The Self-Storage Industry: A Brief Overview

Self-storage has been around since the 1970s, gaining significant traction in the 1990s and even more momentum after the 2008 financial crisis. As someone who has been involved in this industry since the early 2000s, I've witnessed its transformation firsthand and I’ve seen it transform from a niche asset class to a lucrative investment opportunity among the best in the business.

Industry Growth and Projected Worth

In 2020, the self-storage industry was valued at approximately $48 billion. However, it's important to note that this figure has evolved significantly in the past couple of years. Experts predict that by 2026, the industry's value will reach a whopping $65 billion, reflecting a compounded annual growth rate of 5.4%.

A Maturing Asset Class

I mentioned above that the self-storage industry began as a niche asset class. It's important to recognize that self-storage is now entering a maturity phase. Gone are the days when it was an obscure asset class with limited financing options and operational understanding. Today, it stands as one of the mainstays of real estate investing, attracting an increasing number of individuals eager to explore its potential.

Opportunities and Market Size

With over 50,000 storage facilities spread across the United States and a staggering two billion square feet of storage space, the industry offers abundant opportunities for investors. The sheer scale of the market signifies that there is room for growth and diversification, providing ample chances for newcomers to make their mark.

What Drives the Self-Storage Industry?

The self-storage industry is driven by several key factors that contribute to its growth and success. These drivers include: 

• Population Increase 

• Regulations 

• Cost 
• Relocation

Let’s take a moment and focus on each of these drivers one by one.

Population Increase:

• Population growth is a fundamental driver of economic growth. This is especially true in the real estate sector. As the population grows, there is a greater demand for housing, which often leads to downsizing and the need for additional storage space. The increasing population provides a consistent customer base for the self-storage industry. In the United States our population is growing, so this is a good thing for the self-storage industry. 

Regulations:

• Regulations play a significant role in shaping the self-storage industry. Homeowner associations (HOAs) and cities have become more stringent in their regulations, limiting what individuals can build or store on their own properties. These restrictions on space utilization create a need for off-site storage solutions. Additionally, businesses face limitations on operating from residential areas, further driving the demand for commercial storage facilities. It’s a benefit for self-storage.

Cost:

• While the cost of consumer products has decreased over time, the cost of real estate has skyrocketed. This means that although people's dollars can purchase more products, they have less physical space available to them. As a result, individuals and businesses seek cost-effective storage solutions to accommodate their belongings or inventory. Self-storage facilities provide an affordable alternative to expensive property expansion or rental space.

Relocation:

• Relocation, whether it be residential or commercial, is a significant driver for the self-storage industry. People moving to new homes often require temporary storage during the transition period. Businesses undergoing relocation or expansion also need storage facilities to hold their equipment, inventory, or files during the move. The need for short-term storage solutions during relocation drives the demand for self-storage units.

Overall, the combination of population growth, increasing regulations, rising costs, and relocation needs creates a robust demand for self-storage services. The industry provides a convenient and flexible solution for individuals, households, and businesses to store their belongings and assets. By addressing these driving factors, self-storage facilities can continue to thrive and cater to the evolving needs of their customers.

What Hurts Self-Storage?

There are some important factors to keep in mind with self-storage, primarily, the reality of things that can hurt and hinder the industry. Let’s take a look at some of these factors.

Asset Overbuilding

Several factors can negatively impact the self-storage industry. One significant challenge is the occurrence of oversupply, which occurs when an excessive amount of storage facilities are built, saturating the market. This oversupply leads to a decrease in demand for storage units and ultimately results in a decline in revenues for storage operators. Self-storage is particularly susceptible to overbuilding, often happening within a small radius of four or five miles. To mitigate this risk, it is crucial for industry stakeholders to closely monitor and understand market demand to avoid over saturation.

Challenges from Technology Startups

Another potential threat to the self-storage industry comes from emerging technology startups and on-demand storage solutions. These innovative companies aim to disrupt the traditional self-storage market by offering alternative methods of storing and moving items. Although some on-demand storage models have found success in densely populated downtown areas, they have yet to significantly impact the overall market share of traditional self-storage facilities. Consumers still generally prefer the convenience and reliability of self-storage units for their storage needs.

Fragmented Nature of the Industry

When discussing self-storage assets, it's important to note the industry's fragmentation. Currently, a majority of self-storage facilities, around 52%, are owned and operated by individual owners or "mom and pop" businesses who own a single facility. On the other hand, the top hundred operators, including larger companies and real estate investment trusts (REITs), own approximately 31% of the market. This fragmented nature of the industry presents ample opportunities for new investors to enter the market and acquire storage assets. The presence of a significant inventory available for purchase allows for potential success and growth in the industry.

The self-storage industry faces challenges such as oversupply, the emergence of alternative storage solutions, and the fragmented nature of the market. However, by carefully monitoring and managing market demand, leveraging the advantages of traditional self-storage facilities, and recognizing the available opportunities, investors can navigate these challenges and find success in the self-storage industry.

Navigating Challenges and Finding Success in the Self-Storage Industry

To navigate these challenges and find success in the self-storage industry, it is essential for investors to:

• Careful monitoring of market demand and understanding future trends.
• Leveraging the strengths of traditional self-storage facilities.
• Capitalizing on available opportunities for growth and expansion.

Market Feasibility

Market feasibility is a critical factor to consider when contemplating entering the self-storage industry. By assessing market feasibility, we can gain valuable insights into the potential success and viability of a venture. This assessment primarily revolves around two key components: overall demand and utilization within the market.

Understanding Overall Demand

One of the primary aspects to examine is the level of overall demand within the market. To comprehend this, we delve into various factors that influence demand, such as the current total square footage available in the market, occupancy levels, and trends in rent increases. By analyzing the number of units present in a given population and studying the occupancy rates, we can gauge the existing demand and ascertain whether it is on an upward trajectory. Additionally, market demographics, including population growth and related factors, are integral to understanding demand dynamics.

Analyzing Utilization Patterns

Another crucial aspect of market feasibility is understanding how people utilize storage facilities. By examining who the key consumers are, their motivations for renting, and the specific types of units they prefer, we can gain valuable insights into utilization patterns. This knowledge allows us to make informed decisions regarding pricing strategies and ensuring a strong product-market fit. It's important to recognize that each storage unit size and type caters to different customer segments, such as indoor, pull-up, climate-controlled, or wine storage units. By aligning our offerings with customer preferences, we can accurately predict future demand and determine appropriate pricing levels.

Anticipating Future Demand

While assessing present demand is essential, it is equally crucial to forecast future demand accurately. To accomplish this, we must consider market dynamics and demographics. By examining who is moving into the market, their reasons for relocation, and whether they are more inclined towards renting housing, we can gain insights into future demand trends. Additionally, understanding utilization patterns and how people are utilizing storage units provides further context for forecasting future demand. For instance, densely populated areas often exhibit a higher demand for smaller storage units, while rural or spacious regions may have greater demand for larger units. Failing to account for these factors can result in inaccurate revenue projections and flawed underwriting.

Underwriting and Financing

Underwriting self-storage facilities requires a unique set of skills, as each individual unit is treated as a product with its own demand characteristics. Understanding this concept is fundamental to dynamic pricing and effective underwriting.

Dynamic Pricing

Dynamic pricing involves individually pricing storage units based on their unique demand and characteristics, rather than applying a standardized rate to all units. This approach acknowledges that not all units are rented at the same price. For instance, if there are 100 identical 10x10 units and only one is occupied, it should be offered at a discounted rate. On the other hand, if 99 out of 100 units are rented, the last available unit can be priced higher. Dynamic pricing software can be utilized to track and adjust pricing in response to market demand, but it doesn't have to be overly complicated. By understanding the concept and market dynamics, dynamic pricing can be implemented effectively even without sophisticated software.

Understanding the Asset

To develop a revenue model and determine appropriate pricing, it's crucial to understand the specific characteristics of the storage facility. This involves evaluating the asset's market fit, considering factors such as its quality, features, and offerings. Assessing the range of prices charged by competitors with similar facilities helps establish the upper and lower pricing limits. It's important to recognize that a facility with basic amenities, such as gravel drive-up access and minimal security, should not be priced the same as a multi-story, indoor, climate-controlled facility with extensive security measures. Comparing and positioning the facility within the market helps determine reasonable pricing levels and revenue projections.

Driving Revenue and Growth

When underwriting a facility and projecting future growth, it's essential to identify areas of improvement and opportunities to enhance revenue. By understanding where the facility stands in terms of pricing and market position, adjustments can be made to maximize revenue potential. By analyzing comparables, such as the top and bottom pricing benchmarks, one can determine how to position the facility and potentially increase rates or attract more customers.

Optimizing Revenues and Adjusting Offerings: Understanding Seasonality

Seasonality is a crucial factor to consider when underwriting and managing self-storage facilities. While some densely populated areas may exhibit consistent demand throughout the year, most regions in the United States experience seasonal fluctuations in renter activity, closely tied to housing market trends and the ability to move belongings into storage.

Analyzing Revenue Fluctuations

When underwriting a storage facility, it is important to examine historical data to understand the highs and lows of occupancies during different seasons. This analysis helps in adjusting pricing strategies and preparing for revenue fluctuations. During peak seasons when the facility is near full capacity, charging higher prices becomes viable. Conversely, during off-peak seasons, offering discounts can help attract renters and maintain occupancy levels.

Understanding Renter Behavior

Renter behavior also varies depending on the season. During the off-season, when demand is relatively lower, renters tend to stay for longer durations. This provides an opportunity to target higher-priced long-term renters by offering them discounts. In contrast, during the high-demand summer months, renters typically have shorter stays. As a result, charging higher prices without offering discounts becomes a more favorable approach, as the shorter occupancy period may not warrant discounts.

Aligning Pricing Strategies with Seasonality

By understanding the seasonal patterns and corresponding renter behaviors, self-storage facilities can align their pricing strategies to maximize revenue. Offering competitive prices during the off-season can attract long-term renters, while charging premium rates during peak seasons can capitalize on high demand. This approach allows facilities to balance occupancy levels and revenue streams throughout the year, optimizing financial performance.

Maximizing Revenue: Fees, Upselling, and Proper Expense Management

Now that we have a better understanding of what can hurt the self-storage industry, let’s look at how we can counter these hindrances and find success. There are multiple ways to drive profits for self-storage, we’re going to focus on the major ones. 

Fees and Revenue Generation

When underwriting a self-storage facility, it's essential to assess the fee structure and revenue generation potential. Consider whether the facility charges sign-up fees, processing fees, or other types of fees. These fees can significantly contribute to revenue generation. For instance, late fees incentivize prompt payment and help offset losses due to delinquent tenants. It is important to ensure that appropriate fees are in place to cover expenses and mitigate potential revenue shortfalls resulting from unit auctions, which typically yield minimal returns.

Upselling Opportunities

Exploring upselling opportunities is another avenue to boost revenue. Evaluate if the facility offers additional services such as boxes, trucks, or insurance. These upsells provide additional sources of income and enhance the overall customer experience. Identifying and capitalizing on these potential revenue streams is crucial when underwriting a storage facility.

Expense Management

Proper expense management is vital for accurate financial projections and overall profitability. Many underwriters make the mistake of excluding labor costs, particularly in small markets or facilities where the owner handles most of the work. It is crucial to factor in labor expenses, even if the owner performs the work. Unless the owner is willing to work for free, their labor should be accounted for to ensure an accurate assessment of the facility's financial health.

Another common oversight is failing to adjust expenses based on the current tax rate. When acquiring a facility, the tax rate may differ from the rate used by the previous owner, potentially leading to significant discrepancies in projected financials. Factoring in the updated tax rate ensures more accurate calculations and prevents unexpected financial burdens.

Actual Expenses vs. Current Owner's Expenses

When evaluating overall expense ratios and total expenses, it is crucial to determine the actual costs involved in running the facility, rather than relying solely on the current owner's expenses. Consider potential variations in expenses based on factors such as market conditions, future maintenance requirements, and operational improvements. By accounting for the actual expenses, underwriters can establish a more realistic financial outlook for the storage facility.

Unmanned

Will you operate this facility without any personnel? If it's unmanned, do you have call centers or third-party vendors? Will someone be visiting the site? We will discuss operations shortly, but all of these factors need to be accounted for in your expense load and ratio. Generally, larger facilities have an expense load of around 35% excluding debt, solely for operational costs. Additionally, a standard management fee of 6% is typically applied. These figures should be considered and factored into your expenses. When it comes to smaller facilities, it becomes more challenging.

Running an unmanned facility doesn't mean you can simply cut the expense ratio in half. You need to take into account all the expenses involved. The given expense ratio is what you are purchasing, and any improvements afterward will be your profit. In smaller facilities, having an on-site manager usually results in excessive expenses, making it less profitable. Therefore, it is crucial to align your expenses and operations properly. This includes accounting for advertising, promotions, banking fees, computers, software, subscriptions, insurance, meals, travel, and any other necessary expenditures. However, one crucial aspect that many people either overlook or misunderstand is capital expenditures.

Capital Expenditures

One crucial factor that many people often overlook or misunderstand is capital expenditures, especially in the context of self-storage. Some may believe that capital expenditures are not as significant in this industry. However, this perception is flawed because the size of capital expenditures should be considered in relation to the revenue percentage they represent. In self-storage, even though our capital expenditures may not be substantial, we generate far less revenue compared to someone renting a $1,500 apartment while utilizing a $100 storage unit. 

Therefore, the expense load for repairing roofs, reducing cement, and fixing gates (which can cost between $30,000 and $40,000) can have a significant impact on revenue. It is crucial to accurately assess and allocate these expenses. In our underwriting process for a storage facility, we always allocate a fixed two percent to our repairs and maintenance fund.

Repairs and Maintenance

We allocate two percent for repairs and maintenance, but initially, we rely on a third-party to provide us with a detailed quote and estimate. This includes a thorough assessment of gates, gravels, doors, roofs, and any potential repairs or replacements. It is crucial to factor in these upfront costs. The allocated two percent is then placed into a dedicated savings account specifically reserved for future repairs and maintenance expenses.

Operations

Who will operate the facility? Will it be managed by yourself or a third-party manager? If you opt for a third-party manager, you will need to factor in their management fees, typically around six or five percent, along with any additional charges. This allows you to hand off the responsibilities and not worry about the operations. However, if you choose to operate the facility yourself and wish to be compensated for management duties, there are several aspects to consider.

If the facility will be staffed, you need to establish a hiring process and familiarize yourself with lien processes. This includes understanding the necessary lien procedures and ensuring everything is properly aligned. Similarly, if the facility will be unmanned, the same considerations apply, but with a heavier reliance on technology. 

Technology plays a significant role in self-storage operations, enabling efficient revenue management, handling move-ins, move-outs, lock checks, lien sales, and tenant processing. You can explore various property management systems like SSM, Tenant Inc, Open Tech, or AI-driven solutions that automate lien processes. It's important to remember that while there are unmanned facilities, they typically require occasional visits for maintenance and unit preparation.

Operations also involve front-end hardware such as gate access and control, as well as door access and control. You must decide whether to use electronic systems or manual locks and ensure a seamless process for providing locks to new customers. Effective operations require integration with advertising and revenue management efforts. Cloud-based signing and off-site sign-ups can be facilitated through a property management system and a customer relationship management (CRM) app.

Operations in Larger Facilities

For larger facilities, the dynamics change, necessitating on-site personnel to handle the operations effectively. However, even fully automated facilities may still require a call center and multiple on-site staff members due to their size and the need for comprehensive management. The decision to hire staff should be based on the return on investment (ROI) they can generate through upselling and revenue generation, making it worthwhile for both parties involved.

Financing Self-Storage Ventures

Regarding financing, self-storage has become more favorable to banks, and obtaining financing has become relatively easier. Many banks and credit unions specialize in storage financing and offer attractive options. Typically, a down payment of 30 percent is required, but small business loans, including SBA loans, are available. Institutions like Live Oak Bank specialize in helping individuals secure SBA loans for self-storage ventures. Syndications can also be explored for funding, allowing others to invest in exchange for equity and to act as co-signers on the bank note.

Conclusion

Self-storage investing has come a long way since its early days of obscurity. With a projected worth of $65 billion by 2026, the industry offers a promising avenue for investors. The growing demand driven by changing lifestyles and evolving business needs ensures a steady income stream for savvy investors. However, understanding the market dynamics and conducting thorough feasibility studies are crucial for making informed investment decisions in this maturing asset class.