Self-Storage Investment Advice
Self-storage is certainly not winning any awards for glamour and looks, and is a unique commercial real estate asset class. This sector holds a reputation for providing high returns and being “recession proof”. Starting in the 1960’s, there are now over 54,000 self-storage facilities in the United States. In addition, 2017 is set to see an additional 950 stores, for a growth rate of 2.3%.
Self-storage is a top-performing and popular sector among investors for reasons beyond its stable cash flow. Facilities see reduced costs from low tenant turnover (no broker fees or tenant improvement costs), immediate reusability (zero to low re-lease time) and a lean operating structure (minimal management staff, low maintenance).
When you add it all up, self-storage is an investment class that should be included in any investor’s portfolio. Below we outline our best advice to anyone thinking about investing in this top-performing asset class.
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Advice #1: Do Your Research
There are several ways to invest in the self-storage sector: (i) Investing in a REIT, (ii) Developing, (iii) Acquiring or (iv) Crowd funding. No matter which way you choose, it’s important that you do your due diligence. Make sure you study the deal and its fundamentals. Below we outline the more important aspects to think about:
- Supply and Demand: Be sure to research what other self-storage facilities may be located within a three to five-mile radius of a potential investment. These facilities aren’t like retail where many stores can be supported in a given market. While there may be amenities and price differences, you want to ensure you have a safe geographical buffer between you and competition.
- Economic Occupancy Rules: In commercial real estate, we are programmed for a high-occupancy preference. Although, in self-storage this doesn’t always point to high returns. Say a potential investment facility has an occupancy rate of 90%. This looks great, but do some digging into bank statements and you find the economic occupancy rate is actually 70% because rent has not been raised for a few years. Bottom line? Always see how much money is going into the bank each month.
- Secondary and Tertiary Markets: Since self-storage is such a “recession proof” investment it has become increasingly popular among national and regional players. This makes it a lot more difficult for a local investor to acquire properties. To combat such high competition, it’s a great idea to research self-storage investment opportunities in secondary and tertiary markets. This could show where your money will also get more bang for it’s buck.
Advice #2: Know it’s a Long-term Investment
Before investing in self-storage, know this: it’s a long-term investment, not a get rich scheme. Whether dealing in brick-and-mortar facilities or investing in REIT stock, seeing returns on your investment will not happen overnight. Most experts estimate that self-storage investments require at least a 4 – or 10-year hold period.
Though, after delivery and stabilization, these facilities hold value and recover faster than other asset classes. According to CrowdStreet with data reported by NAREIT, self-storage had the highest total annual returns over 5-, 10-, and 15-year averages in an analysis of five different property sectors from 1994 to 2011.
For brick-and-mortar self-storage facilities, there is often a four or five year stabilization period after a change in ownership and/or management. While this may seem like a negative, this investment type offers huge future growth potential. This potential is realized through a lean operating strategy and low, inexpensive tenant turnover.
Moreover, for self-storage REIT stock investments expect a 10-year hold period. While these stocks are expensive on the surface, they are safe and stable investments that produce high annual returns.
Advice #3: Talk to a Professional
You can read a hundred articles such as this, but no amount of information will ever match that of a licensed commercial real estate broker. CRE professionals who specialize in self-storage not only have the market knowledge, but real-world transactional experience. From financing to comps to negotiation, anything can happen in a self-storage sale, lease or purchase. Therefore, it’s always wise to have a licensed expert on your team. To conclude, if you have questions about investing, or need help locating or listing a self-storage asset in the Charlotte market, contact one of our dedicated CRE Brokers today at 704.632.1000.
Percival Partners is one of Charlotte’s most recognized and respected commercial real estate firms with more than 50 years experience in the region. Our professional and experienced real estate Advisors are in the business of listening, understanding, and adding value. No matter the commercial property type you own or seek, you can count on the Percival Partners team to maximize your return and peace of mind. To reach us, you can call us at 704.632.1000 or follow us at @SVNPercival, LinkedIn or Facebook.