Why Self Storage
Why Self Storage.
It may come as no surprise that Americans like to buy stuff, and lots of it. In fact, consumer expenditures in the USA are higher than China, Japan, Germany, India, the United Kingdom, and France combined. Once consumers in the U.S. buy stuff, they do not like to throw it away.
Self storage properties offer a solution for people and businesses who have too many things but not enough space to store it in.
Over 13.6 million households in the U.S. rent a self storage unit. With about 2 billion rentable square feet, there's about as much self storage space as there is office space in the Northeast and Midwest combined. So what are the benefits?
Rent Gowth
Self storage tenants are generally not sensitive to periodic rent increases. In part, that's because people need a place to store all of the stuff they can't do without. Another reason that self storage operators can increase rents while still maintaining a high occupancy level is that the monthly rent on a self storage unit represents a small percentage of the tenant's discretionary income.
The national average rent for all unit sizes of self storage is $89.12 per month, through the end of 2020. That is less than what the average cell phone bill costs in the U.S. Last year, self storage average rent growth in the most popular unit sizes was about 2%.
Depending on the market and general supply and demand factors, some self storage operators enjoy rental increases of 5% - 8% or more. Because the cost of operating a self storage facility does not increase nearly as much as the rent, the majority of the extra cash generated from rising rents increases NOI and returns for self storage property investors.
According to Forbes, self storage investments averaged an annual ROI of 16.9% between 2009 and 2018. In fact, the return on investment from self storage facilities was higher than other commercial real estate such as retail, office, multifamily, and industrial over the same 10-year period.
Self storage properties can also offer the opportunity for incremental revenues increases that further increase ROI. Ancillary products such as boxes, packing tape and pads, door locks, and dust covers are high-margin items that tenants are not likely to shop around for when they're already in the retail area of the self storage office.
Resistance to Recession
During the Great Recession of 2008, self storage real estate investment trusts (REITs) were the only real estate asset type that generated positive returns for investors, according to Inside Self Storage. More than one year into the pandemic, it appears that Covid is helping rather than hurting the self storage industry this time around as well.
For example, many colleges and universities have yet to begin teaching in-person again, creating demand from students ousted from the classroom. Migration trends from densely populated urban areas to the suburbs and smaller secondary markets over the past year are also driving demand for self storage space while people try to find a place to live.
The self storage industry is also benefiting from small businesses that have temporarily shut down and need a place to store equipment, furniture, and fixtures until the economy begins to rebound.
Even when the economy returns to normal, businesses are still big users of self storage space. Contractors need a safe place to store their equipment, landscapers need quick and easy access to tools, and retailers and e-commerce companies use self storage units to store promotional displays and additional inventory that's waiting to be shipped.
Low Maintenance
Self storage properties are also inexpensive to build and easier to operate and maintain compared to other types of commercial real estate. For example, the average construction cost of an apartment building is $229 per square foot, not counting additional costs such as architect fees, land purchase, landscaping, and parking lots.
By comparison, typical self storage construction costs range between $25 - $40 per square foot for single story construction, and between $42 - $70 per square for a multi-story self storage building, excluding the cost of land and site improvements.
The final infrastructure of a well-designed self storage development is relatively straightforward as well. Critical components of the best self storage projects can include lighting and climate control, a good security system, fire sprinklers and an alarm system, all critical components of the best self storage projects.
Self storage properties generate an average national rent of about $11 per square foot, about the same as apartment rentals in many cities across the U.S. However, managing and maintaining a self storage project is much less expensive than other types of commercial real estate.
Average operating costs for a self storage facility range between $2.75 - $3.25 per square foot, compared to an average of $3.50 - $5.00 for multifamily, office, and retail properties.
Assuming a self storage property is 46,000 square feet, gross rental income would be about $500,000 each year. With annual operating expenses running less than $140,000, an average self storage investment in this example would produce an NOI of $360,000 per year.
Resources
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@TomStorage on X
Self Storage Advisor. I broker self storage and RV/Outdoor storage. I also manage, develop, and invest in self storage. Did I mention Self Storage?
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Podcast: Unlocking Self-Storage Success: Navigating Market Trends with Tom Flannigan
The Passive Wealth Strategy show with Tom Flannigan, the Argus Self Storage Advisors affiliate for Minnesota, Iowa, and the Dakotas.
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Yardi Matrix National Self Storage Report
Yardi’s monthly national summary of new rent growth and the supply pipeline in the self storage industry.
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Argus Self Storage Market Monitor
Gain some insight into current industry issues, market analysis and self storage operational issues by reading our helpful publications.
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Minnesota Self Storage Association
The Minnesota Self Storage Association is a non-profit association committed to strengthening and enhancing the self storage industry in Minnesota.
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Iowa Self Storage Association
The Iowa Self Storage Association is a non-profit association committed to strengthening and enhancing the self storage industry in Iowa.
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Dakotas Self Storage Association
The Dakotas Self Storage Association is a non-profit association committed to strengthening and enhancing the self storage industry in North and South Dakota.
