The self-storage industry will be reshaped by the strengthening of three major trends in 2018. These involve Millennials and their reliance on mobile apps, increased automation, and the effects from Baby Boomers continuing to downsize. Let’s take a closer look at what’s ahead.
1. Millennial Influence
One of the hottest topics in the self-storage market has been the rise of valet-storage startups. Companies like MakeSpace, Brute Storage and Clutter have made waves in the sector by providing storage through an app-based, on-demand platform. These companies pick up customers' items from their homes, store belongings in a secure warehouse and return them upon request.
The price differences between a traditional storage facility nearby and a valet operator storing at a more remote location allows valet-storage operators to offer services at competitive rates, while still providing an on-demand experience.
As Millennials gain spending power, their consumer behaviors and preferences are shaping how companies market and conduct business. Millennials are accustomed to accessing apps for all manner of services, and storage is no exception. As the use of these apps becomes more mainstream, and as these younger consumers continue to amass storable goods, there will be significant pressure on self-storage operators to reduce prices. This will particularly effect investors and owners who have focused for decades on purchasing and developing self-storage in highly desirable urban markets.
The valet-storage business model is currently only viable in markets where there is a significant differential between the rental rates of facilities in city hubs compared to those in more industrial neighborhoods. For example, it’s common to see self-storage rates in Manhattan, N.Y., that are 400 percent higher than those at a relatively nearby Brooklyn location. However, in a market like Fayetteville, N.C., the difference between city-center rates and those of facilities in a nearby suburb may be less than 20 percent, which eliminates the potential profit margin when you include the cost of providing on-demand services.
One of the major trends in self-storage has been the increased adoption of automation. As a strategy to leverage technological advances to increase operational efficiencies, many self-storage operators are fully or partially automating their properties. Proponents of this strategy claim that automation can significantly increase net operating income, most notably by eliminating the salary of an onsite property manager—usually saving $50,000 to $60,000 per year.
However, this strategy comes with a potential downside. It’s very unlikely that an automated system will be able to effectively upsell customers on premium products such as larger units, climate-controlled space or drive-in access. Additionally, kiosks may not be able to sell ancillary-income items like truck rentals and tenant insurance as effectively as a human. Truck rentals, alone, can account for more than $3,500 per month in additional net income. It’s still unclear what effects full automation will have on the bottom line.
Nevertheless, it’s certainly something investors should keep their eyes on since technology has disrupted most business models in recent years.
3. Residential Downsizing
This Baby Boomer phenomenon creates a unique data set when analyzing the self-storage asset class. There are 10,000 Baby Boomers hitting the age of 65 each day and projected to do so for the next 15 years. It’s very likely that this demographic shift will result in continued, significant downsizing among this generation over the next several decades. This should be a positive for self-storage investors and owners, as downsizing is one of the most frequently cited reasons for customers to use self-storage.
Self-storage markets like Florida and Arizona, which are destinations for affluent retirees, should experience the largest increases in demand, as Baby Boomers will seek premium facilities with the most services.
Though self-storage is relatively new compared to other real estate asset classes, it has proven it can provide reliable and stable returns for investors. In fact, same-store income growth in self-storage has significantly outpaced multi-family, office, and retail since The Great Recession. However, some of these 2018 trends may significantly impact the business. Smart investors can benefit by factoring them into their investment thesis.
Hunter Thompson is a real estate investor and founder of Cash Flow Connections, specializing in self-storage, residential mortgage notes, mobile-home parks, single-family acquisitions, hard-money loans, office buildings, and multi-family property syndications. He’s helped investors allocate capital to more than 100 properties, with a combined asset value of more than $350 million. He’s also the host of the “Cash Flow Connections” real estate podcast, which focuses on passive investments in commercial real estate. To reach him, call 877.797.3595; e-mail [email protected]owconnections.com; visit www.cashflowconnections.com.