Considering investing in self storage? Here’s what to think about before jumping in

By October 24, 2018 November 20th, 2018 real-estate-investing-101

Self storage is much more than rows of boxes with orange garage doors. As an asset class, storage has delivered stable cash flow and has been demonstrably resistant to economic downturns. During the beginning of the recession in 2008, self storage out-performed residential, industrial, and retail, and is the only strategy of the four that delivered positive annual returns. 10 years later, in the midst of a booming real estate market, investors are challenged to find arbitrage in any asset class as yields are compressed and new equity continues to enter the marketplace. With cap rates on residential and retail at historic lows, many investors are considering self storage as an opportunity to get better returns on their money, but also limit downside as the chance of a market correction continues to increase. But, like any investment strategy, self storage comes with risk – as you consider investing in storage, what should you be looking for?

Supply Ratios

Regardless of a submarket’s household income and wage growth, a given trade area can only support so much self storage. When initially making a purchase decision, the supply of self storage square feet per capita should be one of the first data points you consider. Nationally, there is approximately 7 square feet of storage per person – and while national data is important, the supply ratios in a 1, 3, and 5 mile trade radius from the subject property are much more meaningful. In general, a submarket with 5 square feet per capita is considered under-supplied, 6-9 square feet per capita is well balanced, and anything over 10 square feet per capita would be considerably oversupplied. It is critical to understand the relationship between population density and overall square footage of self storage available in a given target market as part of your valuation process.

Risk of New Development

After getting a handle on the existing supply in a given target market, understanding the risk and likelihood of new supply being built will help you evaluate whether the risk is worth the reward. If your target market has a relatively low population but also low supply, your supply ratios may look very favorable. However, maybe you weren’t aware that Public Storage is about to break ground on a 100,000 SF bomber a few blocks away from the facility you just purchased. Depending on the size of the market, this could double your supply ratio, or even worse, which will drive your rates down and drive vacancy up. Research can avoid major problems like this, and at a minimum help you make a more informed investment decision. Perhaps there are a few new projects in the pipeline, but they are miles away from your facility, and the zoning surrounding your location prohibits any new self storage development. Ask other operators in the marketplace if they have heard of any new facilities getting built, and visit the local building department to determine if any recent submittals have been made for projects that will directly compete with your facility.

Property Tax Increases

Like most commercial real estate, the value of a self storage facility is calculated using a multiple on the net income stream – gross revenue less expenses – that the property produces. On the expense side, annual property taxes can be a large percentage of the overall annual expense load on a typical self storage project. Oftentimes existing self storage facilities were built by the original owners and have not traded hands for decades, and the property taxes might be artificially low. In many cases, we have passed on properties that may look like an excellent investment on paper, but are likely to experience a doubling or even tripling of property taxes within a few years. Forecasting the likely increase in property taxes that a facility will see as result of a post-sale reassessment will help you to better analyze whether the increase in expenses will still yield an acceptable income stream.

Opportunity Still Remains

While there are challenges in self storage investment, the stability of storage as an asset class make it an attractive investment strategy with meaningful upside and minimal downside. Analyzing existing supply, understanding the risk of new supply, and accurately forecasting potential property tax increases will help you make an informed decision as you consider whether investing in self storage makes sense for your long term wealth building plan.