Self Storage - Potential Bubble Forming?
Hey all,
Tried searching but didn't see too much discussion on the self storage sector as a potential bubble forming. I had this thought as I was driving to the office and decided to count the number of self storage buildings on my route and realized that there are 7 large ones on my ~12mi drive.
A couple questions came to mind: how can they all be adequately occupied? won't the insane amount of competition drive rent down? If deurbanization trends continue and people have more space.. won't these places be in trouble?
Seems like there's been a lot of positive chatter around the asset class since its relatively easy/affordable to build and high retention rates. But I've always learned that if it looks too good to be true, it is.
Interested to know if the community thinks the same and just generally curious as to where ya'll see the asset class going in the future.
No knowledge on the topic but when I visit my parents in Hilton Head there are literally dozens of them within a few square miles...kinda seems like the south is the epicenter.
The weird aspect of self-storage is that they take a long time to lease-up (on average) but once people have their items in a unit they are extremely sticky. Let's say I'm renting a unit for $100/mo and the facility decides to increase my rent $10. That's a 10% increase y-o-y, but only $120/year to me. So for $120, am I going to rent a Uhaul, spend multiple hours loading the Uhaul, drive to another facility, and spend another few hours unloading everything? Probably not. It's just not worth the effort once my stuff is in there. People literally just forget about the cost because it's such a small expense and is a reoccurring charge. So once you have a stabilized property, you aren't completely immune to new supply but more so than other real estate types.
All that being said, I would not want to be a long-term owner of SS. I think this asset class is extremely vulnerable to disruption. There are a few companies that are trying to disrupt the space, but I think the cost model doesn't make sense at the moment. It'll probably take the widespread adoption of driverless trucks to really make it happen. But if I can rent an industrial bomber 30 miles outside of the city for $8-10/SF all-in and store people's things in there, you are going to destroy better-located self-storage properties whose bases are $100+/SF. A driverless truck picks up the items from the unit and delivers it to you same day. It won't be for everyone, but it will be it for the majority of people.
This. Self storage is fine...once it is leased. The problem is, it is taking a very very long time to lease. I know of two personally that got to a physical occupancy of 89% after 2.5 years. Keep in mind I said physical occupancy, not economic. Self storage owners are offering a lot of concessions such as free rent. These particular facilities offered 4 months free rent to get leased up and the rents were below market on new construction. However the whole idea is that once its leased, people dont want to move their stuff to another facility. The biggest issue with self storage is that carrying costs until you get leased. Another issue is that MANY investors are entering this space because of the ease of management, which is why you are seeing construction happen even in markets that are oversaturated.
This is very generalized, but you need to look at the square feet per person in your area. The nationally average of self storage square feet per person is around 7. Many investors look at a market with less than 7 square feet per person as one which can add more self storage. Go determine the square feet per person in your market, and you'll get a better sense of if your market is over supplied. This is not the be all end all and is very generalized, but it is a decent starting point.
While this is a good rule of thumb to know, the self-storage SF per capita required in Florida (no basements) is much higher than the Midwest/NE.
Supply varies greatly market by market. Some are overbuilt, or on their way to being overbuilt, some are not.
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