We talk with a lot of physicians everyday who ask us a simple question. “Why should I invest in self-storage?” Obviously, as a self-storage operator we are biased but there are three data points that we believe make this a fantastic asset class for physicians to evaluate for their own portfolios.
Wait a minute, self-storage is a legitimate asset class? Some statistics on the self-storage industry that may surprise you. Here are some numbers on the industry as of 1st quarter of 2021
Number of Self-Storage Facilities in the U.S. 48,000-52,000
That’s more than the number of McDonalds and Starbucks in the US combined!
9.4% of Americans rent a storage unit
Average annual industry revenues of $38,000,000,000
The self-storage industry has definitely come of age in the past 10 years. I remember when self-storage facilities were in very rural areas on a gravel pad and you had to go into owners house to rent a unit. Now facilities are being built on prime real estate on the corner of main and main with 3 story glass and brick retail offices rivaling the very nicest Starbucks locations!
Why has there been such interest in the asset class? I think that brings us back to the three reasons we are bullish on storage.
The first thing that every investor should look at is historical performance. According to the National Association of REIT (NAREIT)* the Self-Storage asset class has achieved an average annual return of 16.85% over the past 25 years. Self-Storage has outperformed Apartments (12.93%), Retail (12.04%), Office (12.15%), and the S&P 500 (7.06%) over that same time period.
I am a big believer that history repeats itself so I am always interested in the performance of an asset class in an economic downturn. According to that same NAREIT database, looking back at the last recession in 2007-2009, Self-Storage lost -3.86% in value versus Apartments which lost (-6.72%,) Retail (-12.32%), Office (8.16%), and the S&P 500 (-21.10%) Even when downsizing, Americans do not seem to lose their appetite for storage.
Market Consolidation Opportunity
Finally, investors should understand what the long-term runway may be in a particular asset class. According to the 2019 Self-Storage Almanac the publicly traded companies own less than 25% of the Self-Storage market. There is a consolidation opportunity for self-storage operators to acquire facilities owned by mom and pop operators and generate revenue enhancements by deploying a professional management strategy.
The other benefit of self-storage to the physician community is the opportunity to invest without a huge time commitment. There are passive investment opportunities in syndications of self-storage investments from operators around the country. There is also an opportunity to buy the facility yourself or with an investment group and hire a 3rd party management firm to outsource the operations of the property. Many of the publicly traded REIT have 3rd party management platforms.
How has self-storage performed during COVID-19? Didn’t all real estate get crushed during this pandemic? Fortunately self-storage has been doing well thus far through the pandemic. We think about demand drivers for self-storage defined by the 4 D’s. Death, Dislocation, Downsizing, and Divorce. Fortunately for our asset class but unfortunately for the general population, pandemics like COVID 19 create more death, downsizing, dislocation, and divorce. We have seen a strong increase in occupancy and revenues during the last 2 quarters of the year even in the midst of the pandemic.
That doesn’t mean that the asset class comes without risk. The biggest risk right now even during COVID-19 is on the supply side. We have seen a major development cycle in storage with many developers jumping in to maximize their returns. As you can see in the chart below the self-storage industry has kept the construction industry very busy over the last few years.
Does this mean it’s too late to invest and garner a strong return? We don’t think so. Just because the 50 top MSA (Metropolitan Statistical Areas) have seen a bunch of new developments doesn’t mean there are not any opportunities to be had to create value.
Reliant has typically operated in the secondary and tertiary markets in the southeast where typically there is less competition and more “mom and pop” operators. Keep in mind that storage is a micro market business. What really matters is the 1, 3, 5-mile radius around your facility because consumers will not travel for storage. Typically, we see 70%+ of our tenants within that 5-mile radius. It needs to be convenient to work or home for them to use the facility. Unlike multifamily where a consumer may travel for the right school district or amenity, storage is an air-conditioned garage so location is key.
Our acquisition team is looking at things like population growth, average income, job growth, rental rate growth in those rings are what tell the story around demand for storage. Even if a market like Atlanta has seen a bunch of development and may be oversupplied that doesn’t mean there isn’t a 5-mile radius in the suburbs that has opportunity. It’s definitely a sharp shooters game right now in storage.
If you are interested in learning more about Reliant and our track record in the industry you can check out www.reliantinvestments.com .
Kris Benson is the Chief Investment Officer for Reliant Real Estate. Reliant Real Estate Management is a vertically integrated self-storage operator located in Roswell, GA. Reliant purchased its first property in 2007 and currently has 50 properties, 31,000+ units, and a portfolio valuation of over $350,000,000+. In 2019 Reliant was named the 25th largest self-storage operator in the United States.
Reliant has sold 22 properties and the project level IRR is just under 44%. We have never lost investor principal or lost a property to the bank. We have sold 80% of these properties to the self-storage REIT community.
Reliant is currently raising it’s second $50,000,000 equity fund (Reliant Self- Storage Fund II) to purchase self-storage properties across the U.S .