03 Sep 2019
Self storage markets are highly diversified. The success of a market is conditioned by local economic and demographic trends. While some investors argue that secondary markets are the new winning deals, others target locations that are considered historically strong. Although the self storage sector is thriving and it is a valuable business to invest in, as the industry becomes more competitive, operators need to be more thoughtful when choosing a market.
Commercial Property Executive reached out to Todd Amsdell, president of Compass Self Storage, to discuss the particularities of the storage sector as well as the company’s strategy and approach to the business.
Amsdell: Self storage is a very local business, but I think the overall health of the market in the U.S. is good. There are certain markets that are experiencing overbuilding and many appear to have peaked in terms of occupancy for this real estate cycle. Most owners and operators agree that we have returned to a more competitive environment, but it is one in which the arrow of growth is still pointing upwards.
Amsdell: When I think about the key features of self storage facilities, I think a good analogy is the differentiated product offering in the hotel sector. Hotels cater to their customers in product, location and quality, and the same is true for self storage. We all think that price is most important to our customers, but the reality is that it is not even in the top two on the list of priorities for self storage customers. Location and availability of product might come first, followed by features such as security.
For example, if you are storing your jet ski in a self storage center, first you think about the location that is most convenient, and then your next concern might be security and the ability to get the jet ski in the self storage unit. If you are storing your business inventory, then you might also be concerned about access and ease/distance to get to your unit, temperature control, easy gate access and the ability for tractor-trailers to drop off inventory. Today, there are varying levels of quality and services provided by self storage operators, but the business is still highly dependent on finding a good location.
Amsdell: The self storage acquisitions and development market are now the hottest I have ever seen them. Ultra-low interest rates and the amount of money chasing self storage deals has led to all-time low cap rates for existing properties. With land and material costs high, the time it takes to entitle and get to the certificate of occupancy is also at or near record highs. Therefore, it has never been more expensive to build self storage. The reality in finding deals to invest in is to throw a larger net and proceed with caution. Nevertheless, it might be the deals you do not complete in this market that you are going to be happiest about within the next few years.
Amsdell: Self storage has always been a need-based real estate class: Death, divorce, displacement, disaster, downsizing are just a few reasons people use self storage. Growth markets always offer more upside. If you make a mistake in a market that is growing and you can hold on, you might just recover and be rewarded. But if you make a mistake in a stagnant market, then you might be in for a long period of difficult days.
We are value-add buyers, so no matter the market we are looking into, there needs to be some potential to increase value. Sometimes, this is created via investing in a growing market, sometimes it comes from investing in an underserved market and every now and then it means investing in a property that is mismanaged.
Amsdell: We are currently looking in all the major MSAs in California: Sacramento, San Francisco, Los Angeles, Inland Empire and San Diego. Those markets are very expensive, with a high concentration of excellent operators, so finding the right deal has been difficult. We are also looking for opportunities in Phoenix and Denver.
Amsdell: I think the self storage industry is headed for new highs as we incorporate new technologies and take advantage of the last mile of distribution needs and the ever-growing need for local storage. Self storage now makes even more sense than it did when it started out as mini storage (mini-warehouse). Today, most users are residential customers and the good news is that their needs are growing, as well as the need for short- and long-term storage for local, regional and national businesses.
