This article discusses the three reasons behind Fairway America’s bullish take on self-storage in today’s market.
Have you considered investing in self-storage? We have, and we do. For multiple reasons, we like self-storage. According to our research1, between 1994 and 2017, self-storage outperformed every other property type. During that period, self-storage averaged 17.42% (REITs only) annual returns over that time-frame while multifamily properties averaged an annual return rate of 13.42%. Since 2008 (during the Great Recession) self-storage has averaged a 13.66% annual return—34% higher than residential, and 85% higher than the 7.39% average return for all major property types2 excluding self-storage. Furthermore, only 18% of the self-storage facilities are owned by six large public REITS, another 8% are owned by the next 100 top operators (excluding the REITs), and the remaining 74% are owned by small owner operator “mom and pop” shops3. Within this demographic, we see opportunity.
Multifamily vs. Self-Storage
First, we find that the economics of self-storage generally mirror multifamily projects, but they are free of the challenges inherent when managing tenants who occupy the property as their primary residence4. Multifamily is appealing to investors primarily because of the relative cash flow stability but, unfortunately, this benefit comes with the challenge of constantly having to manage tenants. Tenants may send in complaints and requests for expensive maintenance and repairs, which requires staffing to both handle the complaints and make the repairs. Meanwhile, self-storage property can offer similar cash flow attributes but is less management intensive as there are no toilets, refrigerators, stoves or similar amenities to repair. Nor does storage require landlords to placate tenants’ day-to-day demands. Evicting people from storage units doesn’t require kicking people out of their homes and typically is a much more landlord-friendly process.
Historically Resistant to Recessions
Second, self-storage facilities have historically been relatively resistant to recessions5. Typically, storage facilities are used for two purposes, either temporary (transitional) storage, or permanent storage. During a recession, individuals downsizing, moving, or adapting to new life circumstances may increase the likelihood for transitional use of the storage facility. Therefore, storage facilities can be a true contrarian play during market corrections. Permanent users may switch to transitional use because of a change in circumstance or maintain the permanent occupancy of the unit until things improve. In some cases, users will sell all their belongings and vacate the unit, but this can be a difficult barrier for many people to overcome since they tend to become attached to their belongings. As the following chart shows, during 2008 self-storage was the only major property type to produce positive returns.
Repurposing Abandoned Commercial Properties
Third, some exciting new repositioning opportunities exist in today’s self-storage space that make a great deal of sense to our underwriting philosophy. For example, one strategy is to buy vacant commercial properties located along retail corridors in highly densely populated parts of major metropolitan areas that have historically been supply constrained due to zoning restrictions that have limited self-storage use. Utilizing expertise in working with local municipalities, some of our partners have been able to obtain the necessary permits to repurpose blighted properties into class A self-storage facilities. Because of limited demand for large vacant commercial properties (50,000+ square feet), purchase prices can approach the value of only the underlying land, resulting in development costs well below the replacement cost of ground up construction. The combination of what we perceive to be below market costs and irreplaceable locations may have the potential to create attractive risk-adjusted returns to our investors. Of course, any investment in large, vacant commercial land may be risky, and the self-storage market may not always behave as it historically has, but we think that it currently has some potential.
Considering the industry-wide market dynamics, introduced by the three points above, we see a bright future ahead in self-storage, particularly certain sub-segments such as this example. All private placement investments like this are inherently risky, and our investment objectives may be very different than yours, but if you are interested in self-storage opportunities, please feel free to contact us for more information. We look forward to talking with you!
Investments in self-storage are speculative and involve substantial risks. Consider the risks outlined in the Investor Document Package before investing. Risks include, but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objective.
This is not an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained in this article constitutes investment, legal, tax or other advice and no investor should rely upon it in making an investment or other decision. Please consult with your own financial advisors, attorneys, accountants, and other professionals who can help you understand and assess the risks associated with any investment opportunity, including self-storage.
Fairway America offers securities through North Capital Private Securities Corporation (NCPS), member FINRA/SIPC. Articles or information from third-party sources outside of this domain may discuss Fairway America or relate to information contained herein, but Fairway does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party content, do not constitute an approval or endorsement by Fairway America or NCPS of the linked or reproduced content.
2Our research excludes property types that have incomplete data dating back to 1994.