Is Self-Storage Overbuilt in 2023?
Self-storage facility
“Isn’t self-storage overbuilt?”
YES!
I get this question from investors and prospective investors all the time. And I often say “Yes” in reply. So, their next question should be obvious:
“Ummm…so why do you invest tens of millions in it?”
They don’t always say, “Ummm.” And they don’t always vocalize that exact question. But they must be thinking it. I would be if I were in their shoes, at least.
So, assuming this question crossed your mind, let’s dive in and take a look at this asset class. An asset class that the Wall Street Journal, the New York Times, and other analysts say emerged from the pandemic as the star of commercial real estate.
My Background In Real Estate and Self-Storage
I’ve never owned and operated a self-storage facility. But I wrote a book on self-storage investing published by BiggerPockets in late 2021.
I’ve been investing in real estate to protect and grow my wealth since 1999 after selling my firm to a publicly traded company. I spent years doing all types of residential real estate, including flipping dozens of homes, operating rental properties, flipping waterfront lots, building houses, developing a subdivision, and more.
Through that decade, I noticed that the wealthiest and most successful investors focus on commercial real estate. So, I often wondered how to get involved. But I didn’t know where the on-ramp was. Who would I trust, and how would I start?
After investing in a North Dakota oil and gas deal in 2010, I recognized a massive housing shortage in North Dakota during the Bakken oil boom. My partner and I responded by building two multifamily facilities that we sold for a significant profit. I was now a commercial real estate investor. And once I recognized the powerful math behind commercial real estate, I vowed to never return to residential.
I published a book on multifamily investing humbly entitled The Perfect Investment six years later. I planned to never stray outside the multifamily realm for the rest of my career. I launched an apartment syndication firm and started making offers on large deals.
After beating our heads against the wall for several years, we faced the fact that the apartment realm was generally overheated. And we weren’t willing to gamble with our investors’ funds.
So, we began to look at other real estate asset classes. Our goal was to find asset classes that were not overheated and had serious fragmented ownership. Mom-and-pop owners who don’t have the desire, resources, or knowledge to upgrade their facilities to increase income and maximize value. We found that in self-storage in a big way.
Our firm, Wellings Capital, recognized the opportunity, but we didn’t have the team, the track record, or the technology to acquire and manage these deals ourselves. So, we put together a fund, our first of five to date, to invest in self-storage and other real estate asset classes.
After about three years of investing in self-storage through our funds and traveling the country analyzing properties and operators, BiggerPockets published Storing Up Profits – Capitalize on America’s Obsession with STUFF by Investing in Self-Storage.
Like you, I’m regularly surprised at the number of new self-storage facilities popping up in every metro area I visit. And this is what caused me, like you, to wonder if self-storage is overbuilt, if all the good deals are gone, and if the cap rates are too compressed.
And like I said, the answer is yes. And no.
Boomin’ in Boise
Boise, Idaho is booming. Like many cities picking up the exodus from California and elsewhere. Just Google “Boise Idaho population growth” and you’ll see what I’m talking about.
I can drive you around Boise and show you evidence that self-storage is overbuilt there. But it’s essential to look at the numbers. Let’s do that…
This is a Radius+ analysis for a section of Boise. Radius+ is a wonderful self-storage data analytics tool that allows prospective investors to assess the number of square feet of storage versus the number of people in a given radius, among other relevant data.
This shows 17.2 square feet of storage per person in this three-mile radius. After accounting for facilities under construction, this tally will rise to 21.6 square feet per capita. This is a problem because the national average is about seven to eight square feet of self-storage per person in a relevant radius.
So, would you invest in self-storage in Boise? I wouldn’t invest just anywhere there. The fierce competition leading to price-cutting and revenue losses could be devastating. Especially since some of these prominent national players can afford to undercut a new facility with shallower pockets. But there may be exceptions. Let’s look at Nashville to explore that.
Nappin’ in Nashville
I can drive you around Nashville and show you that it also looks overbuilt. Like Boise, Nashville is booming. It is crowded with cranes, and the population is increasing rapidly. But there are self-storage facilities all over town, and there are areas that, like Boise, are over-supplied at about 12 square feet per person in a 3-mile radius.
But I can take you south of Nashville to suburbs like Bellevue. This area is historically under-supplied for self-storage and its current ratio is 4.8 square feet per person. Land costs are high, and municipalities have resisted self-storage construction for years. Affluent locals typically drive a long way to inconvenient storage facilities to store their stuff.
So, is self-storage overbuilt in Nashville, Tennessee?
YES.
And NO.
To Invest or Not To Invest
Self-storage must be evaluated on a hyper-local basis. Storage customers obviously want convenience. So, a generally overbuilt city may be significantly under-supplied in a three-mile radius area. And over/under-supply may also be calculated by unit type and size. Older facilities often don’t have climate control, and more clients than ever want this feature.
Some customers want large bays, others tiny ones. Some are looking for boat and RV storage, especially now. So, a deeper dive is warranted.
When I focused on multifamily, I didn’t want to invest in apartments in cities with a population under half a million. This ensures a diversified economy that won’t collapse with an economic shock or two.
But self-storage is different. The square foot per person ratio in a radius generally works in most locations. So, while many U.S. locations are overbuilt, other locations could be great places to build, retrofit, or expand self-storage facilities.
Successful self-storage investing in 2022 is largely dependent on two factors. Factors that are not visible to you and me when we drive past yet another new storage facility and listen to our spouse say, “Aren’t you worried about your mini-storage investments?”
First, a great operator focuses on data. The type of data we reviewed above about Boise and Nashville. Data about demand and competition in a radius around the asset as well as data on vehicles per day, visibility, local incomes, population migration patterns, and more.
Second, a great operator focuses on the type of seller. Self-storage is highly fragmented with about 70% of the country’s 50,000+ self-storage facilities owned by independent operators. Two out of every three of these independents is classified as a mom-and-pop, owning only one asset.
While some mom-and-pops are well run, the majority of their owners don’t have the desire or the knowledge or the resources to increase income and maximize value. Most don’t need to. They have already experienced skyrocketing values due to cap rate compression from the popularity of commercial real estate and this asset class in particular these past several years.
Would you have built self-storage in Beeville, Texas? Their population is around 13,000. I wouldn’t have thought to build that facility. But Wellings Capital invested with a seasoned operator who acquired an under-managed, undervalued facility there. It sold after a few years and provided investors with a 4.6x multiple on invested capital and a 70.5% IRR.
How about Ishpeming, Michigan? They boast a population of only 6,500. But they are a regional hub for this rural area, so residents from the region drive there to shop and store their stuff. We invested with an operating partner in a massive 168,000 square foot portfolio there. This project is 98% occupied and throws off a 31% annual cash flow to the fund. The projected IRR on this facility is approximately 80% if sold at a 6% cap rate.
But I don’t mean to give the impression that rural areas are the only ones with potential. Check out this radius study for downtown Atlanta. Atlanta is one of America’s largest cities, yet the ratio of only 5.8 square feet per person in a three-mile radius with no new facilities in the pipeline suggests opportunity.
What to Look For in a Self-Storage Investment
So how do we like to invest in self-storage?
There are many ways to make a great investment in self-storage. But Wellings Capital has a preferred strategy that works well in almost any market and economic cycle. We like to call it intrinsic value extraction.
This is a fancy-sounding name for a strategy that is easy to understand…but hard to execute. It consists of first locating and acquiring an asset that performs far below its potential. Through operational, marketing, and facility upgrades, income is significantly enhanced. This increased income leads to a proportional rise in asset value and a corresponding strong ROI to investors.
These assets are typically sourced from mom-and-pop operators. These owners don’t usually have the knowledge, resources, or desire to upgrade their facilities to drive higher income and value.
They usually don’t need to. They have a low hassle asset that throws off healthy cash flow. The unsolicited offers they receive confirm that the market values their facility far higher than they dreamed. They can continue in mediocrity (in many cases) and make a small fortune when selling.
A seasoned operator can acquire a facility like this and turn it into a profit powerhouse. There are a variety of value-adds at many of these facilities. You can get a more exhaustive list in my book, but here are a handful of opportunities:
Increase rents (many small facilities are far under market).
Improve marketing (many do little to none) to drive higher occupancy.
Add U-Haul truck rentals.
Add more units.
Add boat and RV storage.
Add propane filling stations, ATMs, billboards, or cell towers.
Add a showroom selling locks, boxes, tape, and scissors.
Buying from a mom-and-pop operator, upgrading, and selling as part of a stabilized portfolio to an institutional buyer is a potent recipe for success.
Conclusion
So, is self-storage overbuilt? Yes. And no. You’ve got to know where to invest. And how. If you have further questions, please email us at invest@wellingscapital.com or use this scheduling link to set up a call to see if Wellings Capital’s investments are a fit for you.
As with all financial matters, please do your own research, draw your own conclusions, and seek professional advice. The information contained in this article is for informational purposes only and is not intended to provide investment advice. Investors should consult their own tax, legal and accounting advisors before engaging in any transaction.