Self Storage

A "sneaky big" industry

By Erica Rascón on Nov 12, 2014 in News

When considering some of the nation’s most profitable industries, what do you think of? The NFL? Entertainment? Self-storage? Surprisingly to most, self-storage outperforms a number of glossier industries.

“The self-storage sector is sneaky big,” says Michael Scanlon, president and CEO of the Self Storage Association. “In 2013, all 30 teams in the NFL generated $9 billion in total revenue, while the music industry generated about $21 billion, and self-storage generated $24 billion.”

The sneaky big industry has the attention of major investors. During the recession, several sectors of commercial and residential real estate suffered. Other than a minor sigh, the self-storage market held its own. Investors began to pump support into self-storage, reaping promising rewards.

“We’re seeing double-digit increases in revenue and occupancy across the country, and developers are hitting near 100 percent occupancy in less than two years after opening where it used to take three years,” reports Adam Schlosser, associate director of the Marcus & Millichap national self-storage group. “The REITs in particular are flowing massive amounts of capital into self-storage. They’re well-capitalized and with new technology can afford aggressive purchase numbers. They know they can increase their revenue stream with acquisitions. We’ve seen more large deals in the past two years than in the past 10 years.”

What’s so sexy about self-storage? Absolutely nothing. It’s a practical business that just so happened to benefit from the recession: former homeowners and business owners sought storage for their goods until things looked up again; Millennials who moved back in with their parents needed a place to store their pool tables and ultra-modern, ultra-uncomfortable furniture; as vacations became shorter and more budget-friendly, the family jet skis and boats needed a safe place to rest. Self-storage awaited those in need with open arms.

Reports suggest that the demand for self-storage has now exceeded the supply.  In 2014, vacancy rates dropped an additional 80 basis points. This generates as many opportunities as problems.

The good news is that low vacancy rates create healthy competition. Ryan Severino, senior economist at REIS, expects rents to grow by 2.8 percent.  The bad news is that construction can’t keep up with the demand.  Lenders require more equity capital before they’re willing to finance construction. While investors are ready to show their support, rising interest rates are slowing down first year returns, causing a bit of hesitation.

Real estate services firm Marcus & Millichap suggests that only 21 new self-storage facilities are scheduled for construction since the first quarter; that’s approximately 1.7 million square feet. Unfortunately, that doesn’t accommodate the storage needs of the projected 1.25 million new households springing up in 2014.  Clients will need storage. Storage won’t be available yet. Potential revenues will be lost.

Innovative storage leaders aren’t letting slow construction halt their growth. Many are turning to a lower cost alternative: buying and renovating existing commercial space. Scanlon began his business that way. It’s a lucrative solution.

Even with a few kinks in the wave, self-storage is expected to enjoy its future on the upswing.