Self-storage facilities are a relatively new asset class. Investors are finding this unique investment property especially appealing due to low default ratios and relative resistance to recessions. In fact, self-storage is considered by Wall Street analysts to be “recession resistant.”
Investors also find this asset class attractive thanks to lean operating strategies. Very little staff is needed, since tenants don’t visit their storage areas daily, and once there is a vacancy, a new tenant can be placed in the space almost immediately. In addition, the break-even occupancy rate for storage facilities is much lower than that of apartments or retail properties.
Typically properties can operate with a 45% breakeven ratio as compared to 65% for other commercial properties. When you combine that with the fact that self-storage facilities hold value better, this asset class becomes even more lucrative.
Types of self-storage facilities
Self-storage facilities differ greatly in terms of size, quality, and construction. Some properties are specially built for storage, while others are commercial properties creatively re-purposed for self-storage.
In 2016 there were more than 54,000 units throughout the U.S., and as demand rises, so does the level of security and sophistication. Units in many urban centers, for example, offer CCTV monitoring and key card access.
Older facilities were one-story buildings with only a padlock for security. Modern facilities are much more sophisticated, offering climate and humidity controlled spaces and much stronger security measures. Some facilities even offer specialty storage for high-priced items such as boats, wine, or art.
If you’re an experienced investor who is new to self-storage, you will need to educate yourself about the demand drivers unique to the asset class.
What to look for in a self-storage facility
High traffic count
Most people discover self-storage facilities on their way to and from their home or work. Thus you’ll want to make sure any property you are considering has a high traffic count – at least 25,000 cars per day – past the facility.
In the same vein, facilities need to be highly visible and easily accessible.
Decent population count
Self-storage facilities do better in larger population areas. And while smaller towns may have the space needed to build a large facility, they won’t have the population count to draw enough tenants to your facility. Look for a population count of at least 25,000.
Make sure prospects have enough disposable income
Self-storage isn’t cheap, and in order to pay a monthly fee of $100 or higher, prospects need to be making a significant amount of money per month.
Additionally, only people in a certain tax bracket will have the money to spend on extra items that need to be stored. Therefore, you should be looking at an area with a minimum household income of $50,000 a year.
Be wary of over-development
Self-storage facilities are all over the country; however as an investor, you want to find a market with a limited supply of facilities – basically, one that allows no other facilities to be constructed. This ensures you don’t have an unending supply of new facilities competing with your facility.
At the same time, you also need to make sure that there isn’t too much space already on the market. Six square feet per person is the absolute maximum, and you would do well to have a significantly lower ratio.
At the end of the day thorough due diligence, evaluation of the location, and crafting a good exit plan is the same for any other type of commercial real estate, and self-storage is no different. You’ll still need to run the numbers and do your homework in order to identify a good deal and make it work.
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