With the growing population and urbanization in the United States, the self storage industry has seen tremendous growth over the past few decades. As an investor, the self storage business presents lucrative opportunities given the rising demand and relative stability of the industry. However, the highly fragmented market also brings challenges in terms of competition and acquisition costs. By understanding the pros and cons, investors can make informed decisions on investing in self storage facilities.
Strong growth potential as self storage demand rises
The self storage industry in the US has grown rapidly in recent years thanks to urbanization, smaller living spaces, moving turnovers and other trends. Occupancy rates have stayed high while rental rates continue to rise steadily. With favorable demographics and space constraints in cities, demand is likely to keep growing, benefiting existing facilities and providing opportunities to build new ones.
Relatively stable cash flows despite economic cycles
Self storage has proven to be resilient across economic cycles. During recessions, more homeowners downsize into apartments creating demand. In growth periods, more business activities spur needs for storage. Rental income tends to be stable as storage is often needed during transitions. This makes self storage appealing for passive investment with steady cash flow.
Fragmented market allows consolidation opportunities
The self storage industry in the US remains highly fragmented with over 30,000 facilities. The top 10 operators account for only around 15% of properties. This presents opportunities for larger players to acquire smaller facilities and realize synergies through economies of scale and centralized management.
Challenges acquiring facilities at reasonable valuations
The attractive fundamentals have led to high valuations for self storage facilities. Cap rates have compressed from the 8-10% historical range to 4-5% in some major metro markets now. Investors must underwrite deals carefully and enhance operations to achieve desired returns. Using leverage can enhance returns but also introduces financial risks.
Intense competition in localized markets
While the broader industry keeps growing, localized markets can get overbuilt when there is excessive new supply. Occupancy and rents can fall rapidly in such cases. Investors should understand competitive dynamics in specific submarkets to mitigate risks and maintain profitability.
The self storage sector provides promising opportunities given America’s storage needs and changing demographics. However, investors need in-depth market research, sensible valuations and operational capabilities to succeed amidst competition and high acquisition costs.