Self storage as an asset class was once looked upon as a nice, niche little property type to have in the portfolio - not going to set the commercial real estate world alight but dependable revenue streams and high cash flow meant slow and steady won the race for this overlooked asset. Fast forward five years and self storage is blossoming into a real adversary to other asset types. So what’s changed?
Well, all the things that made self-storage consistently perform are still present; people will always go through big life changes such as cohabitation, divorce, retirement, moving, downsizing and more. All of these things place storage in demand throughout the year. Recently, there just hasn’t been enough storage space to keep up with demand.
Self storage for the masses
Life changes are still aplenty and to add to the mix, people are spending more, are more mobile than ever and have more disposable income than ever. Stay-at-home inspired spending on house renovations and recreational activities, relocation from cities to suburbs and across provinces and in a ‘hot’ housing market, storing and staging was the in-thing. All of these new trends required some form of storage. With house prices going through the roof, there were also plenty of funds for those looking for upmarket storage to see them through a gap between properties.
Not to forget, businesses are also big storage users and their requirements likely accelerated over the last year as offices closed and space was needed for equipment in the period of flux. Even as employees return to work, a hybrid model means workplaces will need more space for people and less space for ‘things’ to ensure safety for all. Additionally, as commercial rents rise, more and more SMEs are on the lookout for live-work space as opposed to having a dedicated workspace in a downtown hub and storage provides a flexible solution for temporary commercial space. As supply-chain issues continue to plague small businesses during the pandemic, keeping extra inventory on-hand has allowed many of them the certainty in knowing they can still service their customers and take on larger orders; storage is crucial for organizing this reserve of stock.
Self-storage is having its heyday, no longer dull and reliable, it’s exciting and undergoing revitalization and investors might want to get on the train now.
Benefits of self storage compared to other asset types
The primary advantage of a self-storage property is that it’s not uncommon to experience break-even rates of 60-65% depending on the property and location.
This can be achieved by;
Consistent customer demand in both economic peaks and troughs;
Spikes in demand as the ‘hot’ residential housing market peaks and people are moving further outside urban centers;
Both businesses and consumers use storage so it isn’t driven by big residential development;
Low up-front capital costs;
Low operating costs - very little needed in the way of labor, energy, maintenance and more;
More predictability in income as the asset is not as exposed to the volatility of the market with regards to labor and energy costs;
Less risk as there’s more renters turning over less frequently and little-to-zero turnover time between rentals;
More storage required for recreational usage as restrictions increase on keeping boats, RVs and the like in busy residential areas.
Challenges in the self storage market
Challenges in this market lay primarily in securing land or existing facilities. Zoning for a new self-storage property is becoming increasingly difficult given it’s not as aesthetically pleasing as some others and doesn’t generate as much tax revenue for the government, but on the flip side this means increasing demand and higher prices on existing facilities.
Canadian market outpacing US
Fueled by population growth, the domestic self storage market has much room for growth compared to the US. The bigger the population, the more demand for storage year-on-year. The US population is on a downward trend while Canada’s population continues to grow and anti-immigration sentiment south of the border will restrict their ability to grow further.
Overall mobility adds fuel to the fire of this asset class and in Canada. Although Canadians have typically been considered less mobile, the pandemic has inspired a change in outlook, plus it’s a nation whose population is at least a quarter immigrant and growing and the newcomers are inherently used to going wherever the work (and affordable housing) takes them. Once the full ramifications of the pandemic are understood, we could well see a wave of foreclosures on residential properties and in times of economic downturn, self-storage is one industry that thrives and prevails over others.
Building for business
Newer storage facilities are a world-apart from the rows of dark and dusty, single-storey garage-type buildings that are usually relegated to the side of a highway. Disruptors to the industry such as Toronto’s Dymon Group are targeting a higher-end consumer and SME business market with a host of ancillary services and business solutions that attract a modern self-storage customer. Most residential customers booking storage are middle-aged women and companies like Dymon are tapping into the fact that they need more from the service by offering free truck and driver for move-in, drive-in access and climate control. From a business perspective, users are looking for flexible no-contract storage with value-add services like mailboxes, document shredding and storage and storage center employees to take receipt of and manage shipments coming in.
Designing these newer facilities more like condos for storage, gives developers a better chance of getting approval from municipalities whilst meeting the growing needs of the modern customer. With some sources stating potentially 44% more revenue per square foot in storage versus the multifamily residential market, investors should seriously consider adding some new-age storage to their portfolio.