Resilient and Diverse Investments in the Self Storage Industry

The self-storage industry has proven to be fairly recession-proof during the pandemic and offers many diverse investment opportunities and strategies depending on the location, according to a report from Trepp.

The report, titled “Self-Storage: Analyzing a ‘Recession-Resistant’ Sector,” looks at commercial mortgage-backed securities (CMBS) data. According to Trepp’s CMBS database, more than 1,700 CMBS loans totaling almost $16 billion were backed by self-storage properties across the US. It is one of the smaller property types in the private-label CMBS universe of over half a trillion dollars of loans, accounting for only 3% of the total CMBS outstanding balance.

The Four Ds Driving Self-Storage

The reason an individual would rent a storage unit is being driven by what the report refers to as the four Ds of self-storage: divorce, dislocation, death, and downsizing. Of course, there has been an abundance of these throughout the pandemic.

In addition, there were a number of trends that directly impacted the demand in the self-storage sector.

• Students left campuses at a moment’s notice without any visibility of when they were expected to be back.
• The U.S. Unemployment Rate shot up from 3.8% in February of 2020 to 14.4% in April 2020. While the number is coming down, it has caused severe dislocation for a large portion of the labor force.
• There has also been a temporary exodus of millennials from 24-hour cities while working remotely, resulting in an uptick in the demand for storage units.

Self-Storage Resilience

Another big factor contributing to this industry’s resilience are its net operating income margins which are among the highest of any real estate asset type at upwards of 60% to 70%, Trepp says, citing a Cushman & Wakefield report.

Those attributes have attracted a wide variety of players, including the five largest real estate investment trusts (REITs) that together own about 20% of the market:

• Public Storage (NYSE: PSA)
• Extra Space Storage (NYSE: EXR)
• CubeSmart (NYSE: CUBE)
• Life Storage (NYSE: LSI)
• National Storage Affiliates (NYSE: NSA).

That leaves thousands of other owners and other investors that have driven construction spending up by 584% from January 2015 to January 2020, the Trepp report says, citing census data on self-storage facilities.

Rising Expenses and Competition – Adding Value

According to this same report, rising expenses such as wages and advertising are impacting the Self-Storage industry.

There is a lot of competition, especially in a segment that doesn't typically have a lot of amenities to prompt someone to drive farther to get to and feels restricted on how much rent can be raised.

So how do self-storage operators aim to provide a value-add? The Trepp report suggests the following:

• Adding truck rentals
• Selling storage basics
• Offering more climate-controlled units (which cost more to rent)

The report also suggests remote management – operating a facility without an on-site manager through digital interactions with customers. This operating model could make it more feasible to invest in a small size storage facility in a small market.

Is it a Buyer’s Market for Acquisitions (Versus Building Your Own)

Small towns and rural areas are typically not on the radar for big players. This creates a buyer’s market for potential acquisitions. So, this is a great time to look into that steal building construction investment idea.

Adding to the competition, the market continues to be of interest to big players looking for high-quality investments in the ‘recession-resistant’ commercial real estate space. So, for smaller players, the best options might be partnering with other investors in locally owned operations in small markets, or maybe even building your own, using the increasingly robust choice of self-service digital options.

Today it’s possible to build REAL wealth in the Self-Storage industry at a fraction of what it used to cost, meaning the unfair advantages are now available to individuals like you.

To find out more about how to invest in this growing industry, let Forge be your self-storage building contractor partner. See some of our completed projects.

Despite all of the craziness that the pandemic has caused, self-storage development continues its forward momentum—but not without impediments. The cost of raw materials is on the rise, and orders can take longer to ship, plus there are labor shortages. These issues will likely resolve in time, but there’s one obstacle poised to grow still more obtrusive: a lack of suitable sites on which to build. Between market saturation and increasingly restrictive zoning, builders and owners struggle to find suitable parcels to build self storage facilities. It’s a process that’s often taking longer and generating more frustration.

What Every Self-Storage Investor Needs to Know Before Building

Every self-storage construction project has its own nuances, and it’s never a “one size fits all” when it comes to construction but following are some basic “rules of thumb” to help point you in the right direction.

Additionally, also see our blog post, “Building a Commercial Storage Building” for more insights into understanding development fundamentals.

Regarding the property

• Most new self-storage development projects that incorporate single story buildings are developed on parcels between 3-5 acres. Each acre (provided the property is normally shaped) will yield approximately 17,500 – 18,000 square feet of rentable space or 40% coverage ratio.
• Property should be zoned correctly for self-storage. Your self-storage facility would ideally be on a “use by right” parcel. Conditional use permitting is common with self- storage construction but will likely cause higher than average construction costs to appease neighboring businesses or residences by utilizing more expensive architectural aesthetics.
• The property should be visible with good traffic counts. There is no better marketing strategy in the self-storage industry, than people simply knowing where you are by seeing your business when they drive down a particular street on a regular basis.

Preliminary Due-Diligence

• Once suitable parcels to build self storage are identified, a market study will help determine whether the “market” will support more inventory. Demand need s to be determined for more rental, and what type of storage might be best suited for the parcel (i.e., climate controlled, boat and RV, etc.) The typical cost for Feasibility Analysis is between $2,500-5,000.
• Prepare a concept site plan. A concept site plan based on good plat map information will give you an idea of how much square footage can be built on the parcel and will provide a baseline to help with construction budgeting.

Establishing Financial Feasibility

• Most self-storage facilities built today require about 60,000 square feet to support a full-time employee and allow an investor to maintain a “hands-off” approach to the business. The industry average rent nationwide is around $1.01 per square foot in 2023 (source: sparefoot).
• Your rental rate per square foot is the single most important factor in determining financial feasibility. When a parcel is identified – the first step an owner should take is to determine what a baseline rental rate would be by “shopping” your potential competitors (Competitors are usually defined by a one-, three- and five-mile radius from your site). The higher the rental rate, the more you can afford to spend on construction and still maintain an adequate ROI.

Self-Storage Building Costs

• For single-story units, expect to pay $25-$40 per square foot, but multistory self-storage units typically cost $42-$70 per square foot. Additional cost factors like electricity, plumbing, and security systems can add $15-$45 per square foot.
• In terms of constructing storage unit buildings, the cost can be relatively affordable. Depending on the region and building size, expect to pay $25,000-$100,000 for simple, steel buildings with 10-50 units. The cost to build storage units can be surprisingly within reach.

For a sample of the types of single-story self-storage buildings that Forge Building Company offers, please check out: Single-Story Self-Storage Building Contractors

And for more information on costs and location considerations, please see our blog titled “Contractors That Build Commercial Storage Buildings & Facilities.”

Finding a suitable parcel on which to build a self-storage facility with the best steel building contractor will also reap the highest return on investment and get your 2022 off to a great year.