While multifamily apartments is what typically comes to mind for investors in commercial real estate, other asset classes such as self storage have also proven to be recession resilient. This is why we invest in self storage and will continue to do so as a means to diversifying our real estate portfolio.
Background:
Self storage is a unique asset class that has been around since the 1960s. In its early years, the industry was largely dominated by mom-and-pop operators and, even today, is still highly fragmented. Since then, this asset class has become more mainstream as REITs and private real estate companies have entered the market. It’s no secret why these institutions have entered this space as population growth and U.S. consumerism continue to drive demand for this asset class.
Here are some statistics on the scale of the self-storage industry in the U.S.:
· According to IBIS world, annual self-storage revenue is projected to rise to $37.5 billion in 2017.
· Number of self-storage facilities in the U.S: 44,061
· Amount of self-storage space per capita in the U.S.: 5.4 square feet per capita
· Percentage of U.S. households that rent a self-storage unit: 9.5% (Nearly 1 in 10 Americans)
Top 5 reasons you should consider self storage in your portfolio:
#1) Increased Demand:
As mentioned above, population growth and U.S. consumerism have driven demand for self storage. The business concept is fairly straightforward and simple to understand: people need a place to store their stuff, either permanently or temporarily.
The demand is met largely by residential tenants (~70%), whether it be baby boomers downsizing or millennials seeking storage as they are delaying home ownership and renting longer. Other groups include: commercial/small businesses, student, or military.
#2) Low Turnover:
Contrary to what one may think, self storage lease terms have actually averaged 12-25 months, providing stable returns to investors. Estimates are that one third of users have stored their stuff in one of these units for over 3 years.
Self storage leases are often month-to month as opposed to a year (in apartments), so there is potential for higher turnovers as well. However, this can actually be to the investors’ advantage as most tenants would not choose to go through the hassle and inconvenience of moving to another facility if the rent increased from $50 to $60 per month (increasing income by 20%!)
#3) Low Overhead Expenses and Breakeven Occupancy:
Self storage facilities are much less expensive to build, manage, and operate when compared to other commercial assets like multifamily, retail, and office buildings. That’s because there are no tenants living there, no amenities to maintain or clean, and require much fewer personnel to staff.
Lower expenses and overhead mean that the asset can break even with lower occupancy (decreasing risk to investors). On average, the breakeven occupancy for self storage facilities is around 40 to 45 percent.
#4) Asset Class Returns:
According to the National Association of REIT, the self-storage sector produced an average annual return of 17.43% from 1994 to 2017. For comparison here are the returns from some other REIT sectors during that same time:
Office: 13.26%
Retail: 12.75%
Industrial 13.36%
Residential: 13.42%
Apartments: 13.32%
Manufactured Homes: 13.27%
Mortgage: 11.18%
S&P 500: 7.54%
(https://www.reit.com/data-research/reit-indexes/annual-index-values-returns)
#5) Recession Resistant:
According to the NAREIT, the self-storage asset class also outperformed other sectors in the most recent recession. From 2007-2009 the self-storage sector produced an average of -3.80%. For comparison here are the returns from some other REIT sectors over that same time:
Office: -8.16%
Retail: -12.32%
Industrial: -18.31%
Residential: -6.43%
Apartments: -6.72%
Manufactured Homes: 0.47%
Healthcare: 4.92%
Mortgage: -19.54%
S&P 500: -22.03%
Why was self-storage able to outperform almost every REIT sector during the most recent recession? When the economy is good and disposable income is on the rise then people buy more “stuff” and need a place to store it, which makes sense.
How to Invest in Self Storage through syndications:
At The Real Estate Physician, we focus on investing through syndications as we believe it is an attractive way for busy professionals to invest passively in a tax-efficient manner while providing stable and predictable passive income.
As we mentioned above, the majority of self storage facilities today are still run by “mom and pop” owners or small private regional operators. As investors, you can take advantage of the recession resilient nature of this asset class by participating in private syndications when sponsors identify value-add opportunities through management inefficiencies. Just like apartment syndications, we aim to find experienced and trusted sponsors in this asset class who have proven track records of success.