The benefits of investing in commercial real estate are well-documented. With the right real estate investment, in the right neighborhood, you can consistently generate predictable rents while also building equity over time. In fact, in most years, the real estate industry—as a whole—has generated stronger returns than the stock market.
Of course, one of the most important things to consider when becoming a real estate investor is timing. Taking a chance and investing when property values are underpriced can help you earn an immediate, well-leveraged return on your investment. At the same time, if you enter into the market when asset values are overinflated, you could end up losing money, which can take years to get back.
While the market as a whole generally increases in value over time, there is no denying that there are both good and bad years to be holding certain types of commercial real estate assets. This is well-known to anyone who happened to, say, invest heavily in the housing market in 2007, only to eventually watch their equity diminish.
Fortunately, there are plenty of strategies you can take to help develop a well-diversified commercial real estate portfolio that will be able to relatively maintain its value in the event of a recession. This involves finding and investing in asset classes that are proven to be “recession resilient”, such as self-storage units.
In fact, there are many reasons that self-storage units have performed exceptionally well in both bullish, bearish, and neutral economic environments. A recent report shared by Fortune reveals that the self-storage industry is currently estimated to be worth about $50 billion, a considerable increase from the pre-pandemic era.
In this comprehensive guide, we will answer some of the most common questions you might have about the self-storage industry, including the benefits and drawbacks of investing in self-storage units, and the structural factors that make this particular segment of the commercial real estate sector unique.
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What are Self-Storage Units?
Self-storage facilities, as the name might suggest, are facilities where individuals or organizations can rent a select amount of space and store their belongings there. These units are similar to—but notably different—from storage warehouses, which typically have larger units and stricter contracts.
Most self-storage units offer month-to-month rentals, rather than a formal yearlong contract. According to a recent industry report, the average length of time an individual uses a self-storage facility is 7 to 10 months. About 39% of all self-storage users will use the facility for more than a year.
Self-storage units come in many different sizes, shapes, and formats. Most will resemble a personal garage, protected by a locked metal door. On the smaller end of the self-storage spectrum, the units will be between 5x5 feet, while on the higher end of the spectrum, they will be about 20x20 feet, which is roughly the size of a two-car garage (400 square feet total).
The size and location of the unit will directly affect the cost of a self-storage rental. On average, a typical 10x10 storage unit will cost about $180 per month ($2,160 per year), which is considerably less per square foot than comparable residential properties. Other factors that can influence the cost of renting a self-storage unit include the type of facility you are using (for example, climate-controlled indoor facilities will cost more than outdoor facilities), services provided (such as security and cleaning), individual market factors, bulk discounts, and more.
Overall, self-storage units provide practical, affordable storage solutions to people across the world. Let’s take a closer look at why these particular units are so uniquely positioned to weather various economic climates.
What Causes a Recession?
The term recession is often used somewhat ambiguously, so let’s start by defining what a recession actually is. A recession, at least according to most economists, is a term used to describe any period of time when an economy has experienced two negative quarters of GDP growth in a row. Using this definition, the most recent recession was in 2021, though there were many COVID-related anomalies that caused some people to believe this wasn’t a “real” recession.
Colloquially, people often use the term “recession” to simply describe when the economy appears to be doing poorly. This can include periods of time where unemployment has been increasing, periods where inflation and the cost of goods have been rising, or periods of time where there are widespread shortages for certain goods and services. As you might expect, many of these trends are strongly correlated with each other, with some economic indicators leading and other indicators lagging.
There are many things that can trigger a recession. The 2008 recession—which was explicitly tied to the real estate market—was largely caused by the “popping” of an asset bubble that, consequently, created a roughly two million dollar “hole” in the economy. Other causes can include ineffective regulation (both too much or too little), major global events (such as war), destabilized currencies, lost consumer confidence, increased asset volatility, and more.
Regardless of whether you use the formal definition or the colloquial definition, it is clear that recessions can have negative impacts on certain industries. When a recession occurs, the average household will have less surplus spending money, meaning that luxury purchases (travel, jewelry, cars, etc.) will tend to decrease. Non-luxury purchases, on the other hand, are a bit less predictable. In fact, demand for some goods and services—such as self-storage facilities—will actually increase when times are tough.
Why Are Self-Storage Units Considered Recession Resistant?
One of the main reasons self-storage units are so economically resilient is that both good and bad economic conditions can cause demand to increase.
Allow us to further explain.
When the economy is doing well—wages are up, unemployment is low, GDP is growing, etc.—people are more likely to make major personal investments. For example, a family might be considering purchasing a full-sized pool table (about $2,000) and are waiting until they are financially secure to make the purchase. Following a productive year for the family’s primary employer, bonuses are issued, and they are able to finally make this long-awaited luxury purchase.
Following the purchase of the pool table—and additional seating for the recreation room—the family realizes they now have more stuff than they comfortably store in their own home. Rather than selling their possessions or giving them away, they decide to store them in a reasonably-priced self-storage facility nearby. When decisions like these are made across the country every day, the demand for self-storage units will naturally rise.
When the economy is doing well, people make more large purchases, which directly increases the demand for self-storage. But what about when the economy is doing poorly?
When a recession emerges, unemployment almost always increases, meaning many families will find themselves scrambling to pay their bills. With no income and limited savings, a family might decide to sell their house and temporarily move into an apartment, move in with extended family, or downsize to a smaller abode. In all three of these situations, the storage needs of the family will likely be greater than they are able to manage. In the short term, they decide to put their surplus belongings in storage, hoping to eventually move back into a larger property in the future.
The state of the economy affects everybody and when these sorts of tough decisions are made at scale, demand for self-storage will continue increasing. Because the self-storage industry can be boosted by both good and bad economic events, it is uniquely positioned to continue experiencing steady growth.
Benefits of Investing in Self-Storage Units
As indicated, the most obvious benefit of investing in self-storage units is that they are resilient to changing economic conditions. When times are good, people will have more luxury purchases they need to put into storage. When times are bad, people are more likely to downsize or change their living situation, which also causes general demand to rise.
In fact, between 2011 and 2022, demand for self-storage has increased every year except for 2021 (which was largely due to covid-related statistical anomalies, rather than an actual change). The industry has also been boosted by the general increase in age for the population—as the Baby Boomer generation continues retiring in mass, many are moving to smaller homes or retirement homes, thus increasing the need for personal storage solutions.
As a result, the entire self-storage industry has a national occupancy rate of 92%, which is notably higher than nearly all other real estate investment categories.
Additionally, self-storage units are popular because they require relatively little maintenance. The cost of maintaining 100,000 square feet of self-storage space is just a fraction of the cost of maintaining 100,000 square feet of residential space. Construction costs are also considerably lower.
Overall, self-storage is a relatively low-risk component of the broader real estate market, with a strong potential upside.
Drawbacks of Investing in Self-Storage Units
Even though self-storage units are recognizably low-risk investments, it is important to think about all possible risks involved before making a permanent investment. One of the most obvious is that investing in self-storage units usually requires at least a three-year financial commitment. This is because, especially lately, the most productive way to enter into this market is through the use of real estate syndicates, which almost always have a minimum investment horizon.
There are a few other risks associated with the self-storage industry as well. For example, though rare, unpredictable events such as facility-wide flooding can be detrimental to the overall performance of the facility. Purchasing a reliable insurance policy can help mitigate these damages but even with a great policy, it will take time to get the facility back to a state of profitability and perhaps even have to rebuild your entire customer base.
Other common issues include (often frivolous) lawsuits from dissatisfied tenants and tenants who abuse their leases. In some cases, people may even temporarily live in these units (which is illegal but difficult to monitor) or use the units themselves for various nefarious purposes. Having a thorough application process can help minimize these issues but these are still certainly things worth keeping an eye out for. Hiring a security guard and putting cameras in public spaces can also be beneficial.
Is Now the Right Time to Become a Self-Storage Investor?
Keeping these things in mind—both the benefits and the drawbacks—you might be wondering if is now the right time to become a self-storage investor?
Naturally, the answer to this question will depend on many different factors, including your current liquidity, mid-term investment goals, current portfolio structure, risk tolerance, available capital, and more. Be sure to carefully consider how diversifying and entering into the self-storage industry could impact your overall financial well-being.
In general, however, there are plenty of reasons to be optimistic about the future of the self-storage industry. Demand is steadily increasing across the board, especially in the fast-growing sunbelt region. The low occupancy rates and relative economic resilience found throughout the self-storage community will continue to create lucrative opportunities for investors across the risk-tolerance spectrum.
When selecting a property, it will be important to do your due diligence and look at local factors, such as self-storage regulations, demographic trends, competitor rates, and more. But with the right research and a forward-looking investment plan, becoming a self-storage investor can be incredibly lucrative.
