I called a new self-storage center in Arnold, Missouri recently, to find out what their occupancy was, hoping to write a story about that. Instead, I found out that they are already full. Arnold is a hot bedroom community to St. Louis, and apparently the demand for self-storage has already outstripped the supply. So what do you do? You build another facility next door – which is what the owner is doing. Despite all the problems in many other real estate sectors, self-storage has proven to be a pack mule that just keeps on going.
Memo From Frank & Dave
How Self-Storage Has Stayed On Top
Bloomberg recently rated self-storage as the “best risk-adjusted return among 10 U.S. real estate investment trust indexes over the past decade”. This group had the highest total return and the third-lowest volatility, for a risk-adjusted gain of 10.6 %. The fancier offerings of offices, hotels and retail centers did not even come close to matching this performance. So how did self-storage beat the other real estate sectors so badly?
A basic need
People have been storing goods since the time of ancient China. Americans are the biggest consumers in the world, and they need room to store all their “stuff”. It is much less expensive to rent a storage unit than to add on to your house, and much less expensive than throwing out your Christmas decorations and buying new ones every year. It’s a need that is very basic and not going to go away or go out of style. Even in recessions and depressions, Americans need storage.
Simple business model
You rent a floor, three walls and a door. There’s no carpet or finish out. There’s no plumbing. There’s nothing to break. And if the tenant does not pay, you can auction off their contents to cover the back rent. There is no simpler business model in real estate than self-storage. And simple business models are easy to manage, expand, and adhere to budgets.
Rents that rise
You can raise self-storage rents in significant ways without scaring off tenants. A $100 per month storage unit can be raised 10%, and the result is only $10 more per month. For a $2,000 condo to have a 10% rent raise would probably result in the tenant running off.
Diversity of tenants
A self-storage facility typically has hundreds of different customers. This is what gives self-storage properties such stable revenue streams. You can lose one tenants, and you’ve only lost maybe 1% of your revenue. In a shopping center, a single tenant can be up to 50% of the overall rent roll. This is what has made self-storage so resilient in the face of recessions.
Self-storage facilities can’t be improved on. There’s no changes in room sizes and layouts, or kitchen and bathroom details that reduce the attractiveness of the property, unlike apartments. There’s no changes in ceiling heights that can make the facility unusable, unlike industrial buildings. There’s no potential risk of the internet coming up with a new way to store goods that makes the demand fall off significantly, unlike the hotel and retail industry. So self-storage is just a basic model that can’t become out of fashion over time.
Profit from an unstable America
Self-storage has the unique ability to profit from both boom and bust. Why? Because it preys on instability. When times are good and you’re buying lots of stuff, you need storage. And when times are bad and you’re downsizing your living space, you need storage, too. The U.S. economy has been in a period of unrivaled instability, and self-storage is the big winner.
Self-storage REITs have been the leaders of the pack in real estate for the last 10 years. The industry has based its success on good old fashioned common sense, and sprinkled that with luck from the instability of the U.S. economy. It should continue to prosper in the years ahead. And that’s not just true of REIT properties, but of the industry as a whole.
Is The Next Big Thing In Self-Storage Coming From Overseas?
Group First International in England is offering a new self-storage concept, in which the units are sold outright on a 250 to 999 year lease. You can buy just one unit, or an entire floor. Buyers can be either investors or end users. Essentially, they are doing what the “condo”office market did in the U.S. decades ago. But will the concept work in self-storage? They have already sold entire floors to British Gas and Monster Beverage, and have 11 facilities open in England and one in Scotland. Will this concept soon be coming to the U.S.? Nobody knows yet.
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