Americans have a lot of STUFF. For many people, they have more than can be contained within the confines of their home, which is why the self-storage industry has been booming. Yet a recent article (firewall-protected) in American Banker explores whether the storage industry remains secure or is headed for a downturn.
The article’s author, Andy Peters, astutely notes:
“The economics of the self-storage industry are attractive. After initial construction costs, self-storage facilities require little overhead. Customers rarely move out if rent increases. And a self-storage business can be structured as a real estate investment trust, providing the owner with tax benefits. No wonder bankers have rushed in to make loans for self-storage construction.”
But more and more frequently, self-storage facilities in certain geographic areas are not generating sufficient cash flow to meet their debt-service requirements. Supply may have surpassed demand in some areas of the country such as Dallas, Denver, and Houston.
Yet as Peters observes in his article, this is not the case everywhere. “Self-storage facilities tend to draw from a very tight geographic area — typically within two or three miles of their location. That means you can find specific neighborhoods in most U.S. cities that do not have self-storage units,” Peters explains.
For this reason, much of the lending being done in the storage industry is from smaller regional or community banks that may be more attuned to the economies and geographic traits of their local markets.
And indeed, the overall rate of construction for new self-storage facilities has dramatically increased in recent years. The U.S. Census Bureau says that, compared to 2016, total spending on self-storage construction increased a whopping 88 percent in 2017 to $3.6 billion, with 800 new self-storage businesses opening last year alone.
However, for these new storage units, construction costs are high, and they may go even higher as the Trump administration’s tariffs hit building materials like steel and lumber.
Are self-storage facilities right for your book of business?
If you are a banker looking to secure a new niche industry, self-storage facilities may be a good opportunity, depending on your geography and customer mix. Here are some key points to consider about this industry:
Fast facts about the self-storage industry
- There are 10,500 self-storage service providers in the US that rent or lease secure space, such as rooms, compartments, lockers, containers, or outdoor space, for clients to store and retrieve goods.
- The average self-storage company operates a single location, employs 5 workers, and generates about $1 million annually.
- Labor averages 15-17 percent of sales and rent averages 3-4 percent.
- Overall employment by self-storage services changed 5 percent in April 2018 compared to a year ago, according to the latest data from the Bureau of Labor Statistics.
- Sources of revenue include rent, sales of storage items (boxes, packing materials), insurance, late fees, administrative charges, and truck rentals.
- The breakeven occupancy rate for a self-storage facility is estimated at 40-45 percent.
- Storage properties include one story buildings, multi-story buildings, climate-controlled units, and parking areas for boats and motor vehicles.
- Revenue per square foot (psf) varies by facility, but averages about $1.25 psf for non-climate-controlled units to $1.60 psf for climate-controlled units.
- Almost one in nine U.S. households rent a self-storage unit.
- Over half of self-storage facilities are located in suburban areas; about 32 percent in urban locations; and 16 percent in rural areas.
As these facts show, there are certainly bright spots within the self-storage industry, but as explained in the American Banker article, there is also reason to be cautious if you are considering adding this industry to your bank portfolio.
Risks to watch out for within the self-storage industry
Recession-resistant, not recession-proof
While the self-storage industry has generally fared well during difficult economic times, prolonged recessionary conditions have resulted in reduced demand. During the most recent recession, extreme conditions and overbuilding in certain markets have moved spending on storage into the discretionary category, resulting in drops in rental rates, occupancy, and revenue.
Demand dependent on local demographics
Because the majority of demand for self-storage comes from customers within a one- to three-mile radius, a company’s business health is related to local population demographics and density. Key characteristics include population size, percentage of renters, average household size, average household income, and the number of business relocations, retirees, and houses built on slab construction (no basements).
Some markets suffer from excess supply due to oversaturation. Oversupply increases competition, typically resulting in lower occupancy rates and rents. Communities that are able to absorb more storage space include those with a higher occurrence of condominiums, apartments, military housing, and older housing. Demand for storage is also higher in Sunbelt states (southern and southwestern states), where residents tend to own more recreational equipment.
Dependence on credit
Self-storage companies generally require financing to purchase property and construct facilities. Credit restrictions and high interest rates reduce borrowing capabilities and can make acquisitions and new construction cost-prohibitive. For many companies looking to expand, credit may be critical to funding major projects because the majority of assets are tied up in real estate and considered illiquid. While self-storage facilities are considered less capital-intensive than most other forms of real estate investment, many start-ups and expansions still require capital funding.
What bankers can do to lockdown self-storage facilities
- Managing cash given seasonal demand driven by relocations (slower demand in winter months).
Solutions to consider: Life of credit, sweep services to line of credit and investments
- Efficiently collecting rent payments.
Solutions to consider: ACH services with blocks and filters, merchant services
- Funding investments in new services, marketing, equipment, and property conversions to grow sales in a competitive market.
Solutions to consider: Term loans, line of credit, real estate loans, equipment financing
- Efficiently managing payroll and rent.
Solutions to consider: Payroll services, line of credit, ACH services with blocks and filters, merchant services, remote deposit capture
Want this kind of in-depth analysis on more than 300 other industries?
Much of the industry information in this post came directly from the Vertical IQ Industry Profile on Self-Storage Services. Reviewing this profile, or even doing a quick five-minute review of the industry’s Call Prep Sheet, gives you valuable insights into your self-storage banking prospect – their opportunities as well as the issues that may be keeping them up at night.
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