for future development (basically land banking), the storage industry has come a long way to carve out a meaningful home amongst more traditional investment sectors like office, retail and multi-family.
While the industry itself has grown by leaps and bounds, the business of self storage at its core is still a relatively simple one. Self storage facilities lease space to individuals, usually storing household goods, or to businesses both small and large, usually storing excess inventory or archived records. The rented spaces are secured by the tenant’s own lock and key. Unlike a traditional warehouse, the facility operators do not have casual access to the contents of the space. In fact, a self storage operator never takes possession, care, custody or control of the contents of the storage rental space unless a lien is imposed for non-payment of rent. Possessions are generally stored are at the tenant’s “own risk” or can be protected by tenant-purchased homeowner’s insurance or by purchasing self storage tenant insurance.
Who uses Self Storage?
Who are the usual tenants in an office building? And who rents space at in a retail center or apartment building? Pretty silly questions and pretty obvious answers: businesses rent office space, retailers and restaurants occupy retail space, and individuals and families dwell in apartments. Now, the big question… who rents storage units? The answer – almost anyone.
The storage industry is the one real estate sector that benefits from a very diverse clientele that encompasses virtually all comers. Roughly 77% of storage users are of the residential variety, 17% of space is utilized by commercial users, and about 3% is leased out to both students and members of our armed forces respectively.(3) The really interesting fact underlying this tenant diversity is just how long each segment typically leases space at a facility.
The average lease duration for residential storage is roughly 14.9 months. This, strangely enough, compares quite favorably to the average duration of an apartment lease which currently runs about 11 months. Seems Americans are more likely to keep the same roof over their stuff for longer than they keep the same roof over their heads. Along that line, the average leases for commercial, students and military (the other three main patrons of storage facilities) is 23.1 months, 2.5 months, and 6.3 months respectively.(3)
While the makeup of the tenant base is clearly quite diverse, the major rationale most of these parties find themselves utilizing the extra space is because of transition. Changing circumstances in both life and business create the need for storage space. In good times and bad, self storage helps people and businesses weather those transitions.
Some of the drivers of self storage usage are:
- Job relocation
- Business expansion or contraction
- Inheritance
- Baby boomers downsizing
- Change in marital status
- Birth
- Military Duty
- Micro businesses
The transitory nature of the self storage business is really one of the major differentiators in how the asset class has fared during recent economic struggles versus the other more “traditional” real estate sectors. In fact, a Cushman & Wakefield study from May of 2009 noted, “Based on the analysis, self storage is resistant to economic recession… Ultimately, self storage market conditions remain fundamentally stable, even during the economic recession and capital market depression.”(2)
Who owns Self Storage?
One of the most unique aspects of the self storage industry is the unbelievable fragmentation amongst the owners of the 50,000 plus storage facilities across the U.S. There are nearly 30,000 unique self storage owners and amazingly over half of them (56.7%) own just one facility. In fact, 85.1% of storage properties are owned by what I’ll call “smaller owners”, who own only one or two properties.(1,4) This is distinctly different than the other real estate sectors – office, large-scale multi-family, and retail – which are dominated by institutional ownership. One main factor in these demographic differences amongst the ownership of these various real estate types is the simple concept of purchasing power.
Pension plans, real estate investment trusts, insurance companies, and other large scale institutional real estate buyers often have the luxury of coming to the acquisition table with much larger piggy banks than the average Joe individual investor that makes up the lion share of self storage owners. With deeper pockets and potentially greater access to financing opportunities, these institutions have the ability to acquire properties trading in the tens to hundreds of millions of dollars. We saw this recently when Cole Real Estate Investments bought a trophy tower housing Microsoft’s Bing division in downtown Bellevue, Wash., in July 2010. Cole paid a hefty $310 million for the 26-story office building in suburban Seattle, making it one of the largest sales nationally throughout 2010.
That 9-figure price tag paid by Cole was just one of many large scale institutional acquisitions that took place last year. Compare that capital outlay to the average price for a storage facility in 2010 of $2 million to $10 million.(3)
It is this affordability gap that has allowed the storage industry to grow primarily on the backs of the “mom and pop” type operators. It is also this extreme market fragmentation that presents a unique opportunity for an institutional buyer that has the requisite experience in self storage operations to gain significant market share and, more importantly, achieve economies of scale which are unattainable for single facility owners.
The Bottom Line
Most real estate investors are familiar with the basic flow of operations: rents are collected from the tenants at the beginning of the month, expenses are paid by the property manager as they come due, and the cash left over at the end of the day is the net operating income (NOI). This calculation of NOI is very important to analyzing a prospective real estate investment HOWEVER that alone doesn’t paint a full picture of the investment opportunity. In order to see the whole picture one must factor in other costs of ownership that fall “below the line.”
An important factor to consider in real estate investing is the cost of maintaining and re-leasing space. It may be very costly to reconfigure or customize office or retail space for a new tenant, or to pay a leasing agent a commission to find a new tenant. These additional costs are sometimes referred to as “below the line” expenses. They are typically not included in the NOI calculation but may still have a dramatic impact on the amount of cash left in the owner’s pocket at the end of the day.
Contrary to the ongoing capital needs of office, retail and multi-family properties discussed above, self storage space is generic, usually requiring little more than a broom to sweep out the empty units, and perhaps the replacement of some light bulbs in order to prepare the units for new tenants. Also there are typically no leasing commissions to pay.
Below is brief example comparing a $10M office building to $10M storage facility. Each property is assumed to have no debt or leverage.
| Office Building | Storage Facility | |
| Rents | $1,400,000 | $1,000,000 |
| Expenses | $600,000 | $250,000 |
| NOI | $800,000 | $750,000 |
| Leasing Commission | $50,000 | $0 |
| Tenant Improvement | $150,000 | $0 |
| Cap Ex | $50,000 | $15,000 |
| Net Revenue | $550,000 | $735,000 |
| Return on Equity | 5.50% | 7.35% |
The Opportunity
There are a number of different avenues for investors considering an allocation toward self storage real estate in their portfolio. The simplest is purchasing and operating a property on your own just like the other small scale owners operating roughly 85% of all of the storage facilities here in the U.S. For folks looking to access the storage market without being actively involved in the day to day operations, you can hire a management company to operate your facility or, simpler yet, you can invest with a REIT or fund that will manage those issues with their institutional mindset.
There are currently five self storage REITs in existence. Four of them are listed and traded daily on the New York Stock Exchange and the fifth stands alone as a non-traded REIT. A public listing on an exchange provides the investor with daily liquidity, however the value of the shares may move up and down with market sentiment just like any other exchange-traded stock. A non-traded REIT, which is relatively illiquid, can provide added stability of your stock price because the value of your shares is more closely tied to the underlying real estate, rather than responding to the whims of the stock market.(5)
There is no right or wrong way to invest in self storage though there may be an option that is better suited for you and your current and future investment needs. With that said, if you’re one of those folks curious about what a storage investment could do for your portfolio, please contact the South Coast team to learn more today.
For more information on Self Storage or to schedule a free consultation, please contact the South Coast Office.
Posted by Kelly
Disclosures/Citations:
- Self Storage Association “Industry Fact Sheet” (4/10)
- “Recession Resistant – It May Not Be Exactly Recession Proof, But Self Storage Real Estate Is Staying Afloat” – Cushman & Wakefield Business Briefing, Self Storage, May 2009. While the self storage industry may be resistant to recessions, there is no guarantee that a related investment will realize a profit or prevent against a loss. It is possible to lose money on such an investment.
- 2010 Self Storage Almanac
- 2009 Self Storage Almanac
- There is no guarantee that you will not lose some or all of your principal invested in either traded or non-traded REITs. For a full description of the risks involved, please request the full offering memorandum for the REIT or fund prior to investing.