Self-storage, as we know it today, has been around since the 1960s and is available in most communities nationwide. With millions of Americans moving each year, renting self-storage to store household and personal items temporarily has become nearly as common to moving as the moving truck. This, coupled with the popularity of the ever-growing list of self-storage reality TV shows such as Storage Wars and Auction Hunters, means the average person doesn’t need much of an introduction to self-storage. In fact, 38% of Americans identify as self-storage users. But why is the U.S. self-storage industry, which offers a relatively simple service, anticipated to grow to $43 billion in yearly revenue with over 50,000 facilities in 2023?
Simply put, self-storage solves the pervasive problem individuals and businesses have when they move or are in transition - where to safely store their property that is both affordable and convenient. Continued household changes in the U.S., largely driven by an aging population continuing to downsize, will see the self-storage industry continue to grow at an impressive rate. The market size of the self-storage industry is projected to grow from now until 2028 at a Compound Annual Growth Rate (CAGR) of 7.53%
In this article, I will outline three self-storage considerations, in addition to the impressive 7.53% CAGR, that make self-storage not just a good but a great investment.
Rental Duration and Occupancy Rates
Self-storage is often thought of as temporary and short-term rentals, which on balance, is accurate in comparison to apartment rentals or commercial leases. However, you may be surprised to learn that the average self-storage rental duration is 14 months, and 25% of self-storage rental durations exceed 36 months. These high self-storage rental durations contribute, in part, to the average U.S. self-storage occupancy rate of 92%.
By comparison, the occupancy rates for US offices are finally starting to rise above 50% since taking a steep drop at the start of the Covid-19 pandemic. With companies moving to fully remote or hybrid work arrangements and uncertain future demand, many office investors want to repurpose their office spaces for other uses, such as condos and multi-family rentals.
With the average multi-family rental occupancy rate at 94.2% as of Q3 2022, it isn’t surprising investors and developers are looking to repurpose existing office space into multi-family rentals. This is one reason I am also bullish on multi-family housing developments, but that is for another article.
Strong Demand During Economic Uncertainty
One of the main reasons a self-storage investor or developer will tell you self-storage is an excellent industry to invest in is because demand remains strong and relatively inelastic during economic uncertainty. Individuals will always need a place to store their belongings, even during tough economic times. This consistent demand and stability make investing in self-storage less risky as it is less vulnerable to market fluctuations.
Relatively Low Operating Costs and Rental Risks
The average self-storage operating cost in the U.S. is relatively low at approximately $4.03 per square foot of rentable space, which represents an average of 34.34% of gross income. Self-storage operating costs are low because they don’t require high staffing levels and generally have lower maintenance costs. Moreover, technology such as automated kiosks where customers can rent, pay and receive security codes for their rental unit continues to make self-storage operations more efficient.
Another upside to investing and operating self-storage is that there is less rental risk, specifically related to tenant turnover. With the average self-storage facility operating hundreds of individually rented storage units, losing individual tenants is relatively easy to manage. It doesn’t take much time or effort to get a self-storage unit ready for a new renter when the existing renter is vacating. The units are emptied, cleaned, and ready for the new renter, often within the same day. Compare this to investing in retail space, where losing an anchor tenant, even in a strong market, can result in months of lost revenue until a new tenant is found and the space modified to their needs.
There are also less restrictive laws and regulations around evicting self-storage tenants and raising rental prices. While each state and community will have different laws and regulations, evicting self-storage tenants for non-payment or improper use is relatively straightforward. This means less time, effort, and cost getting a self-storage unit back to generating revenue. Compare this to residential rental units, where it can take months to evict a tenant for non-payment.
Self-storage is a great investment for those investors looking to diversify their portfolio and generate a consistent return. With high occupancy rates, low operating costs, and a relatively stable market, self-storage is a smart choice for investors. In fact, self-storage has been the top-performing sector among all Real Estate Investment Trusts (REIT) industries for the past 27 years.