This is Part 4 of a multi-part series on investing in Self Storage assets.
In a prior blog post, I’ve talked about this industry getting started by small “Mom and Pop” owner-operators over 50 years ago. Rental rates back then were generally in the range of 10-20 cents per square foot per month. By the 1990s, those rates grew to averaging approximately $1 per square foot per month. Rental rates have continued to slowly increase in the 21st century as well.
This ability to increase rents as a facility fills up attracts investors to self storage as this translates into quickly turning into cash flow and returns on the invested capital. Will this ability to raise rents continue? A few emails back I mentioned that while rental rates did decrease in April and May 2020 due to the outbreak of COVID-19, those decreases flattened in June and starting turning back to increases in July and August of 2020. In recent years, some local markets have started seeing strong competition. In fact in some local markets, supply has begun to outstrip the demand. That has caused many older projects to suffer because they didn’t have the newer construction or amenities and benefits offered through newer construction. In those markets, the demand has increased for the more sophisticated and aesthetically pleasing facilities.
For these reasons, self storage has become more sophisticated. Construction has gotten more expensive. The land cost has increased as investors have looked for more desirable locations and now land can often be 50% of the investment. Debt service can be a significant factor due to the increased investment required. All of this has to be considered by any prospective investor getting into the self storage market.
While many people still view self storage as an ugly step-child in the real estate industry, the category is maturing and a very viable form of real estate investment. It is more sophisticated now. It performs on a different cycle than other types of real estate. It has survived good and bad economic conditions. It has its own industry associations and suppliers that cater to it.
As the marketplace for self storage has grown, knowledge about the benefits of using self storage has grown among potential customers and this has helped to continually increase demand which helps support growth in rental rates over time.