Self-storage is often an overlooked industry—at least compared to the social media and software startups coming out of Silicon Valley and elsewhere in the United States. But it is a necessary one, and one that’s been on the rise for several years. In 2016, it’s likely that self-storage centers all across the country will continue reaping these benefits—and their investors will too.
The Increasing Profitability of Self-Storage
According to recent industry survey data, self-storage returns are currently some of the most profitable in the real estate industry. The average return for a self-storage real estate investment in 2014 was roughly 31.4 percent, greatly outcompeting other real estate investments, but 2014 wasn’t an isolated outlier; the 5-year average return here is 24.4 percent, the 10-year return is 17.8 percent, and the 15-year return is 20.3 percent. Historically, about 80 percent of all self-storage establishments have been small, locally owned “mom-and-pop” businesses. Private equity is starting to enter the equation, now that investors are starting to figure out the advantages of the industry.
Factors for Growth
You might be asking yourself why the self-storage industry is on such a prominent upward trajectory, or why it’s happening now as opposed to any other period of time. There are a handful of factors responsible for this trajectory:
- Stagnant developments. In most industries, growth is marked by new opportunities for development, such as new franchise locations for a restaurant or store. However, stagnant development in the self-storage industry is a boon to the profitability of the sector. Because there aren’t many new developments for self-storage, supply is remaining steady, and because demand is increasing, the profitability of each location is rising, resulting in profits for owners and investors.
- Self-storage operations are also becoming an increasing focus for Real Estate Investment Trusts (REITs), securities that hedge their bets in multiple types of real estate investments. This is drawing more attention to the industry as well.
- Increasing propensity to rent. Thanks in part to the economic crisis of 2008, there are fewer people interested in buying and owning their own homes. People, especially young people, tend to be flocking toward more urban areas, and are renting as opposed to owning. This combination of factors is driving higher demand for self-storage, which is a cost-efficient alternative to buying more personal space.
How Long Will It Last?
It’s hard to say how long the upward trajectory of the self-storage industry will last because it depends on so many interrelated factors. The economy is recovering smoothly, which could inspire more people to invest in their own homes. As the economy stabilizes further, it could reduce demand for self-storage enterprises. As more private investors realize the growth in this industry, more self-storage businesses could develop, increasing supply and further slowing growth. Because these trends develop slowly, it will probably be a few years before the growth ultimately slows down, but nobody can say for sure.
Considerations Before You Invest
If you’re considering investing in the self-storage industry, there are a few things you should bear in mind:
- Historical returns don’t necessitate future returns. The self-storage industry has seen some amazing years recently, but that doesn’t mean that growth rate will continue forever.
- The market is getting flooded. Thanks to the amazing rates of return over the past few years, more investors are flocking to this niche, which could result in decreased returns all-around (depending on how these investments manifest themselves), or could lead to the development of a bubble in the span of a few years.
- It’s always good to hedge your bets. No matter what your decision is, remember that it’s always in your best interest to hedge your bets in personal finance.
In any case, growth in the self-storage industry is fascinatingly strong, and reflects a number of economic trends that are still developing.