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What Self-Starters Should Know About Self-Storage Investment

Rates and Returns Are Just the Beginning
Self-storage is often seen as a "recession-resilient" sector, said one expert.
Self-storage is often seen as a "recession-resilient" sector, said one expert.

Self-storage isn’t glamorous, but demand remains strong.

The national vacancy rate for the sector was 5.6% at the end of 2022, according to CBRE Investment Management. And 41% of investors polled by the global brokerage said they would pursue self-storage investments in 2023.

For what it’s worth, CBRE has recently added to its self-storage holdings, acquiring a 14-property, nearly 9,000-unit portfolio across Southern California and Utah last month. The fund sponsored by CBRE Investment Management now owns 100 self-storage properties across the U.S., totaling more than 55,000 units.

“Self-storage investment continues to be a preferred strategy for us as the user demand in this sector has continued to broaden and grow significantly in recent years due to structural and demographic trends,” Sondra Wenger, head of Americas Commercial Operator Division for CBRE Investment Management, said in a statement.

Market observers will tell you the sector is recession-resilient. But what should interested new investors know about the self-storage sector before buying in?

LoopNet asked Morgan Windbiel, a senior vice president with CBRE’s Self Storage Advisory Group, for his advice.

Why is CBRE bullish on self-storage right now? What market forces are contributing to this sector’s momentum?

The industry has continued to grow and outperform many other asset classes through both good times and bad. We have also seen tremendous growth over the last three years. As the economy expands, people continue to buy more and need to store old belongings that hold sentimental value, and as the economy retracts, they may have to downsize and store those things that they have emotional ties to and don’t want to discard.

The flexibility of month-to-month leases allows owners to adjust the rental pricing as they see fit. Self-storage also has extremely strong profit margins, as the cost to run a facility is very manageable and doesn’t change significantly with the size.

What was attractive about this recent portfolio acquisition in particular? How does it fit with the rest of CBRE’s self-storage portfolio?

The exposure to the Southern California market was most attractive in this portfolio. It allowed [CBRE Investment Management] to get into a high-barrier, strong-demographic market in an impactful way.

What advice would you have for a new investor interested in self-storage properties?

I would look at buying an existing storage facility where you can afford third-party management to learn the business from an experienced operator.

What factors should investors consider? Location, number of units, potential maintenance, etc.? What steps should they take?

These are all key components in the analysis. The size of the facility and number of units are lower on the list, however, because buyers are generally looking at cash flow, and a facility that is smaller but that has extremely high rates would be just as appealing as a very large facility with lower rates. A key component for many investors in this market is to check competitor rates in real-time as the larger operators have shifted to dynamic pricing models. Another good idea for investors is to check upcoming development in the area to see what competition may be coming to the market.

How do you price or value a self-storage property?

This answer depends heavily on the operational state of the facility. If it was a fully-stabilized facility with little to no upside, then we would likely look at this on a cap rate model.

Despite the majority of facilities being mom-and-pop operations, they offer significant potential for growth due to factors such as under-market street rates, discounted rates for existing tenants, absence of supplemental income sources (e.g. tenant insurance, merchandise), or delinquent payments.

Institutional and private equity buyers interested in facilities with built-in upside prioritize internal rate of return models and achievable upside, rather than the day-one cap rate.

What’s an ideal cap rate CBRE targets when looking to acquire self-storage properties? What cap rate should a smaller investor seek?

It’s less about an ideal cap rap rate because as described above, most investors are looking at a hold period return where they can get to a neutral leverage position by year two. There is still so much upside in operations for most self-storage facilities that a strict cap rate model oftentimes doesn’t tell the full story.

Any potential headwinds for self-storage? How would these properties fare in a recession? Are they “recession-proof?”

I don’t think I’d go so far as to say “recession-proof,” but rather “recession-resistant.” We’ve shown throughout the last few recessions that our asset class performs amongst the best in commercial real estate due to our operators’ flexibility. [That flexibility is derived from] adjusting rates in real time via dynamic pricing models or working with tenants in need.

That being said, as an industry, we also have a few headwinds, such as over-development and softening street rates. However, these are both short-term concerns and the long-term outlook on storage fundamentals continues to be extremely strong.

Anything else you’d like to add or leave the readers with?

Storage continues to be in a very good spot as existing customer rate increases continue to be healthy and our tenant base is still sticky, even through the surrounding turbulence. One thing to continue to watch in the industry, especially for smaller operators, is the growth of technology in the space and the ability to continue to manage labor expenses.

This interview has been edited for brevity and clarity.