One of the best ways to compare real-estate investments is to look at the past performance of self-storage and other real-estate investments during the past decade. Last year, National Development Services Inc. completed an in depth study of the performance of multi-family, office, retail and self-storage developments in Texas, Oklahoma, New Mexico, Colorado and Louisiana during the last decade. The study focused on the failure rate of those developments that opened between 1980 and 1987 and that were operating during the economic recession that began in those states in the mid-1980’s.
The results of the study are as follows:
The number of self-storage properties that ended up in the FDIC or RTC’s real-estate portfolio for sale was substantially less than other real-estate properties during the same time period. Of this 8 percent in self-storage failures, a considerable number of businesses were taken back by financial institutions because they were collateral for loans on other.
Why is there a substantial difference in success between self-storage and other ? What are the key elements that give self-storage the extra edge for surviving tough economic times? The first thing an investor must understand is what happens to the end user, both residential and commercial customers during the swings in a market’s economy.
During times when a market is experiencing an economic recovery, business begins to thrive, employment opportunities increase and the sales of new and existing single-family homes start to climb. One would expect self-storage properties to do well; most often, they do. An evaluation of typical self-storage property rent rolls during this time would usually show a high percentage of mobile customers. People moving into the market for the first time or customers from starter homes. On the commercial side, increased business actively means an increased volume of self-storage commercial tenants.
Conversely, when the economy starts to falter, the same happens to business, employment and in general. However, the reverse effect still causes the same mobility that most often benefits self-storage. People begin moving out of the market or selling their homes and moving into smaller homes or apartments. Commercial businesses downsize or look to self-storage for a more economic means for storing inventories.
A staggering economy does have a negative impact on self-storage, but look at how self-storage properties compare to other . During downswings in the economy, multi-family occupancies drop as much as 25 percent, while office and retail occupancies drop as much as 30 percent. Who are the office and retail tenants? Businesses that have either failed, downsized operations and moved to a cheaper property, or completely moved to another market. This is lost income to office and retail properties, and it is not recovered until the market’s economy improves.
Self-storage will also have an initial drop in occupancy, which differs from one market to another, but usually averages between 15 percent and 20 percent. However, a typical leverage self-storage property has a break even occupancy rate between 60 percent and 72 percent. Compare this to leveraged multi-family, office, and retail properties with a break-even occupancy rate between 80 percent and 90 percent. Which real-estate investment has more room to absorb market declines?
Rents are another key to success of self-storage properties. The average annual rent ranges for the surveyed by NDS are as follows:
As you can see, self-storage’s rents fall within the range of the other . It is not uncommon for customers to pay the same or more per square foot for storage as they do for living in an apartment. This rent comparison is even more enlightening when comparing rents to average development cost per type of . The average development cost per real-estate property surveyed is as follows:
When comparing both rents and total development costs, self-storage most often has rents that are slightly less. But self-storage has a total development cost that is a third to a half that of multi-family, office, or retail properties. To the investor, this means a considerable less investment or loan amount to be serviced while having comparable rents to other real-estate investments.
The cost of operating and the actual management requirements is another key element that is appealing to investors. As stated earlier, self-storage operating cost range from $1.50 to $2 per net leasable square footage. Compare this to operating costs for the other real-estate properties surveyed, which range from $2.50 to $3.50 per square foot. Apartments, office and retail properties have to continually maintain the grounds, appliances, plumbing, electrical fixtures and a variety of other maintenance concerns, which usually require a maintenance staff.
There are apartment "make readies" and interior remodeling for new office and retail tenants. In comparison, self-storage usually has one or two managers and very few of the maintenance "headaches" associated with "live-in" tenants. In general, a self-storage investor has very few of the problems associated with other.
The "bottom line" in comparing self-storage to other real-estate investments is that the investor can realize much higher ROI for the typical self-storage property than for other investments. Secondly, the investor’s initial investment is a third or half that required by other real-estate investments. Due to the lower break-even occupancies, the investor should anticipate investment cash flow sooner and a much lower element of risk in relation to economic declines and their affect on lower occupancies and rents. The investor does not have to worry about additional capital requirements relating to tenant improvements or continual maintenance.
The advantages for investing in self-storage that are mentioned above have been and will continue to be the keyed elements for its success. The self-storage industry’s future is very bright and it will continue to mature along with the demand for its use. Those investors who venture into self-storage will discover what the industry pioneers did 25 years ago: Self-storage is on of the best investment vehicles available in this country, now and in the future!
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