Spotlight on Self-Storage: What’s all the Buzz About?February 27, 2019
This growing asset class may not exude the glamour of a shiny downtown office tower, but self-storage assets have for a long time been the unsung heroes of commercial real estate investments.
Today, commercial real estate experts view self-storage facilities as stalwarts that some even call recession-proof.
We agree: self-storage is a safe and smart bet for owners, especially when they can preserve cash for working capital with an SBA 504 loan from Liberty SBF that provides up to 85% LTV financing.
The self-storage market
Demand is strong and shows no sign of abating. In 2016 there were more than 50,000 self-storage facilities in the U.S., most of them nondescript warehouses divided into cubicles of varying sizes. As of December 2018, according to the Self-Storage Almanac, the U.S. has more than 2.3 billion square feet of rentable self-storage space (about 7 square feet per individual). We are now well into an extended self-storage growth cycle. Supply is increasing to meet the demand. In 2019, new facilities continue to come online, built by individual owner-operators and institutional investors alike.
While observers worry about oversaturation in some markets, the concerns of overbuilding are overstated on a national scale. Only certain submarkets and clusters within the top 50 MSAs are at risk of overbuilding; Portland, OR and Nashville, TN reported rental rate declines of more than 5% (according to a November 2018 study by Yardi). While it is difficult to pinpoint overbuilding nationally or by MSA, other major markets that reflect slight declines include Denver and Miami. There are fears of oversaturation in Phoenix and San Diego, for example but the fears have failed to materialize so far.
Our analysis indicates that self-storage will remain a hot investment in 2019 in large markets such as New York City and Boston. The strong and increasing appetite for self-storage space in growing secondary markets also opens opportunities for tremendous growth.
The demographics are promising, and the market is growing to serve increasing demand. According to the Self Storage Association (SSA)’s 2017 Self Storage Demand Study, almost one in ten (9.4%, or 11,806,381 out of 126,067,560) U.S. households rents self-storage, representing all age groups. (Millennial renters account for 11% of the market; baby boomers for 7%; and the “greatest generation” for 5% of the self-storage market.) Costhelper.com reports that the average national storage unit costs are: $40-$50 per month for a 5-by-5-foot unit; $75-$140 per month for a 10-by-15-foot unit; and$115-$150 per month for a climate-controlled 10-by-15-foot unit.
Home prices are rising faster than wages in 80% of housing markets in the U.S., especially in the urban areas where the higher-wage jobs are. Urbanization is pushing renters into the city, with smaller and denser housing and limited storage space. The buy-or-rent calculation has evolved, with nearly two-thirds of Americans now living in areas where it is more affordable to rent an apartment than buy a home. Renting increases the likelihood of residents to need a storage unit; for example, renters move more frequently than homeowners, and need places to store their furniture and belongings while they are in transition.
Different generations have their own economic and lifestyle reasons for needing to rent self-storage. Millennials, the largest demographic group in the U.S., are delaying or rejecting homeownership. More and more baby boomers are choosing to downsizing their living arrangements but still need to store their overflow belongings.
A recession-resistant investment
Self-storage assets are considered recession-resistant because they have become a basic necessity, not a discretionary expense. Self-storage ranks alongside other essential, need-based asset classes such as retail groceries and healthcare. During economic downturns, such as after the 2008 crash, people downsize their residences, moving to apartments and increasing the demand for self-storage.
Demand for self storage space is based on life events—what the industry calls “the four Ds”: divorce, death, downsizing or dislocation (i.e. job loss). Add to that college graduation, marriage, renovations, and other more positive events that fuel the need for self-storage.
Industry conferences are spreading the gospel of self-storage with encouraging information for investors: self-storage is one of the least foreclosed real estate sectors. Self-storage performance may vary from market to market; e.g., throughout 2018, West Coast markets recorded high occupancy and asking rents.
While a majority (70% ) of the self-storage renters are residential, U.S. businesses represent a healthy chunk of the market: according to Marcus & Millichap, More than 11% of U.S. businesses (1.33 million out of 12 million) are renting storage, and the market is growing, reaching higher penetration than the residential segment (9.4%).
With an economy that supports business expansion, self-storage offers a cost-effective option compared with office and retail rents, and more companies are likely to make use of such facilities this year.
A reliable resource
Another plus for investors is the sticky factor. Self-storage rental turnover is relatively low: most people who rent a storage unit opt for renting it for more than a year. Users don’t shop around after settling on a self-storage solution, and the average lease term for residential self-storage is 13.4 months. Only the smallest percentage of renters occupy a self-storage space for less than three months.
Which are the optimal markets for investment in self-storage? Heavily populated markets without zoning restrictions or community opposition are ideal when looking to purchase and/or develop a self-storage facility. Visibility is important; exposure on highways or major local thoroughfares is an advantage. Currently, self-storage development activity is highest in Portland, Nashville, Orlando, Seattle, and Miami. Desirable locations are everywhere in major MSAs and secondary markets, especially with easy access to:
• Busy intersections
• Industrial areas
• Office nodes
• Military bases
• Retail centers
With a little imagination, there’s no limit to what a safe, secure, dry storage space can be used for. Self-storage owners and developers are thinking far beyond the no-frills storage cubicle and adding amenities for a competitive advantage. Consumers today expect greater value across the board. Climate-controlled units can help to protect and preserve sensitive items. Security is a priority: advanced security measures such as an onsite manager, video surveillance, and electronic gates provide peace of mind. Offering multiple unit sizes allows for flexibility to suit different renter needs. Conveniently located elevators, lifts and doors and the use free of charge of handcarts and dollies make getting to and from the storage unit efficient and easier, and reduce the physical strain of moving belongings to a unit.
In 2010, the SBA deemed some businesses with rental income (“passive income”) eligible for its programs, giving self-storage operators the opportunity to take advantage of the SBA 504 loan’s many benefits.
The SBA 504 program is far superior to any other financing for self-storage property owners. A borrower needs only a 15% down payment toward the purchase of a facility, while most conventional loans require 25% or more out of the borrower’s pocket for a down payment. We can also refinance a property that is approaching stabilization or close to being fully leased up with an SBA 504 loan.
Talk to Liberty SBF about SBA 504 financing for your self-storage property today. As always, we’re more than happy to help.
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