Self Storage Investing Newsletter

Someone recently said that “the only competition to the self-storage industry is the dumpster”. Essentially, this person was describing the fact that most items that most Americans choose to store many material goods that could otherwise be thrown in the trash. So why do people refuse to throw things away, and instead choose to pay good money to keep them locked away and accessible? One reason is that many items have a sense of nostalgia and memories that the owner finds priceless. Another is that people tend to think that certain items that are no longer used may become needed again in the future (like a crib and baby equipment). A third reason is that it’s just unsettling to throw away items that have played a role in our life – it’s like throwing away an old friend. When you watch shows like Storage Wars and say “why did they store that junk?” you are only thinking in material terms, seeing all of these things on a strict basis of dollars and cents. But there’s a whole other side to material possessions that makes storing them attractive for the consumer. Memories are priceless, and certainly worth the $100 per month.

The stats are out, and self-storage has the lowest default rate among all types of real estate – in fact it is the only asset class with a single-digit default rate. How did self-storage achieve such an impressive track record? There are many reasons.

Steady demand

Consumers seek self-storage because of life changes that occur in good times and bad. Some in the industry refer to the 4Ds—death, divorce, downsizing and dislocation, which can include people finding new jobs, getting married or moving away or back home from college. Demand for storage space appears steady, even amid weak job growth, and supply remains tight. Extra Space, based in Salt Lake City, said 94.5% of its space was occupied at the end of the second quarter, up from 92.1% a year earlier. Those are very impressive stats.

Strong collections

If the customer does not pay their rent, self-storage has one of the toughest collections policies in America: they just sell their stuff. Self-storage auctions are fascinating and brutal, as the contents of the unpaid storage locker are sold to the highest bidder. This has been shown on the television show Storage Wars for years now. Because of this ultimatum, self-storage customers have extremely high rates of payment.

Low operating costs

Self-storage facilities have low operating costs as compared to other real estate sectors. This is because the tenant is only in the unit for a few minutes, as opposed to living there. Self-storage has no water, sewer and air-conditioning/heating – just a light bulb (unless the unit is climate-controlled). This allows a self-storage property to maintain healthy margins at all times.

Little capital improvements needed

Self-storage units are simple metal construction in most cases, with a roll-up door. No expensive capital costs are required, and there’s no obsolete design elements to renovate going forward, like you have with apartments, office and retail. This allows the owner to avoid huge periodic capital calls, and keeps their cash flow steady and uninterrupted.

More limited supply

Over time, most of the self-storage land in America has been built. As a result, the new construction has become much more limited and, as a result, the supply is much more stable. Since all real estate works against the economic principle of supply and demand, having the supply effectively capped allows for the demand to keep rates and occupancy high.

Higher cap rates

Self-storage units are bought and sold with higher cap rates than most other real estate sectors. This allows for greater mortgage coverage ratios, and a greater margin for error. With greater cash flow comes the ability to weather unforeseen problems and economic cycles.

Conclusion

Self-storage facilities have the lowest default rate of any type of real estate. That’s a really big deal. With such an impressive stat, lending for self-storage properties should remain extremely robust going forward.

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The economy has been in recession for almost a decade. Jobs are scarce and wages are low. And no group knows this better than those in their 20’s, which is the largest segment of the U.S. population. And all of this economic pain is good news for self-storage, which is a huge beneficiary of these financial problems.

Limited housing space

With reduced incomes, young people have less money to spend on their living space, and that has made storage space reduced or eliminated entirely. So the only option most young people have to store their excess material possessions is a self-storage unit. The differential between housing rents and self-storage rents in some markets is about 10 to 1, and is unlikely to reduce. With housing at such a premium, any items that are not used constantly are going to end up in storage.

Movement

With the job market difficult and the economy unstable, losing a job and needing to replace it is gthe primary focus on young people. As a result, they are constantly on the move for a job or, if they have one, a higher-paying job. With constant movement comes constant demand for storage, as they will store their stuff while jumping from one job to the next, and then come and get it when they are confident their employment will stick.

Upheaval

Young people today have massive college debt. They have big car payments and housing costs. One mistake, and their life can turn completely upside down. In times of peril, most people will put their stuff into storage as a safe haven until they get their life back together. This includes foreclosure, eviction and other traumatic events. And these events are more common today than ever before.

Conclusion

Believe it or not, people in their 20’s are the largest segment of the U.S. population. And they are proving to be excellent customers for self-storage, which explains the incredibly high occupancy rates right now.

We all know that Public Storage is largest owner of self-storage space in the U.S. But they’re a public company. Equally interesting, however, are the largest independents, many of which started out with just one property like you and I. Here are the top 10 independent operators, according to Inside Self-Storage.

1. SmartStop Self Storage

Number of facilities: 165
Total square feet: 13,000,000
Number of units: 106,000
Headquarters: Ladera Ranch, CA
Website: www.smartstopselfstorage.com

2. National Storage Affiliates

Number of facilities: 221
Total square feet: 12,245,075
Number of units: 95,925
Headquarters: Greenwood Village, CO
Website: www.nsaselfstorage.com

3. Derrel’s Mini Storage

Number of facilities: 54
Total square feet: 10,976,207
Number of units: 71,923
Headquarters: Fresno, CA
Website: www.derrels.com

4. Simply Self Storage

Number of facilities: 140
Total square feet: 10,640,000
Number of units: 85,000
Headquarters: Orlando, FL
Website: www.simplyss.com

5. StorageMart

Number of facilities: 150
Total square feet: 9,500,000
Number of units: 95,000
Headquarters: Columbia, MO
Website: www.storage-mart.com

6. SecurCare Self Storage

Number of facilities: 131
Total square feet: 6,351,000
Number of units: 49,536
Headquarters: Lone Tree, CO
Website: www.securcareselfstorage.com

7. Metro Storage

Number of facilities: 93
Total square feet: 5,900,000
Number of Units: 52,751
Headquarters: Lake Forest, IL
Website: www.metrostorage.com

8. The William Warren Group

Number of facilities: 93
Total square feet: 5,700,000
Number of units: 55,439
Headquarters: Santa Monica, CA
Website: www.williamwarren.com

9. iStorage

Number of facilities: 60
Total square feet: 5,554,000
Number of units: 36,505
Headquarters: Winter Garden, FL
Website: www.istorage.com

10. US Storage Centers

Number of facilities: 80
Total square feet: 5,468,246
Number of units: 50,484
Headquarters: Irvine, CA
Website: www.usstoragecenters.com