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Recession-Proof Real Estate (with Little Competition)

by Scott Meyers, CSSM   

They're often called recession-proof: steady investments that are inexpensive and easy to maintain with consistent profit margins. Not to mention, they're an area of real estate that seems largely unaffected--if not helped--by current rough market conditions.

They are self storage units, and people always need them. And all across the country, with a growing population that provides a constant supply of people in transit and in need of storage, they're shooting up everywhere. Self storage facilities require relatively low building and management costs.

Storage facility operators are capitalizing on a constant of modern culture: Americans own a lot of stuff.

According to the Self Storage Association (SSA), self storage has been the fastest-growing sector of the U.S. commercial real estate market for the last 30 years, growing into a $220 billion industry. The rate of growth, however, has slowed somewhat over the past two years.

A slow housing market can actually help storage facilities, according to industry analysts and local facility operators. As the housing market slumps, people downsize their house sizes, and some are even foreclosed upon.

People with second homes often store their large possessions like snowmobiles and RVs in units while they're away.

Businesses use storage units too. Companies like the Old World Cabinet Company use the spaces as warehouses. With the high price of real estate in offices, sometimes it's more economical to rent storage units than to buy up more space.

The fastest growing commercial real estate sector

According to the Self Storage Association:

Self Storage facilities are real property designed and used for the purpose of renting or leasing individual storage spaces to tenants who are to have access to such space for the purpose of storing and removing personal property. They offer rental on a month-to-month basis of individual spaces where customers provide their own lock and have sole access to their space.

Today's typical storage facility may comprise several one or two-story buildings on 2 to 6 acres of land, or a multiple-story building, containing a carefully designed unit mix of spaces. The units typically range in size from 5 x 5 to 10 x 30 feet with 30,000 to 120,000 total rentable square feet of space.

Self storage facilities frequently have large roll-up doors and drive-up access to outside spaces and offer outside parking for storage of boats and recreational vehicles, which often cannot be stored in residential communities.

Today's facilities normally have the following features:

  • From 10,000 to over 100,000 rentable sq. ft.

  • A wide range of unit sizes

  • Well lighted

  • Paved vs. graveled

  • Units are divided by steel, movable panels

  • Some spaces may be climate controlled

  • High-tech security systems, including electronic access, cameras, and digital video recording

  • Perimeters are walled or fenced with security gates

  • May or may not have a resident manager

  • Single or multi-story buildings

  • Carts and dollies for customers to use

  • May contain movable storage modules

  • Sell storage and moving-related supplies

  • Ancillary retail services and products

From the real estate perspective, self storage:

  • Meets the needs of several consumer groups (residential & commercial)

  • Uses simplified structures

  • Makes efficient use of land

  • Has short construction time, thereby providing little traffic disruption

  • Uses very little energy!

Who are the self storage tenants?

It has been said that self storage is used by people and businesses in transition, but that's only part of the picture. Self storage is used by a wide range of consumers with different needs that may include:

  • Homeowners and businesses in need of temporary space for overflow of property or inventory

  • Those in the process of relocating

  • Property stored in relation to an estate in transition due to death, litigation, restoration, etc.

  • Businesses in need of space for general control of inventory, records, supplies, and equipment

  • Businesses that are expanding or contracting

  • Businesses storing seasonal displays

  • College students storing books, desks, etc. during summer

  • Military personnel in need of low cost space or are on temporary duty

  • Seasonal visitors with household items and sports equipment

The advantage of using rental storage space is increased flexibility, low cost, convenience, and value.

Self storage space is generally rented on a month-to-month basis and does not commit customers to long term leases. Tenants typically may leave whenever they want and rent only the space they need. A recent study shows that the average length of tenancy for a typical customer is 11 months, and 24 months for the average commercial tenant.

The cost of self storage space is lower than office or retail space, saving users money. On average, self storage is roughly 60% less than the cost of most office on a per square foot basis.

Self storage users often find facilities in their local area, and they receive additional service value because managers are trained to counsel consumers on how to store items more efficiently in less space, thereby reducing the cost.

Self storage is a useful management resource for small businesses, since businesses can easily get more space as they grow without committing to expensive, long-term leases. Furthermore, it provides businesses with a means to cut costs, should they need to downsize.

Self storage is also useful for college students and seasonal visitors who may rent space for a season, and for military personnel who go on temporary tours of duty, but intend to return to the area, and for those who can't afford to rent more living space.

Today's self storage market

Estimates of the overall number of self storage facilities operating in the United States varies greatly but most industry veterans estimate that there are somewhere between 45,000 and 50,000 facilities.

As the population becomes more familiar with self storage, the demand for off-site storage has expanded to accommodate the growing needs of the business community by storing files, medical records, excess inventory, equipment, etc. In some areas, business storage accounts for 30% or more of the total tenancy of a facility.

Easy access, convenient office hours, short term rental agreements, and no long term commitment to pay for space which may not be needed in the future, make the self storage facility extremely attractive to the retail customer, contractor, home based businesses, manufacturers, and pharmaceutical representatives, etc.

The industry still remains relatively unsophisticated and highly fragmented. Today, roughly 75% to 80% of all self storage facilities are owned by small independent "mom and pop" operators.

There is a considerable amount of medium to large players undergoing consolidation, although it is becoming more difficult for the larger buyers, since most owners realize what a great low-maintenance, high-cash business it is, and therefore are reluctant to sell. As a result, the top 50 companies control approximately 25% of the square footage in the industry.

As demand for space has grown and the self storage industry has evolved, consumers have become more familiar with the property type (92% of the households in the U.S. were familiar with the concept, according to a survey sponsored by the Self Storage Association in 1989).

Inasmuch, local and regional competition ranges from a handful of properties to scores in a given trade area. Accordingly, customers may choose where they will store and from many different options, with unit size and the choice of climate or non-climate controlled space being the base options.

Today consumers have the ability to compare and choose from among a variety of self storage property styles and customer services to meet specific storage needs.

The best kept secret in real estate

Here are some of the most compelling reasons why I decided to focus solely on self storage:

  • Low barrier to entry. With only 50,000 existing facilities in the U.S., the buying opportunity is tremendous!

  • Low risks. No single move-out is going to dramatically affect cash flow.

  • Multiple profit centers--merchandise the sale of locks, boxes, moving supplies, cell towers, billboard leases, car washes, business centers, pack and ship centers, insurance sales, truck rentals, eBay, and much more!

  • Minimal collection losses. Lock out non-paying clients, then auction off the contents of their unit to recapture lost rent!

  • No TENANTS! No TOILETS!

About the Author:

scott meyersScott Meyers is THE leading Self Storage educator. He travels the country revealing why Self Storage has become the hottest sector in commercial real estate over the past 30 years--that virtually nobody has heard about.

He is a Certified Self Storage Manager (CSSM) through the National Self Storage Association and has been a real estate investor since 1993. He was an instructor of the Landlord 101 course through the University of Indianapolis, and now Scott speaks to investor groups nationwide and has students around the world.

Scott is the owner and President of Alcatraz Storage which operates several Self Storage Facilities in the midwest.

 
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