Think about it. Self-storage requires mostly space from you - land to pour concrete and put up secure buildings that don't require infrastructure beyond basic electricity for lighting. Your customers do most of the work for you, moving items into and out of the storage units. Your management is primarily there to monitor payments and to keep things tidy and secure. The only time you really have a problem is when a customer fails to pay bills, and then you can auction off the contents of his or her storage space, hose out the space, and have it ready for the next person. There are few categories of commercial real estate that can promise this much security.
Current and Future Market Changes
Right now, the commercial real estate market for self-storage is somewhat stagnant because the competition between storage facilities is unusually strong. Indications are that this stagnation is getting ready to break up, allowing growth to happen once again.
Why is this changing? It is largely because of current market dynamics. First, the slowdown in building self-storage properties allowed the commercial real estate market to catch up with the capacity. And it's caught up just in time to provide space for two crises of our times: the housing foreclosure problem and the Baby Boomer retirement trend.
For the last ten or fifteen years, consumers have moved into larger and larger houses. Those houses fill up with things: furnishings, mementos, china, clothing, appliances, and decorations. When a single-family house is foreclosed on or its owners are forced to sell to avoid foreclosure, it is rare that the family moves into a new home of similar size. Instead, they downsize, moving into an apartment, a smaller house, or in the worst case with other family members. Often, they don't want to give up the possessions they've spent years accumulating that are now in the way. Where do they go with it? Self-storage is one of the most obvious choices.
Then there are the baby boomers. The first few have already begun retiring, and the trend is only going to become more prevalent. As this generation ages, they are likely to move into smaller and smaller homes, either apartments, senior citizen communities, or nursing homes. Most of the time, they will be selling their now-too-large home, but of course there will be no room for the possessions accumulated over a lifetime in their new homes. Many will choose to use self-storage to hold onto their possessions. Between the two trends, there almost has to be a commercial real estate boom involving senior care, apartment buildings - and self-storage facilities.
Commercial Real Estate ROI for Self-Storage
It's critical for a good ROI to be generated when you buy or develop any kind of commercial real estate. A decade or so ago, Wall Street did not see self-storage as the sort of real estate investment that would bring impressive returns. Today, that's changed.
Though self-storage is one of the slower commercial real estate investments to start turning a profit, when it begins to move it is both lucrative and stable. With self-storage, you can't really pre-lease your units, as you can - indeed, must - with other forms of commercial real estate. Sometimes, depending on your area, storage spaces fill slowly.
But then the balance shifts. Once your facility is past the break-even point, you can see the primary advantage: because you are dependent upon dozens or hundreds of tenants and not a handful, having a single person leave or default on a lease is not the catastrophe it can be with other commercial real estate. Sure, you have a few tenants moving out every month. But you also have a few moving in, and you don't have to have all your units consistently filled. Empty space costs you only rent, not the combined expenses of lost rent, security, air conditioning, electricity, maintenance checks, etc. You never have to invest in retrofitting properties to entice new people to move in.
In essence, you have a smooth, perpetual flow, like a river of tenants, consistently keeping your commercial real estate profits liquid.
As self-storage has matured as a commercial real estate business, a track record of profits has also been laid down at about seven percent a year, once the property has reached maturity. This is very good for a real estate property, and paired with the excellent cash flow, a good self-storage business in a well-chosen location can appreciate very well, making it a very good profit generator as well as an asset that grows in value.
Not only do self storage facilities do well in comparison to other commercial real estate investments, they seem to become more, not less, robust in times of economic turmoil. This is because self-storage is designed specifically as a transitional measure, a place to put your stuff when you don't yet have a permanent new place to put it, and therefore will always do better at times that more people are in that transitional and unsure phase.
Where To Invest In Self-Storage
There are certain key areas where self-storage commercial real estate properties are especially lucrative, and others where they will tend to stagnate. Even more than with other forms of commercial real estate, storage facilities have to be in exactly the right places. But where are those places?
People who store their stuff want to be able to get to it if they are transitioning in place, and want to be able to conveniently store it if they are transitioning elsewhere, as when a soldier is deployed and must store his possessions in the interim. Keep this in mind when looking for locations.
A key spot, for instance, may be an area between neighborhoods of differing socioeconomic profiles. You can expect flow between them to move right past your self-storage facility. Military bases are in areas mostly saturated with self-storage facilities, but if you find out that there will be a large growth in the future of one, a new self-storage facility near that one might be a wise move. One overlooked spot is near senior retirement homes; older people don't like letting go of their memories, and knowing that their possessions are nearby can be a great selling point for your self-storage facility.
More than with any other commercial real estate property, self-storage is about location, location, location. Once you identify that perfect spot, your self-storage facility can become a cornerstone of your commercial real estate investment strategy.