There has been a lot of buzz about the self-storage market in the U.S., but you have to ask yourself when will the market be saturated? Only 8% of the U.S. population use self-storage and that is expected to conservatively grow to 9%. I have watched 3 new properties be built close to my home and it was amazing to see them go up so quickly and I often wonder how quickly they fill up.
Whenever I see a particular asset-type saturate with a new product, I always advise my clients to look at the secondary market because that is usually where the value-add play will be the most profitable. My prediction would be that the older self-storage units run by families and private owners will be anxious to sell as they lose business to the newer, shinier units. You know the ones I mean, they are usually run down, out-dated security, lacking climate-controlled units and not the prettiest properties on the market. This creates an opportunity for the savvy investor who knows how to turn an old product into something better.
It is basic real estate economics. It is a less expensive entry into a product, as opposed to new development, and if you know how, you can turn that product into something competitive to the new product at a better entry price. Most of the Mom and Pop operators will sell to an investor seller-financed with a small portion upfront in cash. This gives the investor a lot more room to add value.
For those of you who are used to the multi-family market, you will know that some of the most profitable operators are those that are buying C or D properties and turning them into B or C properties. These operators know that right-sizing the expenses creates wealth. C or D self-storage units have the same economics, but they are infinitely easier to turn around. Some clean-up, fresh paint, new signs, new security, and better operations and you have yourself a wealth creator.
I think this will continue to be an asset class to keep your eye on in the future, especially the secondary market. I know I am watching it closely. Tell me what your favorite asset class is.
– By Pete Larsen