The U.S. self-storage industry has been around for half a century, but it has probably not seen as much structural change in all those decades as it has since 2020. The Covid era ushered in some megatrends that have rendered good storage facilities bad and hot markets cold. Yet there is opportunity amongst the turmoil if you position yourself correctly.
Get out of the city
Prior to Covid, the bulk of self-storage investors congregated around big cities – the bigger, the better. Then came not only the pandemic but the urban riots in the summer of 2020, and everybody who could afford to move started leaving the big cities in droves. That has caught the storage industry in a bad position in which they have simply overbuilt in an environment of declining customer counts. Smart storage buyers today are focused on the suburbs and exurbs – the places where city dwellers are moving to. You can not only get better prices from moms and pops in the suburbs and exurbs, but you are also on the right side of this exodus trend. While some urban markets may right themselves over the years ahead by converting abandoned office buildings into housing, the kind of young customer that lives in a 600 sq. ft. apartment and walks to work will probably have few material possessions to store.
Stick with the single-story facility
The building frenzy in the urban core caused many storage developers to build additional stories to justify the cost of the land. This was done at the necessity of lender requirements and not at the demand of customers. In fact, nobody likes the. The classic model of accessing your storage unit by backing up your car to the roll-up door is what Americans want. But when that’s not available, they can tolerate multi-story with the inconvenience of access. When you look at self-storage in urban and suburban areas, you will find that nobody builds multi-story – and that’s a good thing. In those urban areas, it’s likely that multi-story have severe vacancy issues in the years ahead from a decline in customers and massive over-building. Just be glad it’s not your problem, and let those who jumped on the ”urban is great” bandwagon – and their investors – suffer as it holds down the competition.
Forget climate control
Does anyone really need climate control of self-storage? That’s a good question. I’m not sure that it would exist if storage owners had not thrust it upon their clientele. What’s wrong with climate control? Nothing if it was free. But unfortunately, it costs the customer extra and is a nightmare of upkeep for the owner. You find many climate-controlled facilities that have turned it off and gone back to regular-styled. However, there is a niche for this service in some markets. But if you’re buying a self-storage in a suburban or exurban market, you’ll probably find that they are few and far between – and that’s a good thing.
Avoid low cap rates
This is one of the biggest problems with the self-storage industry that was exposed during Covid, and that’s a simple truth: investors were paying too much. Way too much. For those who questioned how you could make any money buying a self-storage property at a 4% or 5% cap rate, the answer is that you can’t. Never could. The increase in interest rates has made this clearly apparent. To make money with any income property, you must have a spread of the cap rate over the interest rate. The formula is simple. A 1-point spread can get you to a single-digit cash-on-cash return, a 2-point spread to around 10%, and a 3-point spread to as much as 20%. Storage investors lost their way over the past years and paid too much and accepted too little in returns. Don’t follow that path. Demand to make money.
Now is a great time to buy self-storage if you align yourself with the new America and ignore what buyers of the past have done. There is still plenty of opportunity in the suburbs and exurbs. And you will be ahead of the competition, who is mirrored down with their bad buys in the urban areas.