Our goal at Limitless Investing is to consistently provide high-quality, alternative real estate opportunities to our Investment Club.
While we continue to believe strongly in the investment thesis for multifamily apartments, we also recognize that there are other real estate asset classes that can provide additional layers of diversification, while also offering unique risk/return profiles.
Let’s dive into an overview of Self-Storage and why you should consider it in your portfolio.
What is Self-Storage?
Self-storage facilities are warehouse-style buildings subdivided into smaller storage units. Historically, these were basic structures where individual units had a door, lock and key. Today, self-storage facilities can be high-tech with advanced climate control, lighting and security systems that offer a range of ancillary amenities for tenants.
Until recently, self-storage was considered a small real estate niche. Today, as demand for self-storage grows, it has attracted the attention of prominent institutional investors and sophisticated sponsors looking to unlock upside potential while providing investors with additional portfolio diversification.
What is the Investment Strategy for Self-Storage?
Many self-storage facilities are owned by long-term, mom and pop operators who are largely hands-off operators. A large number of these owners are on the brink of retirement and rather than modernizing their facilities, they are opting to sell.
For skilled operators, the value-add potential of self-storage facilities remains high. Operators can increase the NOI through value-add improvements, which increases the value and positions the property for a refinance or sale. The latter is especially common with so many institutional investors, REITs, and large family offices looking to add self-storage to their portfolios.
What are the Demand Drivers for Self-Storage?
Present market dynamics are highly favorable to self-storage investing, with key drivers such as:
Movement between metros: even before the pandemic, a broad contingent of Americans were moving between metros, generally adding net population to “sunshine” states such as Texas, Florida, and Arizona. This, along with, the general trend toward urbanization, has contributed to increased demand for self-storage units.
Demographic trends: the U.S. population is rapidly aging. As of 2015, there were more than 46 million older adults aged 65 and older living in the U.S.; by 2050, that number is expected to grow to 98 million. The aging of the country means more Americans moving out of larger homes, downsizing or relocating to assisted living.
Rise of e-commerce and reduced office space: well beyond the initial economic shock of COVID-19, many sectors of the economy are operating differently. Retailers are shifting more resources to e-commerce and using less office space, driving the need for flexible storage space to host inventory, office furniture, and other hard inputs.
What are the Advantages of Investing in Self-Storage?
Investing in self-storage offers several key benefits, including:
Less overhead: self-storage investments generally involve no plumbing, minimal electricity, minimal insulation, and less vigilant management. Operating cost and complexity tend to be much less than other real estate sectors.
Simplified tenant management: leases are typically month-to-month, tenant needs are typically minimal (since only their possessions occupy the space) and transitioning between tenants tends to be simpler. Because of this, self-storage investments tend to entail less vacancy risk than other asset classes. Eviction laws are also friendlier to self-storage operators than they are to multifamily or even office landlords.
Diversified tenant base: because self-storage properties are structurally less complex than other real estate, even smaller facilities often have more than 100 units. As such, the potential for positive cash flows at any moment is strong. For a typical storage facility, the breakeven occupancy rate to service standard debt is roughly 45%. That percentage for retail, office and commercial spaces can be 65% or more.
Low vacancy rates: properly managed self-storage facilities tend to have low vacancy rates. The demand drivers discussed above have pushed vacancy rates to all-time lows.
Recession resistant: the self-storage market has acquired a reputation for resilience even during downturns. Economic pessimism or aggregate job losses may result in renters downsizing, or putting off home purchases. In fact, self-storage real estate investment trusts (REITs) produced an annualized return of 16.54% between 1994 and 2020, the highest return on average of all REIT sectors during that period and an over 6% higher rate of return than the S&P 500. This 26-year period included three recessions, including the prolonged Great Recession.
We believe self-storage investing is an established way to tap into predictable cash flow with monthly leases that allow self-storage operators to adjust to changing market conditions in real-time, thereby maximizing the asset's value.
Due to generally low cap-ex requirements, operational simplicity, and a counter-cyclical investment thesis, we think self-storage investing offers the potential for strong downside protection as well.
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