Looking to invest in a growing commercial real estate industry that has multiple benefits, including high demand and recession resistance? Look no further than the booming storage facility industry.
Today, nearly 11% of households in the United States rent an additional self-storage unit. With an annual industry revenue of over $39.5 billion, the need for storage units shows no sign of slowing down anytime soon. In fact, some estimates predict the industry value to climb above $64 billion by 2026.
If you’re thinking of diversifying your commercial real estate portfolio with storage facilities, here’s what you need to know.
Pros and Cons of Investing in Storage Facilities
Like every type of investment, there are advantages and disadvantages to investing in storage facilities. Here are some of the big factors that you should consider when weighing your commercial investment options.
Benefits of Investing in Storage Facilities
The benefits of investing in storage unit facilities are plentiful. The biggest advantages include the cash flow opportunity, relatively low barriers to entry, and low maintenance and upkeep costs.
1. There is a large cash flow opportunity.
Over the last six years, the average vacancy rate of self-storage facilities in the United States never peaked above 9.8%. That means with over 90% occupancy, you can expect a large and consistent cash flow from your storage investment.
Demand for units continues to grow and is showing no signs of slowing down according to experts due to growing urbanizations, an increased number of households downsizing, and shifts in the preferred American lifestyle.
2. Storage units have low construction costs.
Compared to other types of commercial real estate buildings, storage units have relatively low costs. The simplest of storage facilities are essentially covered concrete slabs. Even higher-end climate-controlled self-storage offerings are much simpler to construct than residential or office spaces.
3. Expenses for running and maintaining a storage facility are low.
Overhead for a storage facility is relatively low. Oftentimes, small- to medium-sized facilities can operate smoothly with just a handful of part-time employees. The smallest facilities may not even require on-site staff at all.
4. Storage units are largely recession-resistant.
When a recession hits, people typically don’t suddenly stop needing a place to store their belongings. On the contrary, they may need more space.
During economic downturns, people tend to downsize and tend to need a place to store their goods. Similarly, businesses that temporarily put operations on pause may look for somewhere to keep inventory, equipment, or office supplies. Because of this, storage units are a largely recession-resistant investment opportunity.
Drawbacks of Investing in Storage Facilities
These are the disadvantages to storage units that you’ll want to be aware of.
1. You must understand the needs of the community you’re serving.
To be successful, storage facilities must meet the needs of the specific community that they serve.
For instance, building rows and rows of boat storage facilities wouldn’t be wise if you lived hundreds of miles from the nearest body of water. On the other hand, if your facility was near a popular lake, catering to the boat owners in the area may be a wise move.
Factors to consider include:
- The space that the average renter in the area needs
- Amenities that your renters will require or desire such as climate-controlled units, 24/7 security, etc.
- The average amount of time unit renters in your area utilize a storage space
All of these things will inform what your facility looks like and how it operates. Miss the mark when it comes to understanding the needs of your community and you may find yourself with empty units.
2. The best locations may come at a cost.
Success in the storage industry is all about location. People want to be able to access their belongings at their convenience— not drive miles out of town. Though the cost of construction may be low, the cost of the property to build a storage facility can be high, depending on where you’re located.
3. Occupancy rates may fluctuate throughout the year.
Since storage facilities offer short-term tenancies, your occupancy rates can fluctuate over the course of the year. Though overall occupancy is generally stable, your business may experience busy and slow seasons.
Getting Started with Self Storage Facilities
There are three main ways to invest in a self-storage facility.
Develop Your Own Self Storage Facility
You can actively invest in this type of commercial real estate by developing your own self-storage facility. This will involve purchasing the land, constructing the units, marketing your business, and managing your roster of renters.
The hardest part of starting from the ground up is covering upfront costs and bringing in your first renters. Commercial financing can help you manage real estate, construction, and other costs while you work to get your cash flow started.
Purchase an Existing Facility
If you don’t want to go through the process of building your own facility from the ground up, you can purchase an existing one. Though it’s a booming industry, it’s still possible to find existing facilities for sale from owners who are looking to retire or move into a different industry.
One benefit to purchasing an existing facility is that you likely won’t have to worry about filling your units right away. The sale of a storage facility typically includes the existing tenants, so you are guaranteed cash flow from the get-go.
Investing in a Storage Real Estate Investment Trust (REIT)
Of course, if you’re not looking to own and operate your own self-storage facility, you can still invest in this asset through a storage REIT. You will earn on your investment through dividends, but you don’t have to worry about any of the hands-on work that comes with owning a facility. As with any investment, consulting a financial advisor is wise.
Work with a Local Lender to Start Investing
Ready to take advantage of this investment opportunity? Learn more about your commercial financing options with Amplify Credit Union. Our commercial loan team is happy to craft a loan that meets the unique needs of your business.