For those investors who may be averse to investing in rentals, they turn to alternative asset classes which offer good returns and less headaches. Another commercial real estate class that is less hands-on but still has the potential for high profit is self-storage facilities.
Self-storage units may not be sexy, as far as investment real estate is concerned, but they can do well in both up and down economies. When the economy is good, people are buying more consumer goods and have to store their excess things. When the economy is bad, people may be forced to move into a small home, again, storing their items in a self-storage unit.
The Numbers Tell a Story
According to the Self Storage Association, there are about 49,000 primary self-storage facilities nationwide, totaling nearly 2.6 billion square feet of storage space and which generates over $32 billion in revenue annually.
The national average for units per facility is about 540 units, with most facilities nationwide being 90 percent occupied. This occupancy rate corresponds to about 9.3 percent of all American households that use self-storage space.
An Asset Class Works for Both Active and Passive Investors
Self-storage facilities can serve both types of investors. Whether an investor wants to be hands-on with their property, or participate in this type of asset class as a fractional owner, storage units offer both options.
Ryan Burke, an analyst for Green Street Advisors in Newport Beach, California, says that growth in self-storage real estate has outpaced any other type of real estate over the past seven years. “Self-storage properties are about 75 percent higher from the prior peak in 2007, whereas apartments, industrial and other commercial properties are only 25 percent above the prior peak,” Burke said.
According to Burke, five REITs operate in the self-storage space. They account for approximately 18 percent of total self-storage square footage across the nation.
For the past several years, REITs have been acquiring and operating hundreds of self-storage facilities, but that practice has taken a downturn over the past year. REITs seem to be divesting on the acquisition of units, in part because of a slowdown in operating income.
The fact that REITs are tapping the brakes isn’t all bad news, however, as it allows individual investors an opportunity to jump into the space.
“As an asset class, self-storage has the potential to generate more income streams than just monthly rent, such as packing materials and truck rentals,” says Rick Sharga, executive vice president at online real estate marketplace Ten-X. He went on to say that “whether you buy and manage a facility yourself or purchase a portfolio and have managers running them for you, self-storage is very much a retail business that is very hands-on.”
A Cash-Flowing, Safe Investment
Although the self-storage business can be operationally intensive, tending to delinquent accounts and turnover, the long-term cash-flow outlook is terrific. Storage units typically turnover about 7 to 8 percent of tenants every month, but because many facilities operate more than just units, including offering packing materials and truck rentals, the opportunity for additional cash-flow is there.
Most analysts also see self-storage facilities as a safe investment. The buildings themselves are generally made out of brick and steel, or shipping containers, requiring nearly no maintenance. Also, when a tenant moves out, the owner simple sweeps out the unit and rents it to the next customer. If a tenant defaults on their contract, you can seize the property under the state’s lien laws and sell it at auction, with the owner keeping the proceeds.
During a recession, owners of storage facilities usually see better returns, as people need to store more of their stuff. For the most part, most analysts agree that it is recession proof, inflation proof, and you don’t have to worry about customers going bankrupt.
Interested in making a loan secured by self-storage collateral? Our team of transactional drafting experts can guide you through the process providing you peace of mind.
Nema Daghbandan, Esq., is an expert real estate finance attorney who advises the leaders in the non-conventional lending space. He will be speaking at the National Innovate conference on January 15, 2019 with principals from Pinnacle Storage Properties and Platinum Storage Group, premier self-storage operators.
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