I’ve branded my company as a real estate business that focuses on alternative real estate niches. I want to provide education and investment opportunities for investors to take advantage of the trends and attractive returns certain niches offer. I carefully selected crucial, trusted partners (sponsors) and help provide private equity investor funds to support their projects. I spent my time learning the apartment investing business, hired a coach, and learned how to do market and deal analysis so that I could vet deals before recommending them to my investor clients. I forged a close relationship with Ashcroft Capital and as part of the SEC requirements to market deals, I earned my way into a general sponsor role to help acquire three properties and over 800 units. Out of this grew a strong base of accredited investors that have seen solid performance in these investments up to the present time. I still like this niche very much and this remains my focus for my investor base this year. I expect to do many more deals with Ashcroft Capital as they indicate an active and robust pipeline of potential new projects this year.
Opportunities in Self Storage Investing
As we move into 2020 however, I wanted to research and get a deep understanding of another potentially solid investment niche. Down the road, this could provide my investors with more opportunities to learn and diversify into some other attractive real estate niches. I identified early on in my research into commercial real estate investing niches, that self-storage was one area that deserved a serious look. I attended a multi-family (multi-unit) meetup group in the area and although most of the talk was around apartments, I found a small but vocal group involved in self-storage. They talked about how the business model was more attractive than apartments because the CCR (Cash on Cash Return) was higher due to the relatively low cost to operate these sites. They said the future looked bright as the growing demand mirrored the growing demand for more folks renting. That had always garnered my attention, but I had to admit, it did not seem to be a very sexy niche. I had visions of growing up seeing self-storage somewhat tucked away, out of site, not very attractive, places where folks just stored junk. I’ve also never paid for one in my life and always thought if I ever came to that point, I must seriously examine my material life of needs versus wants.
Wow, have times changed! Nearly 1 in 10 Americans are using self-storage facilities today. These facilities are much more visible, clean looking, automated and professionally operated. Sure, the industry is still very fragmented with lots of mom and pop operations and a lot of leftover, shabby, shed type looking facilities scattered around but the big players are taking the game to the next level. No, I’m not using one yet but based on my research, I’m finding a lot more reasons why folks are using them. Surely, the increasing demand for rental storage units parallel closely with the reasons why I still love apartment investing. Simply, there are powerful trends underlying both types of niches. Demographic trends favor more folks renting, hence needing places to store their stuff. Millennials are deciding to rent longer as well due to the home price increases. Back in the 70s, first-time home buyers rented for only 2.6 years before purchasing their first home, now it has gone up to 6 years. But it goes beyond that.
Newer Homes Have Less Storage Space
I purchased a new investment home near where I live. This was a new home mind you, but storage was limited in all the models the builder was constructing despite the fact that this was a national builder and a very nice home. The A/C is in the attic and I wanted to show the renter how to replace the filters. We essentially had to crawl on our knees to replace the filter because the ceiling and space was so limited. What’s happening that makes storage an important factor in our lives? I’m getting more renters because millennials often delay buying and boomers are downsizing. But when folks do buy a home, the builders are not leaving much space in the two-car garage, attics nor inside the home. In many parts of the country like Texas, homes lack basements. Add to this situation stricter rules from the HOAs where folks can’t store their boat, RV, etc. at home. Many folks are forced to use self-storage beyond just storing excess stuff.
Businesses Needing Offsite Storage
Businesses are also leveraging self-storage facilities like never before. They are finding it cheaper to use self-storage to store files, records, and equipment offsite versus taking space in a more expensive office setting. There is an even growing offshoot in building some storefront warehouse space near the front of the self-storage property in locations where there is a lack of available business space. They are catering to those needing a small 400 sf office as well as a larger warehouse for their storing, staging and shipping operations. I discovered this while I was looking for a similar space with a friend of mine and we both came across the same conclusion: High demand, low supply. I met with a builder and he told me that he found this niche of building a mini warehouse / office for small businesses and is making a killing off just building them and selling them, like 100% return in one year; they’re easy to build and sorely lacking in supply. So, with space, one can add a lot of creative types of storage / revenue streams including simply offering everything from covered and uncovered parking spaces for boats and RVs to full retail operations in the main office where huge markups on locks, boxes, tape, utility hardware, etc. can be offered as a convenience factor to users ready to move into their new storage unit.
Recession Resistant Niche
Ok, got it. So, what’s the investment angle? Several things were starting to get my attention. In my research for this article, I came across a member of the Forbes 400, Wayne Hughes, who started a company called Public Storage and has a net worth of $2.8B. It must be an industry where one can make serious money I gathered. It’s also a very recession resistant industry. Simply, when the economy is growing as it is now, people buy more stuff to store and when the economy slows, individuals and businesses downsize and store more stuff. It’s like apartment investing using a Class B value-add approach, folks have to live somewhere and offering reasonable rents and nicely renovated properties with excellent management will keep them there through ups and downs. With storage, here is another niche that holds up well during good times and bad and is quite resilient. In 2008 when the economy was getting crushed, the self-storage REITs (publicly traded companies that buy lots of self-storage properties) were the only real estate sector to generate a positive return at 5%. Over 5,15, 20, and 25 years, these REITs have outperformed the S&P 500 so they clearly have a solid and consistent track record of good performance.
Factors That Make Self Storage an Attractive Investment
Why is self-storage so attractive from a business model? The cost to build is much less compared to your typical real estate property as we’re talking concrete, steel frames and garage doors. They’re also inexpensive to operate and maintain (maybe one on-site person, much is automated). Plus, turnover (makeover) costs that are one of the things in apartments that drive-up expenses are almost nil in storage; sweep out the unit, provide a new lock and it’s ready to re-rent. Hence, the breakeven on self-storage is around 45% occupancy level where apartments are about 65%. Tenants are relatively sticky as well, as they often move in and never leave. Estimates are that one third of users have stored their stuff in one of these units for over 3 years. Also, the short-term nature of the rentals (month to month) enables owners to turn units quicker and raise rental rates more frequently. This, with the sheer number of units in these facilities, means the owner is not as subject to financial impacts from numerous vacancies hitting at one time. This is another business with scale like apartments that has a very attractive appeal.
Fragmented Industry Provides Opportunities
Up to 80% of the industry is still in the hands of small independent operators. Its highly fragmented and ripe for consolidation. Many owners have not kept pace with the changing times nor reinvested in modernizing their facilities, expanding their footprint or adding new revenue streams. That’s where the opportunity is. It’s not uncommon to find locations lacking simple signage, websites or other amenities to attract users. Climate controlled, biometric scanning access and other security features are lacking in older properties and are becoming more popular. Big players have moved in for sure and five dominate the space but there remains a lot of opportunity for the savvy syndicator looking to find solid, attractive properties that are underperforming. Financing is relatively available and easy to get as the financials and strong history of this resilient sector plays well with lenders.
Further, many cities don’t like building new storage units as many residents deem them tacky and they don’t create a lot of jobs. That may prevent oversupply in some areas which would be a good thing from an investment standpoint. Research shows that most users want a facility within 3 miles up to 5 miles of where they live. Although data proves most don’t go to the facility as much as they think, psychologically the proximity to their residence is part of the buying decision.
Stable and Resilient Niche Market
Institutional investor interest is growing towards this niche, as evidenced by a recent article last week in the WSJ that self-storage facilities are getting a serious look. With many real estate sectors seeing slower growth, think brick and mortar retail with the online threat of companies like Amazon and some concerns of rising interest rates, savvy institutional investors (think pension and private equity funds) are in a “risk off” mode. Stable and resilient niche markets like value-add apartments and self-storage that have very favorable long-term trends are continuing to gain favor with the smart money crowd.
At LWS Investments, we target investments that are expected to deliver attractive risk-adjusted returns over the life of the project. Share this post with others so that they can get the inside scoop on investing in self-storage units.
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