By Jeff Stein
Rarely do we associate the term "sexy" with self-storage. But sexy sells, and the evolution of this product and its place in the market are making private and institutional investors take a closer look at the appeal of this asset class and capitalize on its recession-proof returns.
The Self Storage Association estimates approximately 10 percent of U.S. households currently rent a storage unit, generating an estimated $22 billion in annual gross revenue for property owners. Revenue at this peak level has pushed self-storage real estate investment trusts (REITs) to outperform every other REIT asset class and the Standard & Poors 500 since 1993, according to Wall Street analysts. Likewise, the recent sale of trophy self-storage portfolios reflected this value push with capitalization (cap) rates challenging those of prize office buildingsbetween 5.5 percent and 5.7 percent.
Private investors, such as Atlanta-based Stein Investment Group, are also pumping new capital into the sector. Within a 12-month period, Stein has invested $17.2 million in the storage industry, compared to an infusion of $20 million in retail and office combined for the same period.
So, whats driving the evolution of commercial real estates new darling? Whats propelling the self-storage sex appeal? While some may argue that it's the noncyclical demand for the product, recent opinions indicate its the introduction of facilities as community assets along with the emergence of new client segments that are truly the most important factors in bumping up the sexy.
By 2020, an estimated 85 percent of the U.S. population is expected to reside in an urban environment, according to the Atlanta Business Chronicle. Already, many of the nations largest cities have experienced waves of urban resurgence in their downtown cores, driving the need for self-storage in new submarkets.
With single- or multi-family residences now integrated into mixed-use developmentsand squeezing into smaller footprintsspace is at a premium. Unwilling to sever the emotional attachment to their belongings, urban dwellers are seeking self-storage facilities that are accessible to the home front.
One such facility is Decatur Street Self-Storage, a Stein investment under construction in downtown Atlantas popular Old Fourth Ward district. The $9.2 million, five-story development caters to the residents of 26,500 upscale apartment and condominium units dotting the neighborhood, the 30,000 students who attend Georgia State University, and downtown Atlantas dense commercial areas. Despite the high barriers to entry typically found in an urban environment, Stein identified a residential node that was underserved (less than 7 square feet of self-storage per person), one of the many keys to successful market penetration.
A Workforce on the Move
As suburbanites flock to urban ZIP codes, the nations workforce is also on the move. Crisscrossing the country with only the necessities, short-term workers are moving for work and shaping a new long-term renter. This transient workforce locks up its belongings in a self-storage unit typically for 18 to 24 months while on the job away from home. According to real estate consultant Christopher Lee, almost $1 trillion of student-loan debt and stagnant household incomes are driving this trend.
The Influence of Affluence
While baby boomers arent new to self-storage, their evolving needs are demanding greater product diversification. Loaded with the belongings of their extended family, these typical suburbanites require more climate-controlled and secure storage for family valuables including art, wine and large heirlooms such as pianos.
Another Stein investment under development, Johnson Ferry Self-Storage, meets those needs at the heart of one of the most affluent neighborhoods in metro Atlanta. Larger unit sizes and climate- and humidity-controlled wine storage will be a new addition to the communitys most prominent commercial corridor. This trend is expected to continue for the next decade.
A Community Asset
To attract these new, emerging classes of renters and sustain the sexy, the self-storage industry is expected to evolve from a lifestyle business to an investment-class business model. While single-site operators remain the mainstay, its the capital from new investor resources thats infusing the industry with a sustainable and more sophisticated product type that ensures the asset's longevity.
No longer hidden from view on undesirable sites, the 21st century self-storage facility is front and center at highly visible, class-A retail intersections within burgeoning communities, urban and suburban. Yet its not only the physical address that solidifies this product, its the industry's emergence as a community assetan integral part of a neighborhoods amenity packagethats driving the performance of this product.
The Next Generation
So, what makes a self-storage facility a community asset? First, a quality product. Todays facilities must align with the architectural and lifestyle appeal of the surrounding neighborhood, designed to meet the increasingly strict local and municipal zoning requirements and blend with homes and buildings. This is key to positioning a project in highly visible, prime commercial nodes. Whether progressive or traditional in style, storefronts now incorporate varied exteriors including stone, wood, brick and other high-end finishes. Extensive landscaping and intentional lighting schemes complete the welcoming, upscale environment.
The "next-generation facility" is also wrapped with state-of-the-art technology that controls everything from electronically controlled access to bill-pay. These sites feature bright, clean and secure interior environments that include motion-controlled lighting, music, intercoms and large, clean corridors. Onsite kiosks allow renters to manage their accounts with the opportunity to extend contracts, pay rent or register a maintenance request.
With prime real estate at a premium, many of these new facilities are multi-story to capitalize on a smaller footprint. This alternative floor plan calls for elevators as well as designated, and often covered, loading/unloading areas.
Establishing a Hub
But it takes more than a good first impression, quality product and fancy technology to establish a community hub. With a growing focus on convenience, many facilities offer more than just storage space. Taking a cue from retail, its all about service and convenience.
As 33 percent of self-storage businesses (up from 17 percent in 2004) serve as a one-stop shop for everything moving, including supplies and truck rentals, even more are emerging as office headquarters for transitory workers such as home-based salespeople and tradesmen. By offering conference facilities, Wi-Fi access and a coffee bar, these properties create the ideal atmosphere for small-group meetings and business-networking events, often free of charge, essentially locking in that immediate community connection. Further, many serve as package-delivery sites accepting shipments on behalf of their renters.
As more self-storage businesses stake claim to street-front, retail real estate with appealing façades, small retail and service providers are finding this property type to be a lucrative bedfellow. Boutique tenants, such as coffee shops, spa services and fast casual dining, are opening their doors adjacent to the storage front office. Business models are also being defined by self-storage, as units are retrofitted for hair salons and used by records-management firms capitalizing on the propertys state-of-the-art security, further embedding self-storage into the daily lives of neighbors.
New self-storage development has been virtually flat over the past five years. This has allowed demand to catch up and outpace supply in specific markets. Its expected that properties coming online in those markets will serve as community and business hubs that will ultimately outlast the lifestyle storage of yesteryear. There will always be a need for self-storage, but what gets stored and where will drive the evolution of this recession-proof asset class. Yet, the embedded nature and long-term value of this product will keep the sexy in self-storage.
Jeff Stein is principal at Stein Investment Group, where he's responsible for the overall strategic direction of the company as well as identifying investment and ownership opportunities that align with the firms growth strategy. He has facilitated the acquisition of office, retail, self-storage and multi-family properties valued in excess of $200 million in five states, and purchased more than $13 million in performing and nonperforming loans. He was previously involved in more than $900 million in commercial real estate transactions as vice president of Harbor Group International and Fortress Capital Investors, which he co-founded. To reach him, call 678.892.6963 or e-mail [email protected] .