Editor’s note- this is part seven of a ten-part series on the various asset types of DST offerings.
Self-Storage Asset Classification Discussion
By Al DiNicola, AIF®
June 8, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC
Self-storage has been a stable commercial asset over the years and the acquisition of existing facilities and development of new facilities by public and private Real Estate Investment Trusts (REITS) has been well documented. Self-Storage is also packaged as a Delaware Statutory Trust (DST) affording certain accredited investors to gain access to this sector. In addition, 1031 tax deferred exchange investors (via DST) may also obtain an interest in this asset class. Over the years we have seen volatility in the stock market and this volatility moves investors to seek alternative investments. While the investment into self-storage may lack the sizzle of watching the closing bell reports the alternative investment may provide an even keel in a sea of uncertainty. The non-correlated assets may also provide a foundation to an overall portfolio.
Self-storage does seem to consistently throw off cash flow and potential returns at the end of the holding period. Investors seeking diversification with a non-correlated holding often look to real estate and self-storage is an easy asset to obtain. Investors may also want to own an interest in a tangible asset with the benefits of tax favored returns. We often seek to include a suggestion of a self-storage DST in an investor portfolio. That may be easier said than done. There is the unbalanced number of self-storage offerings as compared to the high number of multifamily assets. The other challenge is the timing of when an investor is ready to purchase.
To appreciate self-storage, we need to take a few steps back to understand the asset class.
History & Background
The potential for excellent returns is very possible in the interesting asset class of Self-storage. Over the years self-storage has been resistant to recession. Homeowners amid recession and financial hardships may be faced with losing their homes to foreclosure or downsizing to apartments. When looking for a place to keep their items the logical solution was self-storage units. This became the holding place until times got better. We Americans have a lot of “stuff”. There is some type of hesitancy for us to simply throw things away. The unwillingness to eliminate items we are keeping (for whatever reason) simply fills up closets, garages, and other areas in the home. Two car garages may be filled with everything but cars. Estimates are that one-third of storage space is filled with items that have been there for over three years. This asset class has produced high yields, experienced lower declines and default ratios when compared to other asset classes. Self-storage is a sizable asset class for a relatively new industry. Mom-and-pop operators dominated the industry in the early years. Today the self-storage industry ownership is fragmented, with 31.2% of self-storage space (by rentable square footage) owned by six public companies, 16.5% owned by the next top 94 operators, and 52.3% is still owned by small operators. (Self-Storage Almanac, 2021).
According to Self-Storage Almanac, annual self-storage revenue rose to $39.5 billion in 2021.
- Number of self-storage facilities in the US: 49,233
- Amount of self-storage space per capita in the US: 5.9 square feet per capita
- Percentage of U.S. households that rent a self-storage unit: 10.6%
- Total rental self-storage space: 1.9 billion square feet
Today sponsors of DST self-storage is gaining popularity and some sponsors are vertically integrated with the potential exit strategy (of the DST at full cycle) would be the acquisition by an associated REIT. One of the top performing sectors recently have been self-storage REITs. The DST offering may be a single site location which tend to be smaller in dollar terms (under $20 million) to a portfolio of several locations that may include larger offerings (over $100 million).
The newer facilities tend to be climate-controlled. There are many factors for this and driven by the consumer wanting a controlled environment that avoids mold and musty effects on their belongings. Climate control facilities can charge a premium. There may be additional revenue obtain from other sources such as truck rental, shipping and other services. Not all facilities have the additional space (i. e. urban locations) to provide these services.
Self-storage facilities and locations thrive on population growth. Population growth is a logical driver for multifamily and residential needs and storage demand and is closely aligned with these asset classes. Strategically placing a storage facility in a densely populated area (or area expecting growth) is the key element.
The self-storage industry is a sub-sector of commercial real estate. The growth of the industry is expected to be positive during the forecast period, due to the trends of increased urbanization and improved economic outlook, across regions, which have led to new business growth.
According to the US Census Bureau, construction spending on self-storage has increased by 584% from January 2015 to January 2020. The United States self-storage market is expected to register a compound annual growth rate (CAGR) of 2.02% over the forecast period 2021 – 2026. The COVID-19 pandemic created disruption in many industries. However, there are opportunities for investors to do well during recession and into recovery. The resiliency of the Self-storage asset class is to be noted. People continue to use self-storage and operating business fundamentals make it very attractive.
Some states and business have seen expansion after the impacts of the pandemic. As states scale back some of their COVID-19 restrictions the self-storage sector is returning to higher levels.
How locations are developed and how they are operated are seeing changes.
The locations of self-storage facilities have move closer to the customers as there has been population growth in the urban area. Granted there has been COVID migration from certain states but that may have been a reaction to certain states locking down. That is another topic. Empty nesters as well as Millennials (as demographic groups) have moved to the urban areas. Many of the dwelling units in urban areas are smaller in square footage and provide little or no additional storage.
Prior to COVID the move back to the city (some reference as Increased Urbanization) in conjunction with the delivery of small living units or apartments created a real demand for storage solutions. Past DST portfolio offerings with multiple locations in large cities have done exceptionally well. Single site offerings are also in demand. These offerings provide for smaller investors, ether cash investors or 1031 tax deferred exchange investors, an opportunity to participate in this asset class.
Move to the Cities
- Cities welcome the increased urbanization that is breathing life into certain areas. Not all cities are experiencing the same increase. However, this increase is a major factor driving market growth.
- When people downsize, they are faced with the reality of what to do with all the possessions that will not fit into the smaller living space. This equates to increased demands for storage. Well located self-storage units provide a convenient way of freeing up space in the new urban living environments. Items that are not needed or rarely used fill the voids of self-storage spaces.
- All new self-storage facilities are not purpose built. Vacant retail and office locations can be converted into unique and interesting storage solutions in a variety of locations. Old larger big box stored with high ceilings have been converted into self-storage facilities thus repurposing a dark building.
Every sector of real estate has experienced advancement in technology and self-storage is taking advantage of those advancements. Security is a prime issue with consumers who seek access to their storage units. State of the art CCTV monitored access and other innovations add to the overall security and customer experience that will retain current renters as well as attract new users.
Self-storage has been a bellwether asset class over the years. This may be an asset class to understand for potential inclusion in your investment portfolio. Participating in a self-storage DST may provide a solution for consideration.
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email email@example.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
NAMCOA® – Naples Asset Management Company®, LLC