The High-Level Guide To Investing In Self-Storage Properties
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
The self-storage industry is a rapidly expanding sector in the global commercial real estate market, seeing steadily rising interest from investors attracted by the sector`s robust fundamentals, relative stability, and enticing yields. Self-storage facilities` appeal as an investment opportunity comes from several key factors, including population growth, declining homeownership, the rise of e-commerce, and the aging population. They come in several flavors:
Single-Story Self-Storage Facilities
Single-story facilities are often the most cost-effective to build and operate. They allow for direct outdoor access to storage units, which can be appealing for customers as it permits easy loading and unloading of items. This building type is common in suburban and rural areas where land is cheaper and more abundant.
Multi-Story Self-Storage Facilities
Multi-story facilities, on the other hand, are common in urban areas where land costs are high. While construction costs are typically higher than single-story buildings, these facilities can offer more rentable square footage. They may also offer climate-controlled units, which can command higher rents.
Climate-Controlled Self-Storage Facilities
These facilities offer temperature and humidity control, which is essential for customers looking to store sensitive items like electronics, artwork, or wine. They are typically more expensive to build and operate but can command higher rents.
Vehicle Storage Facilities
Vehicle storage facilities cater to customers needing to store cars, boats, RVs, and other vehicles. These facilities may offer both indoor and outdoor storage options. Indoor vehicle storage provides more protection for vehicles but is more expensive for the customer.
Portable or Container Self-Storage Facilities
Portable or container storage is a relatively new model in the self-storage industry. Companies deliver a storage container to the customer`s home, which the customer fills with their belongings. The company then collects and stores the container at its facility or the customer`s chosen location.
In addition to the physical attributes of these storage types, their success also relies heavily on location, local demand, competition, and local economic conditions. As such, operators and investors should carefully consider these factors when determining which types of facilities to develop. Despite these considerations, the self-storage industry`s outlook remains positive due to persistent demand driven by the four horsemen: population growth, urbanization, lifestyle changes, and economic factors.
Population Growth and the Self-Storage Market
Increasing global population growth is playing a significant role in the escalating demand for self-storage facilities. As the number of people nationwide continues to grow, and as they transition into new homes or locations, temporary storage for personal belongings often becomes a necessity. This shift creates a steady stream of potential customers for self-storage operations, bolstering the sector`s growth and making it an attractive investment prospect.
Declining Homeownership and Self-Storage
In recent years, the United States has seen a gradual decline in homeownership rates, resulting in an increased number of renters. These renters often have limited space and require additional storage for their possessions, giving rise to a consistent demand for self-storage units. This trend toward declining homeownership enhances the appeal of investing in self-storage facilities in the very short term but could change as the millennial generation, known for its preference for greater inclusion, takes the economic mantle from the Boomer and Gen X cohorts. Home ownership rates have oscillated between 63 and 68 percent of the population since 1961, therefore `declining` should be viewed in a relative sense.
E-commerce and the Demand for Storage Space
The rise of e-commerce has revolutionized the way people shop, leading to an increase in home-delivered packages. This surge in package deliveries has correspondingly increased the need for secure storage spaces where these parcels can be kept until they are picked up. As a result, the self-storage industry has found another avenue for growth.
Aging Population and Self-Storage Needs
The world`s population is not only increasing but also aging. As individuals grow older, they may need to downsize their homes, requiring self-storage for their possessions. This shift towards smaller living spaces among the aging population further drives the self-storage industry`s growth.
Regional Growth of Self-Storage Facilities
While the self-storage industry is witnessing substantial growth globally, the growth rate varies across US states and localities. Self-storage tends to cluster at destination points during periods of high migration, thus the states experiencing the highest growth rates for self-storage facilities so far in 2023 include Utah (10.4%), Arizona (9.8%), Texas (9.7%), Nevada (9.4%), and Florida (9.3%).
Key Factors Driving Rent in Self-Storage Facilities
Certain factors allow a self-storage property to command higher rents, including location, size, amenities, and high occupancy rates. Facilities in high-traffic areas or those offering larger units and enhanced amenities such as climate control and advanced security systems can charge higher rents. Similarly, facilities with high occupancy rates are more likely to command higher rents.
Challenges in Raising Rents for Self-Storage Properties
While several factors can enhance the ability to raise rents, certain elements can hinder this capacity. These include intense competition, adverse economic conditions such as those fled by people moving out, and restrictive regulations. Self-storage facilities in regions with high competition may find it challenging to increase rents. Similarly, during a recession, people`s reduced ability to afford self-storage can hinder rent increases until conditions improve, if ever. Additionally, new regulations increasing operational costs can make it difficult to raise rents.
The Risks And Dark Sides Of Self-Storage Properties
Despite the growth and economic potential of the self-storage industry, it also has its risks and potentially negative impacts on the communities it serves. Some critics argue that the self-storage industry has demonstrated indifference towards the communities in which they operate. Instances of homelessness and illicit activities within self-storage units have been reported. In one case, a man was found dead in a self-storage unit where he had been living, highlighting the issue of housing instability and the desperate measures some individuals resort to. Storage facilities, often marked by bright colors and windowless designs, can sometimes become magnets for criminal activities, such as meth labs, given their low supervision and accessibility. Furthermore, the rising proposals for constructing self-storage facilities, particularly in areas previously reserved for industrial zones or along highways, can lead to the displacement of other community-benefitting establishments and disrupt local ecosystems.
Conclusion
Investing in the self-storage industry offers attractive growth opportunities driven by several continuing societal and economic trends. However, potential investors should be aware of the sector`s challenges, including competition, economic conditions, and regulation not to mention potentially having social issues thrust to the forefront of investing decisions, which can complicate matters. Despite these challenges, the self-storage industry`s overall growth prospects remain robust, making it a likely profitable investment option.
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