Not all self-storage facilities are created equally. Well, they may be built the same, but there’s a whole lot more to a storage property being “investment grade” than just metal walls and roll-up door. And the entire self-storage “media” often point you in the wrong direction regarding what you should be buying and what you should avoid. So what makes up an “investment grade” property? Let’s explore that issue.
The first and most important component to an “investment grade” storage facility is raw demand – effectively the need of customers for storage. Without demand, you have nothing. Therefore, the starting spot of selecting the market to buy a storage facility in – and the fundamental building block of an “investment grade” asset – is demand. However, demand does not only exist in large glossy cities. It can also be found in smaller rural markets. How can you measure demand? Simple. Look at the market occupancy. Areas of high demand will exhibit near 100% occupancy. This is in stark contrast, however, to what much of the storage “media” tell you. They will tell you that you have to be in giant cities such as Las Vegas (because larger operators focus on those markets and that’s who advertises in their publications). I would much rather be in a 100% occupied market in a small town than an 80% occupied market like Las Vegas – and so would any rational investor.
A “moat” to defend against competition
If occupancy is key, then so is defending that occupancy. Warren Buffett calls the defense against competition a “moat” and the “moat” for storage represents a barrier to new construction. There are two types of barriers: 1) no available land or 2) no available zoning. While the storage “media” would tell you that markets like Las Vegas or Denver are great, they completely lack a “moat” – there is limitless land to develop and that’s why they are massively overbuilt right now. The storage industry built nearly 2 billion new square feet in the last few years, almost exclusively in the top ten markets. Again, those smaller markets with zoning and land scarcity are much more safe. And that makes them much more “investment grade”.
Good infrastructure that’s low-cost to maintain
The original self-storage was a single-story building with the ability to back your car right up to your unit. In my opinion, that’s still what 99% of Americans want. Have you been in a big city multi-story complex? Just moving items in and out is an unbelievable hassle that tacks on about 30 minutes of time or more. Multi-story facilities are only an invention for the benefit of storage units trying to max out the amount of storage square feet on a property, not because the customers want them. But more troubling for those multi-story properties is the cost to maintain them. They have elevators and multiple gates to maintain, as well as climate controlled sections with heaters and A/C to malfunction. But the old classic single-storage facility has virtually no on-going maintenance costs or hassles for the owner. That means that they are the more “investment grade” option. So disregard the hype from the storage “media” on this topic.
Superior location going forward
The “Great Reshuffling” has already begun, and millions of Americans are abandoning urban centers for safer suburbs and exurbs. That means that the chic urban metros are going the way of the buffalo, even though they’re on the cover of every self-storage publication. This net effect of the pandemic and urban rioting caught the storage REITs with their pants down, and they will have to suffer through this demand vacuum for years to come – but you don’t have to. “Investment grade” storage properties today would be based on where the demand and customers are heading, and that’s clearly away from large urban centers.
The ability to make money
We left the most important point for last and that’s the simple fact that to be “investment grade” you have to make money. And making money is based on several factors: 1) steady, predictable revenue 2) low cost of operations and 3) the price that you pay for the deal. Even when all the options shown above are favorable, you still can’t be “investment grade” unless you make good money. And here’s where the storage “media” is the most false. The darlings of storage publications – the REITs – are not exactly money makers for investors. Public Storage, for example, pays a dividend of only around 4% -- you’re certainly not going to make any money with that!
Self-storage can be a profitable use of your funds as long as you stick with “investment grade” properties. Unfortunately, much of the storage “media” steers you away from the truth about making money with a self-storage investment. Stick with the facts and make your own decisions and you’ll do much better than the pack that does not think independently.