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Finding a Risk-Reward Balance as Self-Storage Becomes a Mainstream Investment Target

Self-storage is often touted as a niche or alternative investment, but it’s stellar track record has drawn unprecedented interest pushing it toward the mainstream. An increasingly crowded market in the midst of economic volatility can put even seasoned professionals on edge. Here’s a look at some key factors and ISS resources to help you find the right risk-reward balance.

Tony Jones

January 27, 2023

4 Min Read
Finding a Self-Storage Investment Risk-Reward Balance

Every business owner and investor is looking for an edge, some line of demarcation that favorably balances risk with potential return and ultimately results in healthy dividends. For many, the dynamics of the self-storage industry have fit this bill for decades, but increased interest from deep-pocketed outsiders the last two years has strained the notion that this continues to be a niche or alternative business.

The kindling of sustained record-setting rates and consumer demand has kept the industry ablaze with acquisition, development and investment activity for seemingly months on end, but continuing high inflation and constant buzz about a looming recession has the potential to slow the progress. As we flipped the calendar to the new year, some industry insiders were already pointing to cracks in demand as a harbinger for what may be a year of market adjustment.

Uncertainty breeds caution, which can heighten the pressure in the pursuit of sourcing, securing and signing sound investments. Thus, whether you’re a self-storage veteran or new investor, contemplating buying or selling, it’s important to stay abreast of important and trending developments related to investing and real estate. Here are some particular areas of interest, including some links to helpful ISS resources.

Rate volatility. What lies ahead for the economy, including adjustments by the federal government, is top of mind for many. The Federal Reserve hiked interest rates seven times in 2022, including four consecutive .75% percent increases. Rates are expected to remain elevated this year, with another hike possible next week, though some analysts believe the pushes will likely end in March. Naturally, the volatility of the market can make borrowers skittish, but indications are all these fluctuations aren’t necessarily bad news for self-storage investors and owners.

Real estate transactions. The consistent performance of self-storage real estate, principally through economic turmoil, has been central to much of the recent investor interest. This was particularly germane as we emerged from the pandemic with unprecedented consumer demand. To their credit, operators nationwide quickly adjusted to the market and sent property and business values skyrocketing. Though sellers have enjoyed most of the recent leverage, the higher cost of financing impacts the price thresholds buyers can meet. Investor interest remains strong, certainly, but many in the industry believe the pace of transactions will slow this year, depending on the availability of buyer lending options and other market factors.

Investment strategies. If you’re just getting your portfolio started, finding the right investment path is a significant consideration, and it all starts with risk tolerance and how much time and control you want to have in how your capital is put to use. Should you dig into a building project or buy an existing facility, or are you better suited for a more passive approach? Check out these four potential strategies along with some tips on how to figure out which is right for you.

Off-market deals. Of course, if you’re looking to acquire an existing property, you could find yourself in an extremely crowded and competitive environment. Large players are still on patrol for sizable portfolios and well-appointed Certificate-of-Occupancy deals, while other institutional investors are scouring the map for strategic, value-add selections. Market listings frequently draw multiple competitive bids, which drives up the price, so it’s understandable that many smaller investors have turned to sourcing off-market deals. This video explores why this can be a smart approach, particularly during economic uncertainty.

Sale optimization. Though sellers may hold the upper hand in today’s self-storage real estate climate, that doesn’t mean owners shouldn’t take strategic steps to fetch the highest price possible. If you’re thinking about selling your property or feel the tug to do so by the bevy of cold calls blowing up your phone and email, there are steps you can take to prep your property for sale that can help ensure you’ll attract quality buyers and receive a maximum return.

There are, of course, many other factors at play. Keep your eye out for several investment-related articles that we’ll be publishing in the coming weeks. In the meantime, we’ve also created this handy article showcase page as a supplement to our January print issue that provides quick access to several recent items that address key nuances of the investing sector. In addition, the video education sessions from last year’s Investing track at the ISS World Expo offer expert insight to pro formas, financing, real estate trends, inflation impact and much more, while our five-video Mastery package on Advanced Investing strategies looks at structuring deals, growing a portfolio and other pertinent topics.

Whether your aim is to buy, sell or expand, it’s important to stay on top of local and national drivers to understand how fluctuations and factors can affect your money and planning. No investment is without risk, but your ability to make disciplined, calculated decisions can give you the edge you seek, particularly when going head to head against someone less prepared for the changes ahead.

About the Author(s)

Tony Jones

ISS Store Manager, Contributing Editor, Inside Self-Storage

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