This 18.1% IRR Opportunity Isn't The Only Reason Why Self Storage is Booming

·5 min read

Some of the more common commercial real estate sectors are office buildings, shopping centers and warehouses. One commercial real estate sector is often overlooked but is seeing extremely high demand: self-storage.

Self-storage lets clients store their possessions in vacant units for a monthly rate. This sub-niche is projected to grow into a $64.71 billion industry by 2027. Self-storage is especially valuable since it has lower costs than traditional commercial real estate opportunities and provides more recourse for landlords.

Lower Costs

Buying commercial real estate property directly can be very costly. Some costs like down payments, broker fees and closing costs can add up to hundreds of thousands of dollars. Other costs like maintenance and cleaning fees can sneak up on investors as well.

Self-storage units are much smaller than standard office buildings and shopper centers, so typical costs like down payments or maintenance can be much lower. Owners still have to paint the units and clean them after each tenant leaves, but the scope of expenses that commercial office buildings owners face is generally lower.

Self-storage space owners can use technology like keyless and biometric entry to save money. Not only do these save money, but they also make check in and check out seamless for clients. In turn, this helps with gaining positive client reviews, which attracts more business.

Financing can be cheaper too since it’s possible to use SBA 504 loans to finance these projects. With SBA loans, it’s possible to put as little as 10% down on the property. Like traditional financing, these loans can offer fixed interest rates, which can ensure the payment remains affordable.

More Recession-Proof Compared to Other Real Estate Sub-Niches

Many real estate sub-niches, including shopping malls, are more susceptible to recessions. For example, fewer people went shopping in person during COVID-19 quarantines. Shopping malls also have to compete with the rise of eCommerce companies like Amazon.com Inc. (NASDAQ: AMZN).

On the other hand, self-storage can thrive during recessions. Consumers turn to self-storage during difficult times like divorces, dislocations and death, which occur more often during recessions. In fact, self-storage was the only real estate sector that had a positive return of 5.1% compared to the return of general real estate investment trusts (REITs), which was negative 38% during the 2008 great recession.

Higher Demand

Currently, 10% of Americans own a storage unit. This demand is projected to grow as remote work becomes more mainstream. Because of remote work, people are moving to different states and driving up demand for housing in once sleepy towns.

Additionally, more people are starting to travel. Some remote workers — often called digital nomads — travel among different states or countries while working simultaneously.

As many as 80% of Airbnb hosts offer stays of 28 days or more, which is seeing higher demand as a result of the rise of digital nomads. Regardless, mid- to long-term travelers need a place to store their items, creating a greater need for self-storage units.

Owners can also have a property with multiple storage units. Having multiple storage units can diversify risk if one unit remains vacant. Conversely, tenant vacancy has a greater negative impact on small apartment buildings or single-family homes than on self-storage units.

Landlord Recourse

Landlords have to be mindful of each state's tenant protection laws and procedures. Some states like Texas make it easy to evict non-paying or destructive tenants. Others like California make it much more difficult to evict tenants, with eviction procedures taking as much as 8 weeks.

With self-storage, landlords won’t have to worry about overprotective tenant laws. It’s much easier to evict tenants, since they can lock out tenants within 5 to 6 days if they do not pay.

In most states, statutes permit an owner to remove tenant possessions if they don’t pay within 57 days from the due date of the last payment. Best of all, this process can be completed without lengthy legal procedures or hiring an expensive attorney.

Unlike typical residential and commercial properties that have leases of six months to a year, the typical lease for a self-storage unit is just 30 days. A shorter lease expedites the process to evict non-paying and other undesirable tenants. These short leases also make it easier to raise rents with increasing demand.

A Private Equity Self-Storage Offering That Targets an 18.1% IRR

RealtyMogul has a self-storage offering that primarily operates in Texas and Louisiana. This offering has units in Houston, Texas, which is seeing a high period of growth and Metairie, Louisiana, which is a vital shipping area near the Mississippi River. This offering also has 175,000 square feet of self storage space in its portfolio, including 819 Class A units.

Both locations have state-of-the-art technology like enhanced security cameras, online check in/out and virtual document signing. These units also have higher-than-average rent because of the technology and their prime locations.

In Houston, current rents are 13% higher than what existing tenants are paying. Comparable storage units in Metairie are netting 26% over the current asking rents.

Key project details:

  • Minimum investment: $35,000

  • Projected hold period: 3.6 years

  • Projected internal rate of return (IRR): 18.1%

  • Projected cash on cash return: 7%

  • Protected equity multiple: 1.71X

This project is currently being managed by Hickory Capital Group and the Prescott Group, which have a collective 30 years of managing commercial real estate.

Bottom Line

Self-storage will always be needed, regardless of the economy. Unlike other real estate sub-niches, it can actually thrive during tough economic times, as seen with the COVID-19 pandemic.

During April 2020, the unemployment rate was approximately 15%, which caused more people to move in with relatives. These movers needed an affordable place to store their possessions, leading to higher demand for self-storage units.

Self-storage units also have lower costs than other real estate sub-niches and landlords have greater recourse from non-paying, undesirable tenants.

Photo by jackwfrench on Shutterstock

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