Hidden Gems: Unearthing the Potential of Self-Storage Facilities

Published: 03-20-24    Category: Investing

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

The inside of a self-storage facility.

Today's investors in commercial real estate (CRE) may be purchasing the types of properties that are making headlines or are currently offered at bargain prices. For example, the recent shift from office to remote work has resulted in a record number of office buildings being converted to apartments or condominiums.

However, not all investors are prepared to purchase one type of CRE, and then make another major investment in remodeling the property to serve a different function. Creating apartments from office space can take months or even years, while investors receive no rental income.

Investors seeking a less complex investment with proven growth are looking at self-storage facilities. While today's self-storage market is valued at over $44 billion, this number is expected to increase to just under $50 billion by 2029.

Self-storage facilities can be an ideal choice for investors looking for a low-maintenance option. Unlike multifamily and office CRE, self-storage units require no renovations or repairs after a tenant moves out. Instead, basic cleaning and pest control are usually all that's required.

Interested in learning more? Here are statistics that explain the factors driving growth.

What's Behind the Self-Storage Boom

Even though the rise of the home office encouraged growth in some semi-rural areas, there's still an increasing number of Americans moving from rural to urban areas, seeking better-paying employment.

The US Department of Economic and Social Affairs has predicted that the growth of urban populations will continue.

In addition, the latest bout of inflation has driven more renters to smaller, more affordable units, resulting in increased demand for self-storage facilities.

States with growing populations offer attractive investment opportunities for self-storage facilities. Texas, Florida and New York are some of the most populous states, with metro areas offering smaller working and living spaces to fit more budgets.

Consumer spending in the United States, especially among urban populations with plenty of discretionary income, also drives the growing need for self-storage. World Bank data predicts that our urbanization numbers will reach 89.16% by 2050.

The initial rise of e-commerce during the COVID-19 pandemic shows little sign of fading. Today's e-retailers are using self-storage facilities as “mini-warehouses” for their products.

Newcomers to e-commerce are attracted to self-storage because of the short-term leases' ease of increasing or decreasing their required space.

If you're making preliminary notes for an investment business plan, you'll want to compare the advantages of purchasing an existing business or building a new, state-of-the-art facility.

To Buy or to Build?

As with other types of real estate, the investment process required for an existing facility is generally faster and less complex than building. Let's compare the two.

Steps to buying an existing self-storage facility:

  1. Begin with assessing the property's overall condition, financial statements, and potential for improvements and modifications.
  2. Research the existing competition, as this may adversely affect your pricing and occupancy rates.
  3. Your lender may require you to present a facility's history of operations to lending sources, together with profitability and cash flow.
  4. An existing facility with an established tenant base translates into almost-immediate passive income.
  5. A bargain-priced facility may require you to prepare a secondary budget for renovations and repairs.

Steps to building a new self-storage facility:

  1. Locating and purchasing suitable land for your facility will require research into zoning requirements, accessibility and nearby competition.
  2. Whether you've planned a climate-controlled or basic facility, construction costs will include design and site preparation.
  3. After the facility is complete, leasing the new facility and establishing a stable occupancy will most certainly affect your cash flow.
  4. Additional funds may be required to cover expenses during the first months of operation or until most units are leased. These will cover utilities, maintenance, marketing, and leasing.

No matter which approach you take, you'll need to decide if the additional costs of climate-controlled self-storage will deliver adequate ROI.

Cooler Tenants Are Happier Tenants

A climate-controlled storage facility will be mandatory for many potential tenants, as they value their belongings and will pay a premium to protect them.

Leasing a unit with consistent temperature and controlled humidity provides lasting peace of mind, especially if you're doing business in a state with extreme summer or winter temperatures.

As an investor/owner, the climate-controlled option can be a winner for several reasons.

You can charge a premium for these units as they offer additional year-round protection for each tenant's stored items.

If your proposed purchase doesn't offer climate-controlled units, you may be able to renovate and improve a portion of your units. This often helps you lease to more drive-by tenants who are new to your area since you're offering a variety of price points.

Many vehicle owners, especially owners of vintage cars and trucks, will prefer a climate-controlled environment to help protect their investments.

Your property's value will increase, which will eventually deliver a higher ROI when and if you decide to sell.

While your facility's quality will help attract tenants, making it easier for them to shop for storage space will be a win-win. Consider adding the following to your facility.

Safety and Convenience Features

Here are some examples of systems that your tenants will appreciate, many powered by recent developments in artificial intelligence (AI).

Instead of keypad access, tenants can enter via an AI-powered system. This can grant access to the facility and individual units by identifying tenants through biometric data or by “reading” license plates.

Augmented reality tools can assist tenants with visualizing their unit sizes and comparing them to items requiring storage before making a decision.

AI algorithms can beef up security by analyzing security video footage and alerting facility managers to suspicious activities.

AI can also analyze data from sensors and other sources to inform management that an HVAC system or elevator may need repair or maintenance.

Keep your facility's energy bill at a minimum with AI-controlled lighting, heating, and cooling systems.

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