With the rise of e-commerce and demand for warehouse space, storage buildings have become an increasingly popular investment option. However, like any real estate investment, investing in storage buildings also carries risks. This article analyzes the profitability, risks and considerations around investing in storage buildings based on factors like location, building quality, management capabilities etc. Key factors that impact returns such as rental rates, vacancy rates, operating expenses, and cap rates are examined. Both the opportunities such as steady cash flow and challenges like oversupply and competition are weighed from the lens of an investor.
Quality location ensures stable occupancy and rental rates
One of the foremost factors determining profitability of a storage building investment is its location. Prime locations near urban centers, residential areas and transportation hubs ensure consistent demand. Easy accessibility, high visibility, expanding population and job growth in the surrounding region attract tenants. This leads to lower vacancy rates, higher rental premiums and less rent discounts or incentives needed to fill vacant units. For e.g. a Class A facility near New York can command twice or more the rents of an inferior one farther out due to captive tenant base willing to pay more for convenience.
Newer buildings command higher rents but also need capital expenses
While older properties often cost lesser to purchase upfront, they suffer from functional obsolescence over decades lowering rental income potential. New buildings on the other hand provide better security, lighting, drive-up access, climate controlled units that tenants desire justifying 20-25% rent premiums. But the tradeoff is that investors need to be prepared to periodically incur large capital expenses for upgrades, roof and asphalt repairs in parking lots to maintain the facilities as components wear out.
Professional third party management optimizes performance
Managing a storage rental business encompasses everything from marketing, leasing, rent collections, auctioning delinquent units, maintenance to addressing customer service issues round the clock. Unless investors have extensive prior experience operating such facilities, third party property management by specialists in the storage sector is recommended. They provide valuable expertise leasing to optimal occupancies faster, instituting revenue management techniques and cost saving measures contributing to better yields.
Oversupply in an area impacts investment returns
While demand for storage space has mushroomed over the years, supply also keeps rising across metros leading to intense competition in some regions which affects profitability. Forward looking feasibility analysis gauging proposed and upcoming new construction nearby helps assess the investment merits more accurately. Excess supply outpacing demand growth leads to lower rents and occupancies pressurizing yields.
In summary, investing in storage buildings can provide steady cash flows but conducting thorough due diligence around factors such as location, facility specifications, property management capabilities and competition is vital to make optimal risk-adjusted returns over the hold period.