Self Storage Will Remain Strong in 2021
Approximately one year ago, this country faced a corona virus outbreak that morphed into a global pandemic. It not only resulted in worldwide sickness and some loss of life, but had a severe economic impact on the U.S. The imposed lockdowns forced the closing of restaurants and what were deemed as non-essential businesses, prompting the loss of jobs and livelihoods. Addiction, abuse, and suicide are on the rise, and many are concerned that the economic fallout of this pandemic is going to propel the country into recession.
Unfortunately, this outbreak has been fueled by the media and politicized to the point that many people aren’t certain where truth begins and ends. Lives have been disrupted and people are frustrated.
Despite this mess, self storage is a major industry that remains strong and resilient as we move into 2021.
Self Storage Remains Strong in the New Year
Self storage isn’t glamorous, but it is recession resistant. It’s a growing sector that more often than not turns out to be a sound investment. According to Aerial Investment Management, “during the 2008 financial crisis Self-Storage REITs delivered a 5.1% return while General REITs delivered a 38% loss! Self-Storage as an asset class has been a very good investment during recessions because it is stable and generates positive cash flow.”
What Makes Self Storage a Good Investment?
Why is self-storage investment attracting single-family, multifamily, and other real estate investors who are looking to increase their wealth? Here are a few of the reasons that it’s such a lucrative investment opportunity.
- People would rather lose their homes than their possessions. People are reluctant to discard their belongings because “you never know; we might need it someday.” During the distress of this pandemic, people have lost their businesses and their incomes. When this kind of downsizing is forced on them, people still want to be able to keep their personal and business possessions. When the economy is good and people eventually recover from this mess (and they will), businesses will grow, larger homes will be purchased, and shopping will resume in full force. People will need a place to store business inventory, extra household items, and so much more. In one way or another, there is an unfailing need for self storage.
- You make money when you buy, operate, and sell. In most areas of real estate, the standard thinking is that you make money when you buy. The self-storage formula is to buy under-managed, under-enhanced, and under-developed facilities, upgrade to institutional standards, then refinance or sell to a REIT (real estate investment trust). Cash flow is stable, and you’re making money through the entire process.
- Even ordinary investors can get in on this trend. Self-storage involves little capital outlay as compared to other types of commercial real estate. If you find the right buyer, you don’t have to be wealthy to invest in self storage. Investors can participate in the self-storage real estate market by purchasing shares of a REIT that focuses on this industry.
- Value isn’t limited by comps. For residential owners and investors, value is limited by comparable properties in the same area. Commercial real estate isn’t constrained by these approximations. To calculate value, divide the net operating income by the cap rate. If you can increase the numerator and compress the denominator, you can dramatically increase the value of your assets.
- Self-storage tenants are “sticky.” Self-storage tenants are willing to accept more rent increases than tenants in other classes. If an owner increases rent on a $100/month unit by 5%, it’s highly unlikely that tenants are going to waste time relocating their belongings for $5. It doesn’t make sense. An apartment dweller, however, might see a 5% increase on $1,000 as motivation to save money by moving.
- New college graduates love apartments. The majority of college grads don’t have the finances or the desire to immediately saddle themselves with a mortgage. Home ownership among this age group is around 13.2%. But they love spending money on toys like jet skis, boats, ATVs and a variety of other items that need to be stored.
- A key demographic driver is the retirement of baby boomers. When baby boomers make the decision to downsize, they find it hard to let go of their beloved possessions. Self storage gives them that attic or basement that they no longer have. They can store items to eventually give to their children or other family members.
- High divorce rates prompt the need for extra storage. Sadly, a very high percentage of marriages end in divorce. This means that someone usually ends up in an apartment that is probably short on room compared to the previous home. The challenge is to find a space to store all the items that were accumulated during the marriage. Self-storage becomes the solution by providing the time and space needed to sort through combined possessions.
- Self Storage is continually evolving to meet customer needs and industry standards. Self storage operators understand how to adapt not only to what their customers need, but what they want. In the current climate, Industry leaders have capitalized on their prospects’ interest in contact-free rentals by adding an online rental option to their websites.
Please understand that all topics mentioned above are not directly connected to the pandemic, but, the residual effects of Coronavirus has helped to drive increased demand to an already attractive asset class.
One final fact; the national historical average of foreclosure in self-storage is only 2%. As long as you buy it right, run it right, and time it right, you’re not likely to lose money.