While the REIT’s and other top operators control 26% of the nation’s self storage facilities, 74% of the market is still controlled by smaller locally based owners (2018 Self Storage Almanac). Many properties prove to be attractive value added investments as they are currently mismanaged and operated by less technologically savvy-ownership groups. Operators who can leverage technology will be able to capitalize on the fragmentation.
Self storage as an asset class has weathered multiple economic cycles while demonstrating recession resistant traits. The asset class’ resiliency was displayed in 2008, amidst a world wide economic recession, when self storage was the only REIT sector to deliver a positive return. The demand for storage is driven by life disruptions – storage is needed as a result of birth, death, marriage, divorce, retirement, relocation, and military enlistment. Driven by residential relocation, demand for storage is strong during times of both economic expansion and contraction. Families need self storage during boom times as they move out of apartments into their first home or upsize into a larger home. Storage is used when folks relocate for employment or as people transition into a retirement home. Demand for self storage remained stable during the Great Recession as former homeowners used facilities to protect their belongings and heirlooms in the process of downsizing into smaller rental units. On the commercial side, businesses use storage to keep records, inventory, tools, materials, and furniture safe. Similar to the residential customer, businesses use storage during both strong and weak economic periods. The last recession pushed many small businesses out of warehouses and these firms found self storage to be an affordable alternative to maintaining larger, costlier spaces.
In addition to the sector’s recession resistant demand drivers, the resiliency of self storage can be attributed to the lower overhead required to operate facilities. Self storage enjoys higher profit margins and lower delinquency rates than other real estate asset classes with breakeven occupancy rates being approximately 20% lower than multifamily assets.
The proposal to build a new self storage facility often provokes the ire of the town planning board due to facilities typically being viewed as having a low tax base and providing few jobs. The stigma surrounding self storage facilities combined with a lack of available land has pushed development towards increasingly attractive but less accessible multistory interior facilities that lack drive up units. These development challenges translate to the potential value in acquiring existing well located self storage assets.
The opportunity cost for a customer to take a day off work to rent a truck so they can move their belongings to a competing property is often too great to justify relative to the increased rent. A customer who is paying $150 per month for a 10 x 10 unit is willing to accept a 5% increase because the monthly difference is only $7.50. If that same customer received a 5% increase on their $1,500 per month apartment, they would be facing an additional $75 per month. While apartment owners might only be able to increase rents 2% to 3% each year without substantially improving the unit interiors or common areas, a self storage facility could potentially increase rents 5% or more because the actual dollar amount is often considered nominal and readily accepted by the customer.
There are diverse opportunities for ownership groups that are sensitive to the industry’s changing demographics. Owners who implement value added initiatives to attract millennials and females will be rewarded as the customer profile is trending rapidly towards both groups. While the industry’s total customer pool is 52% female, a staggering 64% of millennial self storage customers are female (2017 Self Storage Demand Study).