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If you want to be an active investor, you can buy an existing facility or build a new one. Estimates put the number of self-storage facilities in the country between 45, to 60, depending on how a self-storage facility is defined and the methodology used , which translates to 1. Because the industry is heavily fragmented, a savvy investor may find it worth their while to buy a mom-and-pop facility, turn it around and increase profits, and then enjoy the income or sell to a real estate investment trust REIT or institutional investor.
This takes advantage of what is known as a consolidation play , where a handful of market participants initiate aggressive acquisition strategies in order to gain market share. There is no denying that the market for self-storage is more competitive than ever. Gone are the days when an advertisement in the yellow pages would have sufficed.
Most customers find storage facilities by searching for them on the internet. Marketplaces for self-storage, such as SpareFoot , are helping level the playing field, by providing a platform for smaller facilities to reach their customers for a fee.
The built-in downside is that such platforms will also be providing visibility to any independently owned facilities that compete with your own. Increasingly, rentals are occurring through mobile devices, which has made it important to engage in local SEO and to make sure your business is listed on Google Maps. This article lays out the factors that influence the decision to underwrite a self-storage facility; naturally, these factors aim to maximize the return from an investment, while minimizing the risk.
There are three main stakeholders involved in an underwriting deal: operators , lenders , and investors. Although the aims of each class of stakeholders are distinct, they are aligned; they all benefit from the financial viability of the storage facility. Operators use market data and their experience in the industry to build value into the facility; their experience enables them to decide what capital improvements and management restructuring are necessary.
Investors want competitive returns; they may look at metrics such as the equity multiple or IRR internal rate of return to monitor how well their investment is doing. The number of units currently occupied by customers, as a percentage of total units available for rent. Economic occupancy refers to the amount of rent collected as a percentage of asking or gross rent.
Another way to understand the concept of economic occupancy is to think of it as the amount of rent successfully collected as a percentage of the amount of that could potentially have been collected. Economic occupancy may be impacted by factors such as the number of vacant units, outstanding rent payments, and discounts — anything that can increase the gap between actual and potential rental revenue.
The lease-up schedule refers to the time taken for newly available properties to attract tenants and reach stabilized occupancy. Typically, the time taken for self-storage facilities to stabilize is three to four years. Net Operating Income is defined as gross income, less operating expenses. The debt-service coverage ratio is calculated by taking the net operating income and dividing it by the total debt service over the same period.
A ratio greater than one indicates a positive cash-flow, while a ratio of less than one implies that the business is generating less income than it pays out to its creditors. Lenders look at the DSCR to evaluate the creditworthiness of loan applicants. The capitalization rate is defined as the initial yield on a real estate investment.
It is calculated by taking the NOI during the first year and dividing that by the cost of acquiring the facility or, in the case of a new facility, the expected total development cost. Because of their reliance on the value of income, cap rates are most useful when calculated for stabilized assets. If you are interested in an under-performing facility that has the potential to be turned around, you can use the market cap rate suggested by previous sales of similar facilities to get an idea of what the facility will be worth once the income stabilizes.
Alternatively, you could calculate a cap rate based on stabilized future NOI. Ideally, you want to buy or build in an area that has high demand, but low supply. That may seem like a no-brainer, but as with most things, the devil is in the details. Before we talk about demand and supply factors, we need to define the trade area for the facility.
You can think of the trade area as a circle containing your most likely customers, with you at the center. The size of your trade area will vary based on where you are located. Suburban properties tend to have a trade area of 3 miles, a rural property may have a trade area of 5 or 10 miles, whereas dense urban areas like Manhattan may have trade areas of less than a mile.
As a general rule of thumb, you want at least 50, people in your trade area. A drive-time of minutes on Google Maps can give you a good idea of how far your trade area extends. Firstly, you want to look at the number of people living in your trade area.
This takes into account the fact that most consumers would prefer to have easy and convenient access to their unit, without having to drive too far. Growth trends are also pertinent, as they have a bearing on the future demand for the storage units in your facility. Look for areas that have a steadily upward trending growth in population over the last years.
The U. Census Bureau offers population estimate data down to the county level, including numeric and percentage growth. Secondly, you should look at the median income of households located in your trade area. A higher median income means that more households have the means to rent storage space.
The median income may also allow you to understand the needs of your potential customers. On a related note, also look at the job growth in the area you plan to operate your facility in. Strong growth in jobs bodes well for demand. The Census Bureau offers data on median income at the county level, up to If you want more granular data, Income By Zip Code offers median income data at the zip code level.
Additionally, you can look at the percentage of households occupied by renters, as opposed to homeowners. The idea is that areas with high residential turnover will provide the facility with steady demand for its units. This is a big reason why facilities located near military bases and college campuses tend to do well.
The number of vacant housing units is also pertinent, but the reason for their vacancy deserves some attention. Vacancies may be an indicator of future moving activity, which could drive demand for self-storage. However, if the number of vacant housing units has been on the rise due to net outward migration, that could be a cause for concern.
An understanding of the movement of housing prices in the trade area can be helpful as an indicator of household wealth; the Housing Price Index released by the Federal Housing Finance Agency is a good place to look for trends in the prices of residential real estate.
The average size of a house in the area you are interested in is also a relevant metric to look at. The smaller the average house is, the better; households will have less space for their storage needs, creating demand for your storage units. You might also want to look at the number of businesses that are located near your facility.
Businesses are increasingly becoming important clients for the self-storage industry, and typically prefer units on the larger side for their storage needs. Demand, however, is only one side of the story; there are also supply factors to consider. When considering supply, there are a couple of things you should keep in mind. When looking at the competition, you should consider the quality and quantity of competitor facilities.
REITs have superior management experience, sophisticated technology, and the capital required to sacrifice profits for market share. With regards to quantity, you want to look at the number of self-storage facilities located within the trade area of your facility. The lower, the better; the general rule is that there should be less than 5. You should also consider the distance to the closest competing facility.
Class A facilities command the highest rents; they have superior locations and access, high-quality construction, on-site management, higher standard of maintenance and security, and usually offer climate-controlled units as part of their unit mix. Class B facilities are a rung lower on the quality ladder, and as a result command lower rents than Class A facilities. Class B Facilities may have on-site or off-site management.
You should look at factors like the condition of storage-unit doors, any water or fire damage, and the state of HVAC units for climate-controlled units. If the facility you are interested in is a drive-up or offers vehicle storage, you should examine the asphalt and look for any potholes that might need repairing. In a nutshell, look for any significant deferred maintenance and factor that into the calculation for the value of the facility.
You should also look for anything that may be a source of liability under environmental laws, such as asbestos, mold, lead-based paint, petroleum products, etc. Your lender may require a Phase I Environmental Site Assessment as part of the lending agreement, which covers some sources of liability. Examine the security arrangements at the facility, and evaluate their appropriateness with regard to the size of the facility, clientele, and the area in which it is located.
Check to see if there is a security guard or team, the number and positioning of security cameras, individual alarm systems that detect unauthorized access to units, perimeter fencing, on-site management, and barrier arms. These factors tend to keep occupancy levels high while steadily pushing rental rates higher.
Self-storage properties are also one of the lowest-cost real estate investments since they're typically inexpensive to build and operate. As a result, they tend to have relatively low occupancy break-even rates. These factors enable self-storage investments to generate high margins and investment returns.
While self-storage REITs have been excellent long-term investments, they're not without risk. There are two notable sector-specific risks:. In addition to those sector-specific risks, self-storage REITs face two intertwined potential headwinds common to the entire REIT sector: interest rate risk and financing risk. As interest rates rise, borrowing money becomes more expensive.
If a REIT has lots of floating rate debt or near-term maturities, rising rates can increase its interest expenses. Higher interest rates can also impact a REIT's ability to finance acquisitions and development projects. Meanwhile, rising interest rates tend to weigh on REIT stock prices. That's because it makes lower-risk alternatives such as bonds more attractive investments since their income yields rise.
As a result, REIT stock prices tend to fall, pushing up their dividend yields to compensate investors for their higher risk levels. There were six publicly traded self-storage REITs entering While all focus on owning, operating, and managing self-storage facilities, three of them stand out for their slightly differentiated business models. The second-largest owner of self-storage stores in the U. Data source: Company websites and YCharts. Market cap data as of Jan. Here's a closer look at what makes these self-storage REITs different from their competitors.
It began with more than 2, properties and more than million square feet of rentable space. It's the only REIT that develops new properties; the rest primarily expand by acquisition. The company's development strategy has enabled Public Storage to earn higher investment returns compared to acquisitions over the years. It currently manages more properties than any of its competitors.
This strategy has several benefits. It generates steady management fee income and requires little up-front investment. Meanwhile, it provides the company with a steady stream of acquisition opportunities. Extra Space Storage can purchase a property it knows very well when the owner sells, thereby reducing risk.
It ended by achieving a milestone of having 1, locations. What's unique about National Storage Affiliates is that it doesn't consolidate its properties under one national brand. Instead, it owns, operates, and manages strong regional brands. National Storage Affiliates' PRO structure incentivizes private self-storage operators to come under its umbrella. Meanwhile, PROs benefit from the scale of a larger company, the ability to maintain management, and to participate in the upside.
Self-storage REITs benefit from a combination of lower costs, high demand, and short-term lease structures, which has enabled the sector to steadily increase income. That has helped the industry generate above-average total returns over the years. The ability to earn high returns makes self-storage REITs attractive options that real estate investors should closely consider.
We help people become financially independent without the hassles of tenants, toilets, and trash by investing both actively AND passively in Self-Storage! We. View today's Self Storage Group ASA stock price and latest SSG news and analysis. Create real-time notifications to follow any changes in the live stock. Global Self Storage, Inc. is a self-administered and self-managed real estate investment trust (REIT). The owns, operates, manages, acquires, develops, and.