Why Isn't Anyone Talking About Self Storage??
Just a quick disclaimer. This is a really long post. Also I am also now employed by a self storage operator so my opinion is probably is not objective.
I was a professional sale person who "retired" on 3/31/2018 to launch the investment arm of self storage business due to my belief in the fundamentals of this asset class. I have invested my own capital in multifamily and I have successfully syndicated multifamily deals over the past 8 years. That being said, I don't think we as investors as giving self storage its' due....
We have all seen the cap rates in commercial multifamily compress and as a syndicator it has been very challenging to find deals even with operators who have significant experience ($1Billion+ AUM) and leverage in the marketplace. I am not saying they don't exist but certainly the environment has changed over the past 2 years.
As I started to explore other asset classes to find returns for myself and my investors I came across self storage. As savvy as the BP community is, nobody is talking about this asset class! Here are the 4 reasons I think we should be:
1. Asset Class Returns:
According to the National Association of REIT (Real Estate Investment Trusts) the Self-Storage sector produced an average of 17.43% annual return from 1994-2017. For comparison here are the returns from other REIT sectors over the same time period. Self Storage outperforms apartments by 4+%
For illustration, let’s assume you invested $100,000 in each one of the REITS above in 1994. You also reinvested your annual returns back into the fund at the end of each year, creating a compounded return. What would that investment look like 23 Years later?
2. Downside Protection:
According to the NAREIT the self-storage asset class also outperformed other sectors in the most recent recession. From 2007-2009 the self-storage sector produced an average of -3.80%. For comparison, here are the returns from the other REIT sectors over that same time period:
Why was self-storage able to outperform almost every REIT sector during the most recent recession? And why is this sector somewhat insulated to the impact the recession had on other market sectors?
When the economy is good, and disposable income is on the rise, people buy more “stuff” and need a place to store it. In the midst of the recession, when homeowners were losing their homes to foreclosure or downsizing to apartments, they also needed a place to put their stuff. Where do they go? Self-storage units! At the heart of this issue is the fact that Americans have a culture of buying too many things and we can’t seem to get rid of most of it. The demand curve for self-storage seems to be inelastic which helps pull the sector through major downturns. Estimates are that one-third of storage space is filled with items that have been there for over three years.
3.Rent Growth and Positive Net Operating Income
In-place self-storage tenants are generally not price sensitive, as the self-storage rental fee is normally a small portion of a tenant’s monthly disposable income. This allows operators to raise rents as the market demand grows without an impact on occupancy. For example if you are paying $100 a month for your 10x10 storage unit and the rent goes up 6 % to $106 a month most tenants are not price sensitive enough to rent a moving truck and spend a Saturday moving to another storage facility.
In addition, there is minimal communication between different tenants at a given facility, which allows for the operator to selectively adjust rental rates for individual tenants.
What does this rent growth allow for? An increase in net operating income drives increased value of the property which drives returns for us as the investor.
4.Fragmented Market
Nearly 80% of self-storage properties remain in the hands of small, independent investors. The sector’s solid past performance has begun to capture the attention of large institutional investors. Larger properties in particular are increasingly the subject of interest from institutional buyers, including the larger self-storage companies that run themselves as real estate investment trusts (REITs). The top 6 public companies control approximately 18% of all the facilities with the remaining approximately 82% of the facilities controlled by independent owners. This fragmentation should provide for the opportunity for well capitalized and sophisticated operators to selectively target individual assets and portfolios at attractive cap rates. Consolidation will allow some of these operators to amass attractive portfolios of assets and emerge as large industry players. Once stabilized these portfolios become attractive assets for a REIT to purchase and create an attractive exit for investors. Sound familiar? This was where multifamily was in 2011!!
It's my mission to bring the value of self storage to the BP community! Why are we not talking about this more? There isn't even a category in the forums on it! No fear BP community, I am going to bring self storage data to you! Would love feedback from the community on the post!
Kris