A very wise self-storage expert once said that self-storage is not a sexy industry. “It’s a lot of garages. The shiny hotels, offices, and retail centers tend to look a lot nicer, but self-storage is sexy if you like making money.” Spoiler alert: This golden nugget was mentioned by Chris Sonne, specialty practice co-leader at Newmark, a consulting firm that assists investors in every stage of self-storage development. But we’ll get back to his insights later. The reason this article opens with his statement is that it’s true: Investing in self-storage can be a goldmine, but as with everything else that has to do with real estate, location is key.
So what are the hottest markets right now? And what data should you be looking into to get the highest ROI?
For example, that what’s currently affecting the environment the most is the housing market. “This is the most important component for today’s fluctuations within demand,” says Aghadjanians.
This is a trend that’s affecting the entire country, regardless of whether it’s an urban area or a smaller town. “The more bullish times of the economy, you see that spread to more tertiary markets,” says Sylvester. “That’s a natural ebb and flow of the business and storage within the U.S. right now … I wouldn’t say there’s any one area that’s doing anything different from the rest of the country that would be notable.”
Even when things are going well in the economy, there are people who won’t invest in certain geographical locations due to local hurdles. “Chicago has an enormous amount of unfunded pension liabilities,” Sylvester says. “At this point, this is resolved through increased taxation, and taxation comes in the form of property taxes, which is a direct hit in the storage model. The uncertainty there impacts cap rates and the willingness to invest in certain areas.”
That said, when investors are considering sites that are attractive to them, Sylvester cautions about what they should consider. “A pivotal factor when selecting a site, you’ll want to look at the relative health of the market,” he says. “Rates are critically important, since they are indicative of the supply and demand when looking at an area.”
Sylvester then advises to look at the location’s density. “We generally want to see sites with a certain density level,” he adds, “although we’d still build in an area with a below threshold level if the migration patterns in that area are seasonal. That’s an asterisk to that methodology.”
Finally, he takes a look at the pipeline. “We pay close attention to gauge if there are other projects that have been recently delivered or are going to be delivered in the future,” Sylvester says. This includes paying attention to zoning and what can be built around the area. “That sets the stage for whether there’s going to be a lot of development in that location.”
While you can certainly gather a lot of this data from software-as-a-service platforms like Radius+, it behooves you to also talk to people in the know. “We’re constantly talking with the city, local development officials, architects, general contractors, and anyone within our networks,” Sylvester says.
Aghadjanians also offers words of caution when looking at different sources of data. “Some reports may show a specific city as a top market, but you have to look at everything within context to get the full picture,” he says. “For example, when were the most recent facilities completed? This may cause rental rates to drop as a larger percentage of the market share is competing to fill up hundreds, or even thousands of new units.”
Aghadjanians advises to look for actual self-storage revenue performance instead of just theorizing based on demographics. “What’s rent growth looking like? How are the facilities performing?”
Now that it’s clear that things have somewhat stalled a bit due to the housing market, and that any studies you come across must be considered within the contexts mentioned by Aghadjanians, let’s take a look at which specific geographical locations may have a higher ROI.
Sonne owns self-storage property in El Paso that has exceled due to an abundance of land, lower costs to build, and availability of labor. “People wouldn’t ordinarily think it’s a big market, but it’s done well,” he says. “There are some markets that tend to be off the radar. Certainly not in the top 50 metropolitan statistical areas, but the supply and demand metrics look good and costs are low.”
Sonne emphasizes that regardless of what’s happening in a large city or MSA, what really matters is the trade area—the three mile radius around it. He also advises to do boots on the ground, old school work when conducting research. “I encourage people to rent a facility at the nearest competitor and see what kind of rent increases you get,” says Sonne. “See how full it is. Is there a lot of activity? There are so many articles that are published, and so much data, but this kind of research will give you practical information you can rely on.”
This is especially useful when there’s such a wide range of opinions on any given subject. “You can ask different CEOs which markets they like the most, and they all have different opinions,” Sonne adds. “There’s no consensus among them. And diversity of opinion is good in any industry, but it also shows the importance of going out there and checking things out for yourself.”
In a nutshell, context is everything. And in a world where we rely so heavily on technology, it’s good to use it as a crucial piece of the puzzle, but it’s still not a substitute for good old fashioned leg work. “Storage is a great investment. It’s recession resistant, resilient, and not subject to wide swings,” says Sonne. “It’s a very efficient business model, and there’s a lot of capital waiting on the sidelines to get into the industry.”
–
Alejandra Zilak studied journalism, went to law school, and now writes for a living. She also loves dogs.