Self-storage may not have the glamour of high-rise office buildings, luxury hotels or urban apartment lofts, but it should be a strong contender for an individual’s investment portfolio — whether that’s in the form of public shares of REITs or in a brick-and-mortar property.
“If I were to invest in one type of real estate directly, over the course of my lifetime, my investment would be self-storage,” said David Corak, an analyst with FBR, who covers publicly traded self-storage REITs.
Self-storage has proved to be a stable and reliable sector of commercial real estate, that thrives in good times and bad. The asset class has actually performed exceptionally well despite the impacts the coronavirus pandemic. In fact, the COVID-19 situation has caused more demand for storage space as many people have had to move more for pandemic-related reasons.
There are two primary ways to invest in self-storage:
- Through a real estate investment trust
- Starting your own self-storage businesses.
Let’s take a closer look at each option below:
1. Investing in Self-Storage Real Estate Investment Trusts
A real estate investment trust is a company that owns and operates income-producing real estate. Shares of publicly traded REITs can be bought and sold just like stocks. The advantage of REITs is that they must pay at least 90% of taxable income to shareholders in the form of dividends.
There are five publicly-traded real estate investment trusts that specialize in self-storage properties:
- Public Storage (PSA)
- Extra Space Storage (EXR)
- CubeSmart (CUBE)
- Life Storage (LSI, formerly Sovran Self Storage)
- National Storage Affiliates (NSA).
Self-storage REITs, when growth is slowing, tend to underperform other REITs, Corak says.
“Over the past 10 years, self-storage has been the best performing REIT sector; it has outperformed all of the major REIT sectors,” he says.
The 10-year annualized return for the self-storage REITs from 2010 to 2019 was 16.8 percent, compared to 12.6 percent for all REITs on average.
In 2015, the self-storage facilities outperformed other sectors by about 40%. In 2016, performance of self-storage REITs started to wane as a period of overbuilding started to reach its peak.
However, in 2020 the pandemic has provided tailwinds for the industry once again proving its recession-resistant reputation. This year so far, returns from the self-storage REITs have risen almost 11 percent compared to 2019. Overall, all equity REITs were down more than 15 percent. The pandemic downturn has dealt a blow to office and retail real estate, but self-storage stands out as one of the best performing real estate sectors
The publicly traded self-storage REITs have well-known brands, a low cost of capital and superb digital marketing platforms for economies of scale that give them an advantage.
“These are brand-like companies that are able to scale and acquire other regional and one-off operators to achieve tremendous scale,” said Brad Thomas, editor of the Forbes Real Estate Investor newsletter.
Benefits for future growth potential include inexpensive tenant turnover costs and sticky tenants who often move in and never leave.
“Once someone moves into storage, usually they stay,” Thomas said.
2. Build or Buying Your Own Self Storage Facilities
If you are looking for a more active self-storage investment with more risk and reward, developing your own self-storage unit business is worth your consideration. Rents have rebounded from their lows in March. Occupancy also remains robust despite sustained levels of new construction.
“The market is still very strong,” said Chris Sonne, National Self Storage Group leader at CBRE’s Valuation and Advisory Services. “There is still tremendous optimism in the sector.”
Here are a few key things to know about breaking into the self-storage industry:
- Financing may be more challenging to come by amid the coronavirus era–especially for newcomers with little experience with the asset class. An SBA-loan is one option available for the property type that is accessible to those wanting to invest their capital into their own self-storage business.
- The pricing to buy or build a self-storage facility is north of a $1 million. The average self-storage facility is around 56,000 square feet. The national average rental rate for a storage unit in 2019 was $0.92 per square foot.
- Location is an important consideration. Being close to population centers is important, and a location with a high number of renters nearby can provide a steady flow of customers.
- Day-to-day operation can be outsourced to a third party management company. Once your self-storage asset reaches a stable cash flow, it should provide you with a steady source of passive income for years to come.
Investors can also put their money into a crowdfunded deal.
Under this investment option, individual investors pool their funds via an online crowdfunding company to into a self-storage opportunity that the crowdfunding company has researched and offered — with the hopes of earning higher returns than more traditional forms of investing.
One drawback is that many of these opportunities are available only to accredited investors, which the Securities and Exchange Commission defines as someone with a minimum annual income of more than $200,000 and a net worth that exceeds $1 million.
Advice For New Investors
1. Do your homework. Whether you investing in a REIT, developing, acquiring or considering a crowdfunded investment, study the deal and its fundamentals. Attend conferences, reach out to operators and experts, do online research.
2. Learn the metrics. The earnings metrics on REITs are different than ordinary publicly traded stocks. Examine the funds from operations (FFO) as the core earnings metric. There are both public and private storage REITs
3. Diversify your portfolio. If you do invest, don’t put all your eggs in one basket.
4. Do your due diligence. Talk to a professional real estate broker or a stockbroker familiar with the sector.
5. Factor in lease-up time. If you are acquiring or developing, it will take time to lease the facility and reach a positive cash flow.