Why You Should Invest in Self-storage Facilities During a Recession

As the threat of a recession looms, commercial real estate investors are scrambling to figure out where to put their money. One sector they might want to consider is self-storage, given its strong track record even during rocky economic times.

During a November conference call with Wall Street analysts, Joe Margolis, CEO of publicly traded self-storage operator Extra Space, said his REIT is “well-positioned to continue to produce solid results due to our resilient need-based asset class.” Executives at other self-storage REITs express similar sentiments about the sector’s time-tested recession resilience.

A report from MJ Partners Real Estate Services notes that the self-storage industry’s growth trajectory looks healthy, thanks to demand factors such as the desire to declutter, the ongoing shift toward renting versus owning, the general downsizing of households, and the relocation of Americans for job changes and other reasons. Many of these factors are likely to remain in place during recessions.

Are self-storage facilities good investments in 2023?

While growth in rental rates are moderating, self-storage facilities remain good investments in 2023, despite high-interest rates and fears of a recession.

In part, that’s because the addition of new self-storage facilities appears to be in the midst of a “three-year holding pattern,” according to S&P Global Market Intelligence.

This pattern is likely to continue through the end of 2023, meaning supply will be constrained in areas where demand is high. That, in turn, may make self-storage facilities attractive acquisition targets in places with metrics such as substantial population and job growth, along with vigorous rent growth.

Are self-storage facilities resistant to the effects of a recession?

By and large, self-storage facilities are likely to be resistant to the effects of a recession.

Self-storage operator Pinnacle Storage Properties points out that the four D’s — death, divorce, downsizing and dislocation — help drive the sector’s recession resilience. The four D’s are constants that largely escape the impact of a recession.

But the sector’s success even during recessionary periods goes beyond the four D’s, according to Pinnacle. Most modern-day facilities boast nice amenities, good security and “concierge-level management staff,” the company says.

“Back in the day, self-storage brought to mind shabby properties on the outskirts of town. Security was dubious at best, and good customer service was, indeed, a work in progress. As the industry grew, self-storage became a unique asset class that provided a stable cash flow, passive income, and long-term appreciation opportunities,” Pinnacle says.

Are self-storage facilities profitable?

Generally speaking, self-storage facilities turn a tidy profit. And that profit might be higher than you’ll find with other businesses.

One way to gauge profitability is by looking at profit margin. According to Storable, which provides products and services to self-storage owners and operators, the typical profit margin for a self-storage business is an estimated 11%. By comparison, the profit margin for a restaurant normally ranges from 3% to 5%.

Another way of measuring self-storage profitability is by examining cash-on-cash returns.

“For leveraged self-storage investments, the difference in cash-on-cash returns is impressive,” the CCIM Institute says.

To back up that statement, the institute compares a leveraged self-storage facility at a 10% cap rate to a leveraged office property with the same net operating income at an 8.5% cap rate. In this example, the self-storage facility’s cash-on-cash return is 13.4% versus 7.4% for the office investment.

“A self-storage facility is an attractive investment because of the relatively low operating costs. It requires less upkeep than an office building or multifamily complex, for instance, and demands less overhead — namely in the form of labor — than most other kinds of income-generating real estate,” Storable says.

Furthermore, self-storage facilities can take advantage of more frequent rent hikes than properties like office buildings can, and they benefit from the ability to sell locks, storage boxes, insurance, and other products and services.

Will storage facilities remain good investments if other asset classes bounce back and the economy improves?

Chances are favorable that self-storage facilities will remain good investments if other asset classes bounce back and the economy improves. You can give a lot of credit for that to a stable customer base and high demand, according to REjournals.

The publication says self-storage “is on an upward curve.”

“Self-storage is unique as an asset class in that it has maintained steady growth throughout the Great Recession, COVID-19 and the Great Resignation. That stability spurs new investment in the industry, and as prices and inflation heat up, more and more money is rolling into storage,” says REjournals.

Which markets offer the best investment opportunities for self-storage?

Primary, secondary and tertiary markets can each offer investment opportunities for self-storage investment. The attractiveness of investments in these markets depend on an array of factors, such as current and projected:

• Supply and demand
• Rental rates
• Population growth
• Job growth

That being said, several U.S. markets of various sizes are worth a close look by self-storage investors. They include:

• Coeur d’Alene, Idaho
• Jacksonville, Florida
• Los Angeles, California
• Miami, Florida
• Myrtle Beach, South Carolina
• Nashville, Tennessee
• Orlando, Florida
• Provo, Utah
• Phoenix, Arizona
• Raleigh, North Carolina

Of course, this is not a complete list of the self-storage investment markets that may be promising. And it’s worth noting that self-storage facilities generally draw customers from a one- to five-mile radius. Therefore, one trade area within a market may be ripe for opportunity, while another one may not be.

Let Broadmark Realty Capital be your trusted real estate finance partner for alternative capital investment opportunities, including self-storage facilities. Contact us to finance your next commercial real estate project.