Investors looking to park their money in real estate often consider self-storage. Known as a resilient business model through good times and bad, a self-storage facility can generate reliable returns while being relatively easy to operate. Finding the right property, however, can be elusive. Many have fumbled by jumping into the business too quickly
If you are thinking about buying a self-storage property for the first time, it is important you do a lot of research to better understand the nuances of the business. To get you started, we spoke with some industry brokers to learn more about the current state of the market and what new investors need to know about the self-storage industry.
Current Hurdles
Nationally, the self-storage industry is in a bit of a slow period, coming off the highs of the pandemic. That means average street rates and occupancy levels are on the decline nationally, which makes it harder to finance the purchase or construction of a mini-storage complex.
“It’s not always easy for want to be operators to get into the business because right now you have financing issues,” said Connie Neville, Self-Storage Specialist & National Director at National Storage Partners. “A lender is going to look and say why should I give you money when you don’t know what you are doing?”
Neville added that there are several banks that offer SBA loans that are supportive to helping new operators that qualify get started in the industry.
Another hurdle is current mortgage and interest rates, Neville says nothing that it’s much harder to pencil deals at 6 or 7 percent than it was a few years ago at 3.5 to 4 percent—especially amid a period of declining rental rates.
“It is a challenge to sell or buy a home right now. If there is no movement out of apartments, out of the starter homes, out of the baby boomer homes because buyers can’t get the money, then it’s a damper on the growth of the self-storage industry world because they can’t raise the rates and people don’t move out.”
Opportunity Knocks
For those with investable funds in hand, the self-storage biz remains an attractive draw despite a sluggish couple of years in the sector.
“Rates and demand have been facing a lot of headwinds over the last couple of years and transaction volume has been following suit with that,” said Scott Schoettlin, senior managing director at SkyView Advisors.
“What we are noticing is that when we do put good product out on the market we are seeing a large uptick in the number of groups signing the NDAs and doing the underwriting, and we’re seeing an increase in total offers per deal,” Schoettlin said.
Schoettlin said he’s seeing buyers from the top 100 storage operators as usual, but lately he’s seen more buyers that are transitioning from other asset classes such as retail or multifamily.
“Some of the more competitive offers lately are coming from groups that have been representing family office money and they are just showing an interest in this asset class,” Schoettlin said.
What’s attracting them?
“Self-storage overall is still a very resilient asset class. If these are the toughest two years we’ve seen in some time, then it’s not really that bad,” Schoettlin said, “We did not see a big drop off in occupancy. We haven’t seen a lot of rate growth although that is turning around this year.”
Schoettlin said street rates and demand have been rebounding in the top MSAs since the beginning of this year and most market declines have flattened or have seen positive rate growth through the summer leasing season.
“The positive rate growth we are seeing and the absorption is coming through, some of those reasons people are feeling more optimistic for the next two to three years for storage, seeing where the activity is right now,” he said.
Think Outside the Buy Box
With fewer deals on the market and more competition looking at deals, securing a suitable self-storage property can be the biggest hurdle new investors face.
Anne Blackwell, a partner at EquiCap Commercial, explains that every buyer has their own buy box, a checklist of criteria that a buyer has for a property. The problem is, every buyer has the same buy box.
“They are all looking for the value add, room to expand, rent below market, it is almost a cliche,” Blackwell said, “Get rid of the buy box. Give me the do not buy box.”
In other words, there is not enough inventory to satisfy investor appetite. “It is taking a while for this new equity that’s coming in. They are anxious and excited but they have to be patient for the right deals to come along,” she said.
The option to operate a self-storage facility remotely has opened up the prospective inventory for buyers into a nationwide quest, allowing investors to consider properties in other states or regions. But Blackwell cautions investors that remote management isn’t a one-sized fits all solution.
“There is a misconception they can buy a property and set it up with all the automations and lean into it for passive income. It is still a business that needs to be managed and not every remote managed facility works,” Blackwell said.
What Investors Need to Know About Buying Self-Storage Right Now
- Operating Your Facility. Blackwell said the biggest misconception is that remote management is a cookie cutter model for success. “I’ve seen cases where diversified equity comes into the industry and they implement the automation model and switch remote management companies three times thinking that was the solution,” she said. What was needed? The solution was a hybrid model with staff on-site.
- Self-Storage Is Highly Fragmented. The largest 100 self-storage operators own about 50% of the 55,000 or so self-storage facilities in the country. “The 50% that really holds up the industry on its shoulders are the small operators, with two or three stores or maybe just one, and they’ve been that way since the industry came out of its infancy,” said Neville.
- Market Analysis is Critical. “What I would like to see new buyers asking us about the underwriting and about our assumptions, how did we arrive at the value and let brokers walk them through the deal analysis,” Blackwell said. For example, “It can be very challenging for newbies to discern what street rates really are when you have a larger operator who is asking extremely discounted street rates but they know how to manage that through rate increases. For someone that is new that is all they see, so underwriting is very challenging.” Blackwell says partner with a broker that can guide you through the process and what the market rents actually are.
- The Price of Admission. Blackwell said buyers financing at market rate interest to buy a property should be prepared to put down 35 to 40% just to get into a deal. With SBA loans, Blackwell said buyers can lower their down payment but they will pay more on the interest rate.
- Watch Out For Oversupply. One reason for the recent slump in storage is too much development in some markets. Schoettlin cautions against buying properties in markets where the amount of square foot per capita is in the double digits. Neville adds: “The Self Storage Association recommends the gross square feet per capita should be 7 and 7.5 square feet of storage per person. If you get over that nationally you are tipping the scales towards oversupply.”
- Find Your Sweet Spot in Secondary and Tertiary Markets. Schoettlin advises buyers just starting out to look for opportunities where they will not be competing with large private equity groups or national REITs. “It is very difficult for someone new to the space to be able to get the other cap rates some of those larger groups can get to at closing. I would focus more on secondary and tertiary markets where you won’t face as much competition,” Schoettlin said. Look for facilities in areas with low saturation (less than 10 square feet per capita within a three to five mile radius) and median incomes between $50,000 and $60,000. “If you see median incomes higher than that, that’s a positive sign for future rent growth,” Schoettlin said.
- Buy the Right Size Facility. Another way to find competitive deals is to look for facilities that are 50,000 square feet or smaller. “If I was going out as an individual buyer, if you look at larger facilities, you will be competing with well-capitalized groups. If you look at a facility around 30,000 net rentable that may below the threshold many institutional buyers would consider,” Schoettlin said.
- Find a Fixer Upper. “A lot of properties require cap ex spending. If someone can come in with some capital or in-house expertise—you see a lot of people in the construction industry that get into storage—and can step into a facility that needs some TLC…someone that is willing to put in the spending and elbow grease can add a lot of value that helps them raise rates once they improve the quality of their rentals,” Schoettlin said.
Once you’ve acquired your self-storage property, you’ll need a way to operate it. Whether you go third-party, staffed or remote, you’ll need systems like management software, payments, access control, insurance and a new website for online rentals. Storable offers all the tools you need to operate a facility on one platform. Learn more how Storable can empower your new self-storage investment.
