DST.EDU Series B- Asset Classification Discussion Self Storage

Editor’s note- this is part sev­en of a ten-part series on the var­i­ous asset types of DST offer­ings.

Self-stor­age has been a sta­ble com­mer­cial asset over the years and the acqui­si­tion of exist­ing facil­i­ties and devel­op­ment of new facil­i­ties by pub­lic and pri­vate Real Estate Invest­ment Trusts (REITS) has been well doc­u­ment­ed. 

Part 7- Self-Stor­age

April 21, 2024
Orig­i­nal Post: June 8, 2022

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC- Mem­ber of FINRA/SIPC

Self-Stor­age is also pack­aged as a Delaware Statu­to­ry Trust (DST) afford­ing cer­tain accred­it­ed investors to gain access to this sec­tor. In addi­tion, 1031 tax deferred exchange investors (via DST) may also obtain an inter­est in this asset class. Over the years we have seen volatil­i­ty in the stock mar­ket and this volatil­i­ty moves investors to seek alter­na­tive invest­ments. While the invest­ment into self-stor­age may lack the siz­zle of watch­ing the clos­ing bell reports the alter­na­tive invest­ment may pro­vide an even keel in a sea of uncer­tain­ty.  The non-cor­re­lat­ed assets may also pro­vide a foun­da­tion to an over­all port­fo­lio.  

Self-stor­age does seem to con­sis­tent­ly throw off cash flow and poten­tial returns at the end of the hold­ing peri­od. Investors seek­ing diver­si­fi­ca­tion with a non-cor­re­lat­ed hold­ing often look to real estate and self-stor­age is an easy asset to obtain. Investors may also want to own an inter­est in a tan­gi­ble asset with the ben­e­fits of tax favored returns.   We often seek to include a sug­ges­tion of a self-stor­age DST in an investor port­fo­lio.  That may be eas­i­er said than done.  There is the unbal­anced num­ber of self-stor­age offer­ings as com­pared to the high num­ber of mul­ti­fam­i­ly assets. The oth­er chal­lenge is the tim­ing of when an investor is ready to pur­chase.

To appre­ci­ate self-stor­age, we need to take a few steps back to under­stand the asset class. 

His­to­ry & Back­ground
The poten­tial for excel­lent returns is very pos­si­ble in the inter­est­ing asset class of Self-stor­age. Over the years self-stor­age has been resis­tant to reces­sion.  Home­own­ers amid reces­sion and finan­cial hard­ships may be faced with los­ing their homes to fore­clo­sure or down­siz­ing to apart­ments. When look­ing for a place to keep their items the log­i­cal solu­tion was  self-stor­age units. This became the hold­ing place until times got bet­ter. We Amer­i­cans have a lot of “stuff”.  There is some type of hes­i­tan­cy for us to sim­ply throw things away. The unwill­ing­ness to elim­i­nate items we are keep­ing (for what­ev­er rea­son) sim­ply fills up clos­ets, garages, and oth­er areas in the home. Two car garages may be filled with every­thing but cars.    Esti­mates are that one-third of stor­age space is filled with items that have been there for over three years.  This asset class has pro­duced high yields, expe­ri­enced low­er declines and default ratios when com­pared to oth­er asset class­es. Self-stor­age is a siz­able asset class for a rel­a­tive­ly new indus­try.  

Mom-and-pop oper­a­tors dom­i­nat­ed the indus­try in the ear­ly years. Today the self-stor­age indus­try own­er­ship is frag­ment­ed, with 37.6% of self-stor­age space (by rentable square footage) owned by five pub­lic com­pa­nies, 22.2% owned by either large and mid-size com­pa­nies; and 40.2% is still owned by small oper­a­tors. The mar­ket share held by small oper­a­tors has decreased by 12% in the past two years. (Self-Stor­age Almanac, 2024).

Cur­rent Sta­tis­tics:
Accord­ing to Self-Stor­age Almanac, annu­al self-stor­age rev­enue rose to $44.3 bil­lion in 2023.

• Num­ber of self-stor­age facil­i­ties in the US: 52,301
• Amount of self-stor­age space per capi­ta in the US: 6.32 square feet per capi­ta
• Per­cent­age of U.S. house­holds that rent a self-stor­age unit: 11.1%.
• Total rental self-stor­age space: 2.1 bil­lion square feet

Trends
Today spon­sors of DST self-stor­age is gain­ing pop­u­lar­i­ty and some spon­sors are ver­ti­cal­ly inte­grat­ed with the poten­tial exit strat­e­gy (of the DST at full cycle) would be the acqui­si­tion by an asso­ci­at­ed REIT.  One of the top per­form­ing sec­tors recent­ly have been self-stor­age REITs.  The DST offer­ing may be a sin­gle site loca­tion which tend to be small­er in dol­lar terms (under $20 mil­lion) to a port­fo­lio of sev­er­al loca­tions that may include larg­er offer­ings (over $100 mil­lion).

The new­er facil­i­ties tend to be cli­mate-con­trolled. There are many fac­tors for this and dri­ven by the con­sumer want­i­ng a con­trolled envi­ron­ment that avoids mold and musty effects on their belong­ings.  Cli­mate con­trol facil­i­ties can charge a pre­mi­um.

There may be addi­tion­al rev­enue obtained from oth­er sources such as truck rental, ship­ping and oth­er ser­vices.  Not all facil­i­ties have the addi­tion­al space (i. e. urban loca­tions) to pro­vide these ser­vices.

Self-stor­age facil­i­ties and loca­tions thrive on pop­u­la­tion growth. Pop­u­la­tion growth is a log­i­cal dri­ver for mul­ti­fam­i­ly and res­i­den­tial needs and stor­age demand and is close­ly aligned with these asset class­es.  Strate­gi­cal­ly plac­ing a stor­age facil­i­ty in a dense­ly pop­u­lat­ed area (or area expect­ing growth) is the key ele­ment.

The self-stor­age indus­try is a sub-sec­tor of com­mer­cial real estate. The growth of the indus­try is expect­ed to be pos­i­tive dur­ing the fore­cast peri­od, due to the trends of increased urban­iza­tion and improved eco­nom­ic out­look, across regions, which have led to new busi­ness growth. 

Online rentals and tech­nol­o­gy
Tech­nol­o­gy, Arti­fi­cial Intel­li­gence (AI), and remote access all lead to increased cus­tomer sat­is­fac­tion and rental use. Cus­tomers are more accept­ing of the dig­i­tal trans­ac­tion of busi­ness.  There is an increased focus on the expe­ri­ence the cus­tomer has when apply­ing for, access­ing and exit­ing the rental premis­es as well as the rental con­tract. Paper­less billing and auto pay also pro­vides a lev­el of con­vience for the cus­tomers as well as help ensure pay­ment to the facil­i­ty. Inte­ri­or light­ing and sen­sors are being installed in old­er facil­i­ties to become more ecofriend­ly. Oper­a­tors will con­tin­ue to seek improve­ments with tech­nol­o­gy as well as AI to improve effi­cien­cies and cus­tomer expe­ri­ence.

Demands
Accord­ing to the US Cen­sus Bureau, con­struc­tion spend­ing on self-stor­age has increased to $6.99 bil­lion in 2023. This is an all-time record of con­struc­tion spend­ing.  The Unit­ed States self-stor­age mar­ket is expect­ed to reg­is­ter a com­pound annu­al growth rate (CAGR) of 2.44% over the fore­cast peri­od 2024 — 2029.. The resilien­cy of the Self-stor­age asset class is to be not­ed. Peo­ple con­tin­ue to use self-stor­age and oper­at­ing busi­ness fun­da­men­tals make it very attrac­tive.  

Some states and busi­ness­es have seen expan­sion after the impacts of the pan­dem­ic.  

How loca­tions are devel­oped and how they are oper­at­ed are see­ing changes.  
The loca­tions of self-stor­age facil­i­ties have move clos­er to the cus­tomers as there has been pop­u­la­tion growth in the urban area. Grant­ed there has been COVID migra­tion from cer­tain states but that may have been a reac­tion to cer­tain states lock­ing down.  That is anoth­er top­ic.  Emp­ty nesters as well as Mil­len­ni­als (as demo­graph­ic groups) have moved to the urban areas. Many of the dwelling units in urban areas are small­er in square footage and pro­vide lit­tle or no addi­tion­al stor­age.

Pri­or to COVID the move back to the city (some ref­er­ence as Increased Urban­iza­tion) in con­junc­tion with the deliv­ery of small liv­ing units or apart­ments cre­at­ed a real demand for stor­age solu­tions. Past DST port­fo­lio offer­ings with mul­ti­ple loca­tions in large cities have done excep­tion­al­ly well. Sin­gle site offer­ings are also in demand. These offer­ings pro­vide for small­er investors, ether cash investors or 1031 tax deferred exchange investors, an oppor­tu­ni­ty to par­tic­i­pate in this asset class.

Move to the Cities

Cities wel­come the increased urban­iza­tion that is breath­ing life into cer­tain areas. Not all cities are expe­ri­enc­ing the same increase. How­ev­er, this increase is a major fac­tor dri­ving mar­ket growth.  

• When peo­ple down­size, they are faced with the real­i­ty of what to do with all the pos­ses­sions that will not fit into the small­er liv­ing space. This equates to increased demands for stor­age. Well locat­ed self-stor­age units pro­vide a con­ve­nient way of free­ing up space in the new urban liv­ing envi­ron­ments. Items that are not need­ed or rarely used fill the voids of self-stor­age spaces.
• All new self-stor­age facil­i­ties are not pur­pose built. Vacant retail and office loca­tions can be con­vert­ed into unique and inter­est­ing stor­age solu­tions in a vari­ety of loca­tions.  Old larg­er big box stored with high ceil­ings have been con­vert­ed into self-stor­age facil­i­ties thus repur­pos­ing a dark build­ing.

Every sec­tor of real estate has expe­ri­enced advance­ment in tech­nol­o­gy and self-stor­age is tak­ing advan­tage of those advance­ments.  Secu­ri­ty is a prime issue with con­sumers who seek access to their stor­age units. State of the art CCTV mon­i­tored access and oth­er inno­va­tions add to the over­all secu­ri­ty and cus­tomer expe­ri­ence that will retain cur­rent renters as well as attract new users.

Con­clu­sion
Self-stor­age has been a bell­wether asset class over the years. This may be an asset class to under­stand for poten­tial inclu­sion in your invest­ment port­fo­lio.  Par­tic­i­pat­ing in a self-stor­age DST may pro­vide a solu­tion for con­sid­er­a­tion. 

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion).

Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin ‑Sher­wood Rd, Suite 200 Tualatin, OR 97062 MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC