I have discussed in my training and classes why I think there is a bright future for the next decade or so for the small investor in self-storage, but I realize I haven’t created an episode for the general public on this topic.
Here is it.
There are three main reasons why self-storage has a bright future, in my opinion. I have mentioned them periodically in these episodes but have not gone into a lot of detail or backed up my assumptions.
I am listing them in a particular order because I think one leads into the next. I also have a few cautions for the small investors as well.
Fragmented Industry
Most people do not realize just how big the self-storage business is in the US today. According to Spare Foot, there are around 49,000 self-storage facilities.
That’s 1.9 billion square feet. It is a $39.5 billion industry generating 5.9 square feet per capita nationwide.
That’s big.
However, the majority of these 49,000 facilities are “Mom & Pop.”
The statistics here vary, but my current research this year has the percentage of these facilities that are owned by REITs to be as low as 16% and as high as 21%.
The last statistic I have seen from the Self Storage Association indicated that 62% of all self storage facilities are owned by someone who owns only one.
So, for all practical purposes, this is still a mon & pop industry.
However, the REITs and larger players define the space and set the standards of what a self-storage facility is today and how to run one. From what I can tell, many of these mom & pop owners have been dragging their heels, resisting taking their facilities into this century.
I cannot tell you the number of projects I have seen where:
- There have been no price increases in a long time, sometimes years, because they “don’t want to lose their customers.”
- When there are some increases, the existing customers don’t have to pay them, only new customers.
- Auctions are sporadic, if ever.
- If a customer gets behind in payments, plans are put in place. I have seen up to 50% of potential monthly cash flows trickling in and delinquencies getting higher each month.
- Fees waived Each quarter, a larger and larger percentage of their potential incomes goes into the 60, 90, 120+ day column on the delinquent report.
- No, websites or if there are, they very week.
And the list can go on. You have seen them as well.
Our experience is, many of these mom & pop operators get very comfortable and complacent with their cash flow. As a result, their focus and energy focus on keeping that in place and not rocking the boat.
Then one day, they wake up and realize the industry has moved on from them, and they have to play catch up. Many do not want to.
Also, what drives many of these types of faculties to the market is a life change. Someone gets sick, retires, or dies.
I am not a big proponent in finding distressed self-storage and buying it cheap, and repositioning it. First of all, there are not many of them out there, and the very few I have seen are distressed for a very fundamental reason. There is no rehab or solution I can offer to fix it., such as being built in a bad location with no market or visibility.
But I am very excited when I see one of the mom & pop type of facilities we have been discussing hit the market. Especially if I can expand it and there is demand for more self-storage in the trade area.
How many of the 62% of facilities do you think will hit the market over the next decade?
Half? 35%? 75%?
Any of these numbers represents a lot of opportunities.
And in most cases, the larger institutional players are not interested in them or are not interested in bringing them up to “institutional” standards. But boy, are they ready to buy them once we have brought them up.
I often get down today because our current portfolio is so low. But our business strategy has called for us to create a “liquidity event” and pay our investors back once the value-add play has been achieved.
This, for us, is either a refinance cash out or a sale. And with the low CAP rate offers we have received from the REITs and larger players today, we have a fiduciary responsibility to maximize our partners’ profit. Usually, that means take the offer.
But to get back to the subject at hand, this is where so much upside is for us smaller investors over the next decade. To buy these mom & pop products and reposition them.
Population Growth
The main driver for self-storage is population growth. Period.
Population growth will fix almost any mistake we make as self-storage developers, from what I have witnessed. It is also the next reason I see a bright decade or so ahead for us.
The estimated population projections from the US Census Bureau indicated expected population growth from 2020 to 2030 will be 23.2% – from the 2020s 56.1 million to 73.1 million.
It does slow down from 2030 to 2040 with only an estimated 9.1% growth taking to the total estimated population in the US to 80.8 million.
At an average of 7.5 square feet per capita, there will be an additional demand for 185,250,000 square feet of new self-storage just to meet that population growth.
That is worth getting in on, in my opinion.
A Larger percentage of the Population Using Self Storage
Today, 10.6% of the US population uses self-storage, according to Spare Foot.
From what I can see this is up almost 2% from between 2000 and 2010.
So, if we take the average US population during this decade (2020 to 2030), a 2% increase in people using self-storage would be an additional 64,600,000 people. That alone is an additional 10,000,000 square feet of demand on top of the population growth.
No doubt about it, demand for self-storage will be there, and I do not see any disruptors on the horizon.
Pods did not disrupt self-storage. Concierge storage has not disrupted self-storage. We have a lot of stuff and need places to put it where we can get to it whenever we want.
The simplicity of this business is part of its attraction for me.
Conclusion And Cautions
These are the three main reasons I see a bright future for our industry over the next decade or so. There will be increased demand for the product as well as a lot of consolidation.
As small investors, our job is to carve out a small niche in this industry and position ourselves and our facilities.
However, self-storage is not like it was in the 1980s.
This industry is becoming a very sophisticated and fast-changing industry, not to mention many markets and submarkets have a lot of current supply.
Let’s unpack these two cautions.
If you are unwilling to test, grow, change and upgrade operations today, my suggestion is to get third-party management.
The challenge for smaller operators is to stay relevant to the consumer and the market, which requires keeping up with the industry. I have written many episodes on this.
And part of that sophistication is how to analyze trade areas to determine if there is more demand than supply and how to access the barrier of entry to that submarket.
I have also written many articles on that.
However, remember, oversupply in any trade area is a temporary situation. It is a natural part of the real estate cycle.
I will end this episode how I started it. Population growth will solve almost any problem we create for ourselves, including oversupply.
These are the three main reasons I see a bright future for our industry. Now go and carve out your spot. There is no better business in the world today for us small investors than self-storage.
