Monday, September 30, 2013

Investing In Self Storage May Be A Good Idea

Have you ever watched Storage Wars? Well, the premier episode of the second season drew no less than 5.1 million viewers, making it the highest rated single episode of any series in the history of A&E. However, for serious investors, putting money into storage is about much more than paying $500 to own the contents of an abandoned, unopened storage unit. What exactly is the state of the self-storage industry, and is it a good investment?

Self Storage
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Well, it turns out that the industry is doing rather well on the whole. Perhaps the best evidence of this is the returns we are seeing in the stock market on REITs for storage companies – in other words, the value placed on the real estate that they occupy. In 2011, the average return on self-storage REITs was no less than 35.4%, which is very impressive when you consider that the average return on REITs overall only came in at 8%. That’s in a year when the Dow was up about 5.5%, so while real estate did well, the performance of storage was spectacular.

Another indicator of just how strong the storage market is comes from the amount that investors are now starting to be willing to pay for premium storage facilities in good urban locations. A recent deal involving Storage Post in New York City saw the company spend $300 million for 14 facilities, and, importantly, the deal came in at a 5.5% capitalization rate – the ratio of property income to price paid. Another way of looking at that is that it is the equivalent of an 18 to 1 P/E ratio – which is certainly not what you would expect of a seemingly stolid industry. In contrast, the capitalization rates back in the depths of the Great Recession went as high as 9%, so it now appears that companies are willing to pay slightly less than a 65% premium compared to a few years ago.
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If you want to understand some of the things that are driving demand for cheap storage San Diego perhaps gives some clues. There is an increasing trend for young adults to live in apartments and condominiums in the center of cities in general, rather than making their homes in single-family dwellings in the suburbs. This in turn is making them look to self-storage to make up for the lack of room in their homes. However, San Diego experienced a dramatic collapse of its condo market during the Great Recession, with foreclosure rates high and many properties lying vacant. But that has started to turn around dramatically over the last year, with the market actually starting to experience some scarcity. In turn, the influx of new, young residents is creating an opportunity for self-storage facilities to capture the increasingly affluent new residents in the downtown core. It is reasonable to assume that similar scenarios are playing out across North America, and indeed analysts are forecasting that the market for self storage will continue to grow over the next five years.