We talk with a lot of physicians every day who ask us a simple question. “Why should I invest in self-storage?” Obviously, as a self-storage operator, we are biased, but there are three data points that we believe make this a fantastic asset class for physicians to evaluate for their own portfolios.
Wait a minute, self-storage is a legitimate asset class? Some statistics on the self-storage industry that may surprise you. Here are some numbers on the industry as of 1st quarter of 2019:
- Number of self-storage facilities in the U.S. 48,000-52,000
- That’s more than the number of McDonalds and Starbucks in the U.S. combined!
- 4% of Americans rent a storage unit
- Average annual industry revenues of $38,000,000,000
The self-storage industry has definitely come of age in the past ten years. I remember when self-storage facilities were in very rural areas on a gravel pad, and you had to go into the owner’s house to rent a unit. Now facilities are being built on prime real estate on the corner of Main and Main with three-story glass and brick retail offices rivaling the very nicest Starbucks locations!
Why has there been such interest in the asset class? I think that brings us back to the three reasons we are bullish on storage.
The first thing that every investor should look at is historical performance. According to the National Association of REIT (NAREIT), the Self-Storage asset class has achieved an average annual return of 16.85% over the past 25 years. Self-Storage has outperformed Apartments (12.93%), Retail (12.04%), Office (12.15%), and the S&P 500 (7.06%) over that same time period.
I am a big believer that history repeats itself, so I am always interested in the performance of an asset class in an economic downturn. According to that same NAREIT database, looking back at the last recession in 2007-2009, Self-Storage lost -3.86% in value versus Apartments which lost (-6.72%,) Retail (-12.32%), Office (8.16%), and the S&P 500 (-21.10%) Even when downsizing, Americans do not seem to lose their appetite for storage.
Market consolidation opportunity
Finally, investors should understand what the long-term runway may be in a particular asset class. According to the 2019 Self-Storage Almanac, the publicly traded companies own less than 25% of the self-storage market. There is a consolidation opportunity for self-storage operators to acquire facilities owned by mom and pop operators and generate revenue enhancements by deploying a professional management strategy.
The other benefit of self-storage to the physician community is the opportunity to invest without a huge time commitment. There are passive investment opportunities in syndications of self-storage investments from operators around the country. There is also an opportunity to buy the facility yourself or with an investment group and hire a 3rd party management firm to outsource the operations of the property. Many of the publicly traded REIT have 3rd party management platforms.
That doesn’t mean that the asset class comes without risk. The biggest risk right now is on the supply side. We have seen a major development cycle in storage, with many developers jumping in to maximize their returns. As you can see in the chart below from the U.S. Census Bureau, the self-storage industry has kept the construction industry very busy over the last few years. Does this mean it’s too late to invest and garner a strong return?
We don’t think so. Just because the 50 top MSA (Metropolitan Statistical Areas) have seen a bunch of new developments doesn’t mean there are not any opportunities to be had to create value.
Secondary and tertiary markets in the Southeast have less competition and more “mom and pop” operators. Keep in mind that storage is a micro-market business. What really matters is the 1, 3, 5-mile radius around your facility because consumers will not travel for storage. Typically, we see 70%+ of our tenants within that 5-mile radius. It needs to be convenient to work or home for them to use the facility. Unlike multifamily, where a consumer may travel for the right school district or amenity, storage is an air-conditioned garage, so location is key.
Our acquisition team is looking at things like population growth, average income, job growth, rental rate growth in those rings are what tell the story around the demand for storage. Even if a market like Atlanta has seen a bunch of development and may be oversupplied, that doesn’t mean there isn’t a 5-mile radius in the suburbs that has opportunity. It’s definitely a sharpshooter’s game right now in storage.
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