Investing In Self-Storage Units

The profile of the self-storage industry has been on the rise in recent years, driven by such popular series as Storage Wars. However, for the serious investor, what …

The profile of the self-storage industry has been on the rise in recent years, driven by such popular series as Storage Wars. However, for the serious investor, what matters isn’t the hidden bonanza that lies behind the locked doors of abandoned units, but whether or not investing in storage facilities provides a strong and sustainable return on investment. In other words, what are the current trends in the industry, and are they likely to continue?

Right now, the market for convenient, cheap self storage appears to be booming. Occupancy rates are hovering at around 90%, which in reality represents nearly full occupancy given the high turnover of tenants – three-month leases are very common in the industry. At the same time, rental prices appear to be rising at around 5% a year, indicating that landlords are able to benefit from ongoing and increasing demand.

Moody’s released a report as recently as July 2013, where they predicted that strong growth is likely to continue for at least the next 3 to 5 years. They cite a number of reasons for this. First, there is a growing trend among so-called "echo boomers" – children of the original baby boomers that are aged between 18 and 34 – to live in apartments rather than purchasing homes, which is leaving them with insufficient storage space. Second, demand from the corporate sector is increasing, leading to longer occupancy terms and more stability for the industry. Third, they point out that demand for storage appears to be relatively recession proof, with storage faring significantly better than other sectors of the real estate market in the Great Recession of 2008 and 2009. They also point out that the customer base is relatively diverse, so that storage providers do not have large exposures to individual tenants.

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There is further evidence that the self-storage market is heating up. For example, Acadia Realty Trust recently sold 14 facilities across New York City, receiving approximately $300 million from the purchaser, Storage Post. While this is not an enormous real-deal for New York, what is impressive is the capitalization rate, which came in at a very low 5.5%.

To explain, the capitalization rate is the ratio of the net income of the property to the selling price. For example, if a property has $10 million in net income, and sells for $100 million, then the rate is 10%. Lower rates indicate that the purchaser was willing to pay more for the property given its income, and presumably did this because they believed that the long-term earning potential would increase. Basically, this is the inverse of a P/E ratio with a stock – a 5.5% capitalization rate is the equivalent of P/E ratio of 18. Less than a year before the Acadia transaction, capitalization rates were running at an average of 7%, and reached as high as 9% during 2009.

The outlook is also bright for another reason. Currently, construction rates are low, with only about 200 facilities currently being built in the US. Compared to the 2600 facilities constructed between 2003 and 2007, construction is down about 60%, so the risks of oversupply are minimal.


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