Why Self-Storage Is Attractive
Self-Storage has been a popular investing trend since the resurgence of the real estate industry around 2010. In fact, it is currently one of the fastest growing sectors of commercial real estate in the US. This trend can be attributed to self-storage’s scalability, low overhead and development costs, and its strong performance during the great recession. Even though some people stopped renting storage units, in order to cut expenditures, the drop-in demand was not terminal. The national average occupancy rate in the trough of the recession was still in the low 70% range, while the average breakeven point for these facilities range in the 60%-70% range. Although this is not an indication of future performance, it certainly grabbed the attention of investors. This coupled together with the low interest rate environment, opened the way for self-storage to provide a higher return.
With a mass increase in investor interest and the attractiveness of lower construction costs, developers were not shy to enter the space. The graph below illustrates the boom in self-storage construction spending by year.
With the unprecedented growth in the sector, we are starting to see some supply-side pressure on rental rates. According to a leading self-storage data firm, “Nationally, units under construction and those in the planning stage total 9% of existing inventory. Yardi Matrix estimates a balanced market maintains an under construction and planned pipeline of roughly 8% of existing inventory” (Yardi Matrix 2). With supply growing faster than demand, we can see the slowing of rental growth rates.
Although we are starting to see revenue growth decline on average, occupancy rates are still above 90% on average and many experts argue demand will hold. Experts point to the U.S. demographic trends. As Baby Boomers begin to retire, downsize and move into assisted living facilities, we may see an increase in demand for storage space that could meet the increase in supply we are observing.
With all this being said, it is clear why self-storage has been such an attractive investment over the past half-decade. Despite the influx of capital investment, cap rates remain higher than many other sectors of real estate. Depending on your market, self-storage may still be an attractive investment option. For more info on investing in self-storage check out TCI Episode 34 where we speak with Ryan Gibson.
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