Why I like self storage facilities as an asset class

Once you start looking at syndication deals, you will find that there are a huge number of opportunities to invest in a wide variety of real estate – as well as other types of syndications as well (did you know that many movies and broadway shows are syndications?).

While many people consider “real estate” a single asset class, for most investors, there are multiple asset classes within the broader area of real estate investing. These asset classes include, but are not limited to: short term / vacation rentals, long term single family rentals, multifamily (apartment buildings), strip malls, shopping centers, warehouses, office buildings, hospitals / medical centers, storage facilities, and agriculture.

In general, with real estate as with other investments, some level of diversification is useful – especially as a passive investor – since different asset classes move in different cycles. However, many investors typically have a few favorite asset classes that they particularly like.

For me, self-storage is my favorite. It has a lot of advantages that, to me, make it an ideal cash flowing investment. My top four are:

1) Self-storage is generally considered to be a recession resistant asset class that has, historically, been less likely to be affected by economic downturns than other types of real estate investments. You can see from the chart at [1] that self storage actually provided a positive return throughout the 2008 recession, unlike the other asset classes.

Self storage has also had historically low foreclosure rates, even during recessions. Note that while the table at [2] starts in 2011, it typically takes 12-24 months for a foreclosure to be recorded (the property needs to be delinquent for a period of time, paperwork needs to be filed, then the courts need to approve the sale, and the sale needs to occur) so this is a reasonable reflection of the fallout from the recession that started in 2008.

There are three main reasons for this. First, self-storage has become a necessity for many people who need a place to store their belongings, regardless of the state of the economy (the LA Times [3] and Bloomberg [4] have reported on this for years) . Second, self-storage is a relatively affordable option for storing belongings, making it accessible to a wide range of people, even during economic downturns (average cost of a unit in 2022 was $110 [5]). Third, during a recession people may need to downsize, bring on renters, move in with roommates, or otherwise need to relocate their belongings and self storage provides them a place to hold their treasures.

Of course, as is often stated, historical performance does not guarantee future returns. The world is a very different place than it was in 2008. Nonetheless, I believe a well run, well located, conservatively financed, self storage facility has great potential to provide solid cash flow through a recession.

2) The self-storage market is currently dominated by small, independent operators with the top 5 operators controlling less than 37% of the available space and focused primarily on the largest facilities [5]. This is a great opportunity as you can buy an existing, smaller, facility or portfolio from a small operator and benefit from an inefficient market.

While the pandemic bump for storage units has receded, the current demand is still above pre-pandemic levels, with vacancy rates in the 8.0-8.5% range, down from over 9% pre-2020 [6]. Because self storage is highly seasonal, with higher demand during the summer months when people are moving, a reasonable expectation is for a facility to have 10-15% vacancy, especially in an area where supply can increase to match demand – unlike many downtown areas. Overall, the storage industry is expected to grow by over 5% per year, compounded, from 2022 – 2027 [7].

3) Self-storage is a relatively easy asset class to manage. Self-storage units are relatively small and easy to maintain since they don’t contain plumbing, and have minimal electrical (if any). The buildings are typically simple construction, either concrete or wood frames, with minimal maintenance costs. In addition, there is the opportunity to use technology – such as website signups, automatic payments, access controlled gates, and security systems – to reduce the operating costs. While this requires an upfront investment, the resulting operational efficiency can improve cash flow for investors.

4) Despite self-storage tenants being on a month-to-month lease, the ones who are not renting based on a fixed, short term situation such as a move, tend to be relatively sticky. This is due to the combination of the relative affordability of the units and the perceived high cost of emptying out the unit and finding a new home for their belongings. This means that, in many cases, bringing a unit up to market rents can be done more aggressively than with other properties that have longer lease terms (for example, multifamily leases are typically 12 months and retail leases can be 5-10 years and so cannot adjust for changes in demand as easily).

The ability to raise rents to market is also supported by the fact that self-storage is a relatively lightly regulated asset class. While it is important to be aware of, and follow, the relevant laws, there is less government regularly than in other types of real estate investments. For example, there was no moratorium on rent payments for storage units during the pandemic and municipalities do not have caps on rent increases for storage units. This can be beneficial for investors, as it can reduce the risk of management not being able to turn around a non-performing unit for an extended period of time.

Of course, no asset class is perfect. There are challenges with self storage including the ongoing building boom [5] and the low cost of entry. The high turnover can also make the cash flows vary dramatically over the course of the year, as demand is much higher during the summer months when people tend to move, and drops off during the school year [8]. And the expenses associated with building and operating a facility have gone up considerably since 2020 [9] as materials, labor, insurance, taxes, and energy prices have all increased. Consumers are also expecting more capabilities and features with their units – such as 24 hour access and in some cases climate control – raising the operational costs to provide those assets. Fortunately, these features often enable higher rents as well.

This is also not an asset class with as much potential upside as, for example, a vacation rental. There are things that you can do to improve a building and attract a higher class of tenants, but there is never going to be a huge difference between facilities, so there is only so much you can do to differentiate yourself from your competition and thus only so much you will be able to raise rents. Once you are providing a well maintained, secure, climate controlled, facility your rents are effectively topped out.

Within an asset class, the details of the specific asset are also extremely important. Location, demographics, and the property itself all need to come together to make a good investment. However, as a general rule, I do believe that the cash flow available from a well managed, well located self-storage facility can be hard to beat.

If you have any questions or comment about this post, please email them to me at blog@mbc-rei.com, I will reply to the questions that are straightforward and will turn the questions requiring more detailed answers into future blog posts.

For additional reading:

This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.