Are Storage Units Profitable for Investors?
If you have been thinking that you would like to diversify your portfolio into self-storage facilities, you’re not alone. The self-storage industry is thriving with annual revenue of $39.5 billion dollars in the United States and growing. Self-storage properties can be a very profitable business with nearly 1 in 10 Americans paying each month into a self-storage facility.
Real estate investors are taking a closer look at this asset class because of its high return on investment and because it is projected to have a compound annual growth rate of 134.79% between 2020 and 2025, according to Forbes.
Why Is Self-Storage the Fastest Growing Segment in CRE?
The self-storage market has been the fastest-growing segment of commercial real estate over the last 40 years, and the projections for investors are very favorable. Why is that? Well, there are a number of factors. As more people work from home, it is predicted that more room will be needed for home offices, which means there will be an increased need for storage.
Additionally, with housing costs, rents, and interest rates increasing, people are having to size down and buy or rent smaller properties, which means, again, there will be an increased need for extra space storage.
Furthermore, as Americans have accelerated their migration trends moving from one place to another more frequently this too has caused a consistent demand for storage units. In fact, self-storage outperformed all other sectors in commercial real estate during the pandemic according to the National Association of Real Estate Investment Trusts.
Self storage units are essentially metal boxes that are proving to be very profitable, recession-resistant assets that need very little maintenance and oversight, and have lower vacancy rates than most other commercial real estate investments. Cha Ching!
The Advantages of Investing in Self-Storage Units
As we already discussed, there are many benefits to becoming a self-storage investor but let’s dive in a bit deeper as to why:
1. High Demand – As mentioned previously, the demand for storage units has been on the rise as people become more mobile and need storage space for their belongings. Additionally, storage units are often used for business storage solutions, which is something we won’t elaborate on in this article, but there is a niche for this type of storage as well. This creates an overall steady demand for storage.
2. Low Maintenance – Self-storage facilities require minimal daily maintenance and very little management. In fact, with technology, self-storage units have become even easier to maintain and manage. Additionally, there is low tenant turnover, making them relatively low-maintenance investments compared to other types of real estate investments.
3. High Returns – Self-storage investments can yield high returns for investors. Considering the low cost to build, and low management and maintenance costs, these types of assets can produce a great return on investment for both private investors and REIT (real estate investment trust) investors.
4. Low Vacancy Rates – Self storage facilities typically have low vacancy rates due to the steady demand for storage space. This means that storage owners are able to rely on a steady stream of income from storage rentals.
5. Recession-resistant – Self-storage units can be a recession-resistant investment. During the full spectrum of economic conditions – times of prosperity or inflation or during economic downturns – there has been a steady demand for storage units.
Other Favorable Factors for Self-Storage Investing
6. Economies of scale – Self-storage facilities typically have several hundred units. The size of a facility can range from 50-700 or more. With economies of scale of this magnitude, all expenses become minimized across a larger segment of assets.
7. Easier/quicker eviction processes – Every state and municipality has an eviction process for self-storage owners and managers. We won’t go into the myriad of what various states allow/disallow, but the eviction process overall is typically much shorter for self-storage assets than a tenant eviction process with other commercial real estate assets, which helps to mitigate losses.
8. Shorter leases than other commercial assets – a shorter lease cycle allows operators to be more nimble with rent increases when economic cycles such as inflation kick in.
9. Low cost to build – construction costs to build a new facility are low in comparison to other commercial build-outs such as an apartment building. Even as construction supply costs spiked, the average cost per square foot to build a single-story facility is roughly $65 – $85 per square foot. Development costs will vary depending on the cost of land and labor costs and the market rates of the area, of course.
10. Broad customer base – While other asset types have a specific customer base, self-storage businesses appeal to a much more broad and diverse customer base which provides more stability.
In addition, storage facilities can be well-positioned to generate capital appreciation due to their high demand, convenience, and affordability.
Finally, storage facilities require less upfront costs than traditional rental properties.
What are the various types of self-storage facilities?
Self-storage facilities come in a variety of shapes and sizes, ranging from traditional storage units to mobile storage containers. In addition to single storage units, storage facilities also offer storage space for businesses and larger items such as vehicles or boats.
Here are the most typical self-storage facilities:
Outdoor drive-up storage units are some of the more popular asset types for investors. These facilities provide a cost-effective way for renters to store household items or even vehicles so they are usually in high demand. These are also the most cost-effective to build and require lower costs to maintain, so they can get overbuilt.
For investors, storage facilities offer a variety of storage options beyond traditional storage units. These include specialty storage units that feature additional amenities or services, such as climate control storage units. Climate-controlled storage units provide greater protection from extreme temperatures and humidity levels than traditional storage units.
Climate-controlled storage units are often more expensive than traditional storage units. They are typically more expensive to build and maintain, but that cost is passed on to the renters.
Vehicle & RV Storage
Vehicle and RV storage is an increasingly popular storage solution for investors. Storage facilities typically offer dedicated storage units or outdoor storage areas specifically designed to accommodate vehicles like cars, motorcycles, boats, RVs, and trailers.
These storage services feature larger storage units and additional amenities to accommodate the unique size and needs of RVs and boats, such as 24/7 surveillance cameras or outdoor power sources.
Mixed-Use Self-Storage Facilities
Investors looking to enter the storage space have a variety of options. Mixed-use storage facilities are becoming more popular, offering storage units and other commercial uses such as retail, industrial, warehouse, office space, and storage under one roof. Mixed-use can often decrease the risk of the overall investment.
How to Invest in Self-Storage Facilities
Indirect ownership is a more passive approach to storage investments. This involves purchasing shares in a storage company or investing in storage unit-backed securities such as real estate investment trusts (REITs). These types of investments can provide investors with access to the storage industry without having to purchase storage units directly, reducing the risk associated with direct ownership.
We generally discuss multifamily syndication here at PCRP Group, so you may be familiar with the term “syndication”, but you as an investor can own part of a self-storage facility as well by way of syndication. Participating in self-storage syndication is a great way to have direct ownership in a self-storage facility, unlike with a REIT where you have indirect ownership.
What to look for with a self-storage investment?
High Occupancy Rates: Always look at the occupancy rates of the investment you are reviewing as well as the occupancy rates of the competitors. You want to make sure the demand is there, and the occupancy rate is just one metric you will want to look into.
Square footage of storage units per capita in the area: According to Lev Capital, the national average is 7 square feet per person, so you will want to make sure that the area you are investing in has 7 square feet OR fewer of storage units per person to be competitive.
High Per Square Footage Price: The higher per square foot the better because that means that there is more demand and less supply for storage units.
Condensed Living Areas in Vicinity (small homes or apartment living): It would stand to reason that the smaller the living areas in and around your proposed investment, the better the investment would be given that people with less space will be more likely to need storage.
What are the risks associated with storage unit investments?
When investing in storage units, there are some risks to consider.
These include a drop in market demand for storage space and the potential for increased rental vacancies.
There is also the possibility of overbuilding in the self-storage sector because of the low start-up costs and the lower maintenance and management costs that are typical with this asset type.
Also, there are a number of zoning and regulatory actions that investors should be looking into before investing in a self storage facility. For example, some municipalities have instituted zoning changes that require certain storage facilities to become mixed-use facilities requiring the ground level to be office space, restaurant space, or retail. So investors should research the storage facility’s zoning and regulatory compliance standards before deciding to invest.
Additionally, storage facility insurance costs can be substantial and self-storage operators may be exposed to significant liability in the event of tenant injury or property damage. Furthermore, storage facilities are often subject to natural disasters such as floods and earthquakes, so it is important for investors to understand their exposure to these types of risks.
Clearly, self-storage investing can provide for lucrative real estate ventures. It’s no wonder why more and more people are looking to invest in storage units as a way of diversifying their portfolios and generating long-term returns.
As families seek smaller and more affordable spaces to live and work and while businesses move out of commercial buildings and office spaces, the need for more space will only fuel the self storage industry.
As storage facilities continue to grow in popularity due to changing lifestyles and increased demand for storage solutions, these types of investments can offer investors a profitable opportunity to enter this industry.
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