Owning a well-managed portfolio of facilities allows for the sale of the portfolio to a well-capitalized group eager to grow and willing to pay a premium. Institutional groups recognize this and will reward the company that has done the work.
According to reports, all three portfolios traded in the low to high four percent cap rate range. For doing the hard work of acquiring a portfolio of well-managed facilities, these sellers received a significant payday. Fragmented ownership ties in with my final reason why now is the time to start self-storage investing:. A low cost of capital. These groups borrow at one to three percent interest, which allows them to pay a three or four percent cap rate for deals.
What is the key to interest from institutional investors and a high valuation? A portfolio of facilities that are similar in quality and located in good markets where they want to be. In other words, acquire the types of assets institutional investors want to own.
More institutional investors will be jumping into the self-storage space in the coming months, making the pool of buyers that much more attractive for groups like us that want to exit our portfolio in the coming years. But I want to add a few more reasons as honorable mentions:. Inflation Hedge: When someone rents a unit, they sign a month-to-month rental agreement, not a long-term lease. If expenses rise due to inflation, you can raise rents to capture that potential revenue or cover your costs.
Besides, where would they go? Down the road where another facility is charging the same amount? The article describes how lenders want to add more storage loans to their portfolios. Self-storage data has proven, not once, but twice, that it is resilient through recessions.
Rental rates have continued their upward trajectory that began last year and show little signs of declining to pre-pandemic levels. Life changes drive storage demand, creating customers that typically absorb rent increases, allowing owners to hedge against inflation. Fragmentation among owners provides an opportunity for the ones who can execute a viable acquisitions plan and exit properly to institutional investors with a lower cost of capital. Figure 3 As you can see in figure 3, rates increased Y-o-Y in every market that Yardi tracks.
Conclusion Self-storage data has proven, not once, but twice, that it is resilient through recessions. This asset class has historically performed well in times of financial strain as consumers look to storage units to provide extra space in their homes without turning to more expensive options. As the industry continues to evolve, the future remains bright for self-storage. The unprecedented development cycle that began in late is now beginning to taper off and markets that were hit by new supply are starting to reach an equilibrium where supply is meeting demand as opposed to supply being greater than demand.
The continued urbanization of the modern storage facility and the increase in percentage of households that use the product should help push this sector to new heights. Self-storage, once thought to be on the fringe the real estate investing world, is now firmly planted amongst the other major sectors. The information herein is being provided in confidence and may not be reproduced or further disseminated without the permission of NexPoint. The information contained in this document is subject to change without notice.
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NexPoint encourages any person considering any action relating to real estate topics discussed herein to seek the advice of a financial advisor. An investment in self-storage includes risks associated with owning, financing, operating and leasing self-storage facilities, and real estate generally; risks associated with the self-storage industry, such as significant occupancy rate fluctuations and relatively low capital requirements or other barriers to entry for competing properties; risks associated with the impact of pandemics, including the COVID pandemic, and the economics of the communities in which the properties exist; risks related to competition from properties similar to and near the properties; and the possibility of environmental risks related to the properties.
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That is a great number for any type of investment. Self-storage facilities can be found in most cities and are often buildings divided into multiple units that customers can rent to store their possessions. Sometimes clients need to rent the storage space only for a month while others need it for the long term, which could be years at a time. Hidden in these self-storage facilities is a potential gold mine for investors looking to diversify their portfolio.
What makes self-storage so successful within the greater real estate investment arena? It comes down to a few factors, especially flexibility and low overhead. Together with increasingly mobile lifestyles, the market is perfectly calibrated for a growing self-storage sector.
Though the phrase self-storage tends to conjure up a singular image of a garage or closet-like spaces—and many do look like this—part of what makes this market so profitable is that it can shift to meet the needs of the local community. Flexibility is a virtue and easy to achieve in the self-storage world. Many storage facilities offer boat or RV parking, for example, so that owners do not have to keep these large vehicles at their homes.
However, these types of offerings are contingent on location. Rather, there are standard storage spaces in many sizes in those locations, but facilities near large bodies of water or along the coast often include boat storage.
One word of warning about storing cars, boats, and RVs: Investors should be conscious of liability. Unlike most other items kept in self-storage units, these items need to be insured, and proof of ownership must be provided. In general, overhead costs for self-storage units are much lower than those for residences or even for offices and commercial spaces.
They just do not need the same level of architectural finesse as spaces that people inhabit. There are no windows to buy or special siding to choose from. Many storage facilities are even built from inexpensive, recycled shipping containers. Since infrastructure costs are fairly low to begin with, there is no reason not to upgrade a self-storage site to make it more appealing.
For example, while almost every self-storage site uses a gate code to monitor who comes in and out of the site, that cannot prevent theft by unit owners. Consider upgrading the units to install door alarms that are coded to individual users, rather than just using locks that someone else can cut. Based on the community, some storage companies provide storage calibrated to wine collectors. Others emphasize climate-controlled spaces that can be a boon to antique collectors who want to protect their finds.
These varied offerings emphasize the importance of listening to customers. Requests like these typically come more from affluent neighborhoods where it is possible to charge higher rents, but it may also be necessary to improve the appeal of the property. In some areas, investors have changed the appearance of their storage units to better fit in, making them look like modern, commercial buildings while maintaining a utilitarian manner inside.
Ultimately, these types of requests require infrastructural changes. Therefore, it will be necessary to assess the facility to determine if the improvement is viable, how much it will cost, and what kind of profit it will yield. During good times, people are buying lots of stuff and need a place to store it.
And during downturns, people are downsizing their homes, so again, they need storage space. People in this asset class are willing to put up with more rent increases than tenants in other asset classes. But the way in which things are optimally run within the industry is shifting. The strategy now is to buy mom-and-pop-owned facilities, upgrade them, increase the income, increase the value, then refinance or resell it to an institutional investor or real estate investment trust REIT.
For example, adding truck rental can increase income by a few thousand dollars on a self-storage facility. Late fees, admin fees, raising rent, selling moving supplies, and putting in a showroom are other options. In other areas of real estate, it is said that one can only make money when they buy.
But the self-storage value formula is to buy from a mom and pop, upgrade to an institutional standard, then refinance or sell to a REIT—and money is being made the whole time. For residential owners and investors, value is limited by comparable properties in the area. The value is calculated by dividing the net operating income by the rate of return or cap rate. This is ultimately what will drive profitability. As of , there are 51, self-storage facilities in the U.
So do we need more self-storage facilities? Consumers continue to find themselves constrained by the space inside their homes and must utilize self-storage facilities. Self-storage may not be the most attractive sector in real estate, but it has caught the attention of Wall Street. The four publicly traded self-storage real estate investment trusts REITs have been turning in impressive results reporting higher occupancy and higher rates with an increase in revenue.
Many have found that their income producing business has increased in value beyond what was expected. They are ready to sell to capitalize on this opportunity. This provides a fertile field for investing opportunities by individual investors looking for income producing businesses that can be proven to be increasing in value with high market demand. This is not a get-rich-quick scheme as it could take years for a return on investment. In the meantime, investors benefit from monthly income plus if utilizing 3rd-party management companies, income without preforming office duty.
If you want to invest in self-storage, there are two ways you can go: passive or active. If you want to be a passive investor, the best way to do so is to buy shares in publicly traded companies operating in the self-storage industry. If you want to be an active investor, you can buy an existing facility or build a new one. Estimates put the number of self-storage facilities in the country between 45, to 60, depending on how a self-storage facility is defined and the methodology used , which translates to 1.
Because the industry is heavily fragmented, a savvy investor may find it worth their while to buy a mom-and-pop facility, turn it around and increase profits, and then enjoy the income or sell to a real estate investment trust REIT or institutional investor. This takes advantage of what is known as a consolidation play , where a handful of market participants initiate aggressive acquisition strategies in order to gain market share.
There is no denying that the market for self-storage is more competitive than ever. Gone are the days when an advertisement in the yellow pages would have sufficed. Most customers find storage facilities by searching for them on the internet. Marketplaces for self-storage, such as SpareFoot , are helping level the playing field, by providing a platform for smaller facilities to reach their customers for a fee.
The built-in downside is that such platforms will also be providing visibility to any independently owned facilities that compete with your own. Increasingly, rentals are occurring through mobile devices, which has made it important to engage in local SEO and to make sure your business is listed on Google Maps.
This article lays out the factors that influence the decision to underwrite a self-storage facility; naturally, these factors aim to maximize the return from an investment, while minimizing the risk. There are three main stakeholders involved in an underwriting deal: operators , lenders , and investors. Although the aims of each class of stakeholders are distinct, they are aligned; they all benefit from the financial viability of the storage facility. Operators use market data and their experience in the industry to build value into the facility; their experience enables them to decide what capital improvements and management restructuring are necessary.
Investors want competitive returns; they may look at metrics such as the equity multiple or IRR internal rate of return to monitor how well their investment is doing. The number of units currently occupied by customers, as a percentage of total units available for rent. Economic occupancy refers to the amount of rent collected as a percentage of asking or gross rent. Another way to understand the concept of economic occupancy is to think of it as the amount of rent successfully collected as a percentage of the amount of that could potentially have been collected.
Economic occupancy may be impacted by factors such as the number of vacant units, outstanding rent payments, and discounts — anything that can increase the gap between actual and potential rental revenue. The lease-up schedule refers to the time taken for newly available properties to attract tenants and reach stabilized occupancy.
Typically, the time taken for self-storage facilities to stabilize is three to four years. Net Operating Income is defined as gross income, less operating expenses. The debt-service coverage ratio is calculated by taking the net operating income and dividing it by the total debt service over the same period. A ratio greater than one indicates a positive cash-flow, while a ratio of less than one implies that the business is generating less income than it pays out to its creditors.
Lenders look at the DSCR to evaluate the creditworthiness of loan applicants. The capitalization rate is defined as the initial yield on a real estate investment. It is calculated by taking the NOI during the first year and dividing that by the cost of acquiring the facility or, in the case of a new facility, the expected total development cost. Because of their reliance on the value of income, cap rates are most useful when calculated for stabilized assets.
If you are interested in an under-performing facility that has the potential to be turned around, you can use the market cap rate suggested by previous sales of similar facilities to get an idea of what the facility will be worth once the income stabilizes.
Alternatively, you could calculate a cap rate based on stabilized future NOI. Ideally, you want to buy or build in an area that has high demand, but low supply. That may seem like a no-brainer, but as with most things, the devil is in the details. Before we talk about demand and supply factors, we need to define the trade area for the facility. You can think of the trade area as a circle containing your most likely customers, with you at the center.
The size of your trade area will vary based on where you are located. Suburban properties tend to have a trade area of 3 miles, a rural property may have a trade area of 5 or 10 miles, whereas dense urban areas like Manhattan may have trade areas of less than a mile. As a general rule of thumb, you want at least 50, people in your trade area. A drive-time of minutes on Google Maps can give you a good idea of how far your trade area extends.
Firstly, you want to look at the number of people living in your trade area. This takes into account the fact that most consumers would prefer to have easy and convenient access to their unit, without having to drive too far. Growth trends are also pertinent, as they have a bearing on the future demand for the storage units in your facility.
Look for areas that have a steadily upward trending growth in population over the last years. The U. Census Bureau offers population estimate data down to the county level, including numeric and percentage growth. Secondly, you should look at the median income of households located in your trade area.
A higher median income means that more households have the means to rent storage space. The median income may also allow you to understand the needs of your potential customers. On a related note, also look at the job growth in the area you plan to operate your facility in.
Strong growth in jobs bodes well for demand. The Census Bureau offers data on median income at the county level, up to If you want more granular data, Income By Zip Code offers median income data at the zip code level. Additionally, you can look at the percentage of households occupied by renters, as opposed to homeowners.
The idea is that areas with high residential turnover will provide the facility with steady demand for its units. This is a big reason why facilities located near military bases and college campuses tend to do well. The number of vacant housing units is also pertinent, but the reason for their vacancy deserves some attention. Vacancies may be an indicator of future moving activity, which could drive demand for self-storage. However, if the number of vacant housing units has been on the rise due to net outward migration, that could be a cause for concern.
An understanding of the movement of housing prices in the trade area can be helpful as an indicator of household wealth; the Housing Price Index released by the Federal Housing Finance Agency is a good place to look for trends in the prices of residential real estate. The average size of a house in the area you are interested in is also a relevant metric to look at.
The smaller the average house is, the better; households will have less space for their storage needs, creating demand for your storage units. You might also want to look at the number of businesses that are located near your facility. Businesses are increasingly becoming important clients for the self-storage industry, and typically prefer units on the larger side for their storage needs. Demand, however, is only one side of the story; there are also supply factors to consider.
When considering supply, there are a couple of things you should keep in mind. When looking at the competition, you should consider the quality and quantity of competitor facilities. REITs have superior management experience, sophisticated technology, and the capital required to sacrifice profits for market share. With regards to quantity, you want to look at the number of self-storage facilities located within the trade area of your facility.
The lower, the better; the general rule is that there should be less than 5. You should also consider the distance to the closest competing facility. Class A facilities command the highest rents; they have superior locations and access, high-quality construction, on-site management, higher standard of maintenance and security, and usually offer climate-controlled units as part of their unit mix.
Class B facilities are a rung lower on the quality ladder, and as a result command lower rents than Class A facilities. Class B Facilities may have on-site or off-site management. You should look at factors like the condition of storage-unit doors, any water or fire damage, and the state of HVAC units for climate-controlled units. If the facility you are interested in is a drive-up or offers vehicle storage, you should examine the asphalt and look for any potholes that might need repairing.
In a nutshell, look for any significant deferred maintenance and factor that into the calculation for the value of the facility. You should also look for anything that may be a source of liability under environmental laws, such as asbestos, mold, lead-based paint, petroleum products, etc. Your lender may require a Phase I Environmental Site Assessment as part of the lending agreement, which covers some sources of liability. As of , there are 51, self-storage facilities in the U. So do we need more self-storage facilities?
Consumers continue to find themselves constrained by the space inside their homes and must utilize self-storage facilities. Self-storage may not be the most attractive sector in real estate, but it has caught the attention of Wall Street. The four publicly traded self-storage real estate investment trusts REITs have been turning in impressive results reporting higher occupancy and higher rates with an increase in revenue. Many have found that their income producing business has increased in value beyond what was expected.
They are ready to sell to capitalize on this opportunity. This provides a fertile field for investing opportunities by individual investors looking for income producing businesses that can be proven to be increasing in value with high market demand. This is not a get-rich-quick scheme as it could take years for a return on investment. In the meantime, investors benefit from monthly income plus if utilizing 3rd-party management companies, income without preforming office duty.