Why do people use self storage facilities? The reasons why people store their belongings affect nearly everyone at some point in their life. And these reasons aren’t going anywhere anytime soon. They are known as the Four D’s of self storage demand: Death. Divorce. Dislocation (moving). Downsizing. The common theme here is change…change in life comes in different forms and forces people to decide to either part with their old stuff or put it in storage. At this fork in the road, many decide to store their stuff. The reasons could be sentimental or simply just because they need a few months to decide where to put it (donate it, sell it).
We became interested in self storage years ago and were attracted by these underlying reasons of why people store their belongings. People ultimately don’t want to separate from their stuff. And it’s a sticky business…meaning that once in storage, it’s difficult for people to pull their belongings from the storage facility. The average time someone uses a storage unit is 14 months, according to Neighbor.com! Many of us can relate to this. Because the Four D’s occur regardless of how the economy is doing, the storage business is also considered to be “recession resistant”. The storage industry performed very well during the height of Covid in 2020.
The self storage business has many similarities to the multifamily apartment business. The assets have many tenants that help provide steady income when managed properly. The larger assets also deliver economies of scale in the form of multiple tenants, multiple income sources (rent, tenant insurance, storage and moving supplies), better terms on insurance and lower property management fees. With these economies of scale and an operational team who has a strong track record, the terms on bank financing are also very favorable for the borrower with non-recourse terms, low interest rates and long amortization periods.
Similar to multifamily, we like the underwriting (analysis) side of this business too. A self storage property has a market demand that is highly localized…typically within a 1-5 mile radius of the property. Most people don’t want to drive more than five miles to get to their storage unit. So when analyzing this, it’s critical to understand the other storage suppliers (competitors) in this geographic area.
Another fun fact on the storage business…As a landlord of a self storage asset, you can actually be nimbler than an apartment owner. With apartments, you are typically stuck with annual leases which means that some potential rental income is not able to be earned at the market rates because below-market-rate rents are currently under lease and locked in until the lease expires (known as “loss to lease”). But in the storage business, the leases are monthly. This means that owners can bump up monthly rents as the market demands it. And by leveraging technology and market intelligence, rents can be increased systematically without having to wait for that annual lease to expire before adjusting rents to match the market demand. Month-to-month leases also allow a property manager to get rid of the non-paying tenants more efficiently.
The storage business also allows for other ways to add value than just increasing rents to meet market demand or delivering better operational efficiency (lower expenses). Sometimes storage units can be converted to climate-controlled units when the market demand for climate-controlled storage is there, and climate-controlled units earn a premium. Other times the property may have an adjacent, vacant parcel that will allow for expansion of storage space.
When looking at the macroeconomy, the storage business is highly fragmented. According to the 2020 Self Storage Almanac, less than 25% of all storage facilities are owned by publicly traded storage companies…think of Public Storage, Extra Space, U-Haul, CubeSmart. The remaining 75% of the facilities are owned by mom-and-pop companies. This presents great opportunities on the buy-side and on the sell-side. Let’s think about the buy-side….Most of these small owners are not sophisticated and are not getting the highest income out of their property. This presents great opportunities for the sophisticated operators who have the team and systems in place to be able to add value by driving up rents, improving rent collections, and/or reducing operational expenses…similar to why we like the strategy of multifamily value-add business plans. Let’s now think about the sell-side….After the value is added and the income is steady with a professional management team in place, this asset delivers steady cash flow and is low on the risk spectrum. When aggregated with similar properties, these assets can be sold as a package to larger investment groups looking for yield and low risk.
As you can see, the storage business has many similar characteristics to the multifamily apartment business that make it attractive from an investment standpoint. Storage assets can deliver nice cash flow with a potential to force appreciation by adding value to the property. Because the industry is fragmented with many, small mom-and-pop owners, these investment opportunities exist. We like this supply of assets being available in a fragmented industry. Storage is also driven by the times in life where people experience a fork in the road and need to part with their stuff or keep it. The Four Ds will be around to affect change and cause the storage issue to remain in people’s lives. We also like these “recession resistant” drivers of demand.
