Is Self-Storage a Recession Proof Investment?
Investor · Greenville, SC · Member since 2020 · 14 posts · 17 votes
For those who have investments in self-storage or other real estate categories touted as "recession proof," how are your investments performing right now?
One of the things that attracted my husband and I to invest in self-storage was that it was claimed to be recession proof with very low default rates. Since March, I had been nervously watching the occupancy rates and percentage of late contracts of our self-storage facility anticipating some dramatic change due to the economy and coronavirus shutdowns. Speed up to 3 months later and we are stable and in fact have the highest occupancy we've had since owning the property. We also are seeing a low number of late contracts, and our one mobile home tenant has been keeping up with rent payments no problem. We are grateful that the facility is still performing well but know that we may not be out of the woods yet as you hear reports of possible future waves of shutdowns, continued high unemployment, defaults, etc. Still cautiously optimistic though.
Faith Hill
Hi @Faith Hill; Welcome to the BiggerPockets forums! Way to go picking up and operating a self-storage facility!
There are two things I want to assert here that are on display now:
That said, what I like about self-storage and B&C class multifamily is that they can perform in a stable market cycle but they also can profit on a down cycle because of what happens to consumer mentality in a pinch. When the sky is falling, you're less likely to rent that A or B class apartment that was a stretch. You're also less likely to lease that 3rd bedroom, or you realize that your mortgage payment on your 4 bed is bonkers now that the kids have moved out and, presto blamo, enter the need fo additional storage.
Hi @Faith Hill; Welcome to the BiggerPockets forums! Way to go picking up and operating a self-storage facility!
There are two things I want to assert here that are on display now:
That said, what I like about self-storage and B&C class multifamily is that they can perform in a stable market cycle but they also can profit on a down cycle because of what happens to consumer mentality in a pinch. When the sky is falling, you're less likely to rent that A or B class apartment that was a stretch. You're also less likely to lease that 3rd bedroom, or you realize that your mortgage payment on your 4 bed is bonkers now that the kids have moved out and, presto blamo, enter the need fo additional storage.
@Faith Hill
Yes, but many situations are different. (And we're living in unprecedented times.)
I spoke with a SS operator we work with the other day. They've had a slower rate of new customers, but their churn isn't anywhere near negative. Rental collections have been high in this downturn.
In their words: "people will lose a house or car, but they like to hold onto their stuff."
I agree with what has been said above. People hold onto their "stuff." No investment is recession "proof" but some are "resistant." We have a percentage stake in a portfolio of self-storage units in the Midwest/central states and management just reported steady occupancy and cash flow.
"For those who have investments in self-storage or other real estate categories touted as "recession proof," how are your investments performing right now?"
DISCLOSURE - Am an apartment broker, so not my expertise, but know enough owners.
Couple of things to consider:
1) In Portland, these things are popping up a lot. So make sure you're not in an over-supply.
2) They are sensistive to the economy, it's like Vegas, economy ticks up and people have an extra $2000 for a trip or to buy stuff to store. Economy goes down, people get rid or walk away from stuff. On the plus side, you get more material for those storage locker TV shows.
3) If you're building them, at least in Portland, the city doesn't like these lights-out buildings too much - For whatever reason.
In a recession, some people will choose to downsize, move in with roommates or move in with family. This leaves the problem of not enough room for their belongings, so they get storage.
Self storage is a relatively small expense and the value of the items in storage far exceeds the cost to store them. This is incentive to pay.
Self storage relies on Americans accumulation of personal property and the need to store that stuff. There is evidence that generation ally, there is a shift towards experiences over belongings. The subscription model is replacing the buy model in many industries. That trend is worth watching because it could reduce the need for storage units as older generations pass and their children choose a more minimalist existence. Of course the other possibility is that as younger generations age, they choose to acquire more and more.
@Faith Hill Storage Investments are not Recession-Proof. In fact, I don't think any investment is 100% bulletproof against a severe recession. But if you're asking if the storage business is more "resistant" than other Commerical RE investments, then the answer is a resounding, "YES". Glad we own storage through all of this rather than other CRE. We own apps, storage and mhp's. Good holds for times like these. Also, lately, storage deals have gotten too expensive. I think some projects purchases within the last two years will be vulnerable. As always, management and location will be key.
@Will Fraser Thanks so much for your comprehensive and thoughtful response.
I absolutely agree that every economic situation is different depending on what triggered the downturn, so I am continuing to watch and monitor how things progress in this current, ever-changing environment. Hopefully no Zombie Apocalypses are in our future!
@Account Closed
You are absolutely right that these are unprecedented times.
We are seeing similar customer behavior as the SS operator you mentioned. Not nearly as many move-outs. I suspect that moving stuff out of a storage unit that they haven't seen in 6 months is probably not the top priority on people's minds right now.
@Mike Krieg I really appreciate your comment as I think that recession "resistant" is a more tempered and realistic description of storage investments rather than saying recession "proof." It's important to not paint an overly optimistic picture of any one type of investment as all come with some level of risk.
I invested in one, but the issue I have is that they are so expensive to acquire. THe upside is not as high as I would like.
@Tom Makinen I was wondering about this. I looked at SS investing a while back. The prices were so high that I didn’t think it would break even, even assuming that demand never decreased. Do you have to be the original builder to make $$$?
@Faith Hill Historically, Self Storage has been recession-resistant class of Commercial Real Estate, however, the barriers to entry into this segment for the average owner/operator have become much higher. This is in large part due to the extraordinary appetite of the large Self Storage operators and REITS who have been rapidly buying-out all of the "mom and pop" self storage facilities nationwide, while simultaneously constructing large yet extremely efficient facilities in most major markets. As @Steve Morris pointed out above, all Self Storage investments should be carefully evaluated to determine if there is an oversupply or if there will be if one of the big guys moves into the area. As for purchasing an existing national-credit Self Storage facility in today's market, returns are simply too skinny to make it worthwhile for the average investor, in my opinion.
On the other hand, with detailed site analysis and selection, RV and boat storage can still provide an excellent return with very little Capital Expenditure to get started (aside from the land itself.)
Recession proof? No!
Recession Resistant? YES!
I have at least partial ownership in 10 properties and every single one of them have faired very well over the last 4 months. Occupancy and Collected Rents are up at all but two...and those two are operating at status quo.
Note that our strategies involves very little leverage, small markets and discounted buying of value add properties as an intentional way to compound the resiliency that the asset class itself has inherent within it.
@Faith Hill no Investment is recession proof. Each recession is different. If someone tells you it’s 100 percent recession proof, run away
Hi @Faith Hill; Welcome to the BiggerPockets forums! Way to go picking up and operating a self-storage facility!
There are two things I want to assert here that are on display now:
That said, what I like about self-storage and B&C class multifamily is that they can perform in a stable market cycle but they also can profit on a down cycle because of what happens to consumer mentality in a pinch. When the sky is falling, you're less likely to rent that A or B class apartment that was a stretch. You're also less likely to lease that 3rd bedroom, or you realize that your mortgage payment on your 4 bed is bonkers now that the kids have moved out and, presto blamo, enter the need fo additional storage.
I agree with much of what you said, but a recession (using the standard definition of 2 quarters of falling GDP) is virtually inevitable seeing that the first quarter had negative GDP (-5%) and we are more that 2/3 of the way through the 2nd quarter with a large negative GDP projected. We would need one incredible finish to June to avoid a recession (the job reports was a nice start, but no where near sufficient to result in a positive GDP for the quarter).
I agree recessions differ and this one may be more different than most (which already have a lot of variation). Therefore I am hesitant to call anything recession proof. Maybe recession resistant (like the difference between water proof and water resistant).
I think not, as others have identified. Nothing is recession proof. Resistant, perhaps. And I say that as a self storage investor. My SS investment is performing well during the current recession, but it's certainly not immune from economic conditions in principle.
Can it be a great investment? Heck yes!! Self storage has fantastic fundamentals, and bought at the right price, in the right location, and the right size, it can be a home run.
There are 3 trillion reasons why rents have held up for the short-term...
I own Capitol Hill Storage in Conroe, TX. It's a boat & rv storage facility. In March (when covid lockdown started) we had a record month. In April, right in the middle of lockdown, we beat the March results.
So, in our case it's like nothing was going to stop the train.
In fact, we've just bought more land to quadruple the square footage that we currently have.
@Lance Langenhoven How much land is typically need for a boat and RV storage facility? Do you see yourself building more boat and RV storage facilities or a different type of storage facility going forward?
Hey Jason,
Sorry, I don't know how one does the little @ sign and then the person's name?
My existing boat & rv storage facility was on 2.7 Acres when I bought it. I managed to take some land back from a house that was on the property by fencing the house in so that took it to 3.1 Acres.
Anyway, I think one could start with 2 Acres and make it work if the shape is good. Here in Texas (near Houston) we have to provide really big detention ponds so that can affect how much you can put on the land. So, in the Houston area you might want to start with about 2.5 Acres. But, I've seen people do boat & rv storage on an acre!!! This particular site I'm thinking of has quite a narrow strip of land and they have just one covered / open building that can take maybe 10 RV's and then they have a few outdoor parking spaces as well. I've been driving past it since the guy bought the little tract and built it up and now he's filled up. So.... he's done well as I know he bought the tract for very little.
I'm expanding my existing one into the additional 4.7 Acres I've got under contract and I have another +- 8 Acre project that I'm doing 50/50 with a friend and that will have boat & rv storage as well. We're currently working on obtaining building permits for that one. So... I think I'm going to end up doing parallel development on both projects within a few months!
@Jenifer Levini. I was looking at one used, the cap rate was very low, somewhere around 4-7% at about 80% occupancy. Like anything else, the upside is way higher if you develop yourself, but the risk is even higher. I ended up joining in on a development, I won't know what happened until 2022. With storage unit, the exposure is just way less due to how easy it is to get people out and there is just less to maintain. I personally think it is like real estate, it's all about location and the price you pay for it. As with anything else, diversify.
@J-P. Pesare True! With all of the new construction from REITs and savvy operators who have expanded on their facilities, there are certainly some major markets where there's a risk of oversupply. I am in a market where I do not (yet!) compete with REITs. There are still deals out there for beginner investors not afraid to look in secondary and tertiary markets and/or to take on an underperforming facility to add value.
RV/Boat storage is great! We are looking into expanding our RV/boat spots as we have several acres of undeveloped land. I agree that detailed analysis is very important as there are numerous factors (such as local demand, the cost of county approval, land prep, gravel cost, labor, etc.) to consider in determining if the ROI is ultimately worth it - especially since in our market, RV/boat spots command lower rent/square foot than a storage unit.