Risk Factors

Occupancy Risk - Self-storage has exposure to vacancy.  High vacancy rates can be caused by competition and oversupply in the marketplace.  The rent-up of a newly built 500 unit self-storage center can typically take four years to rent up to 90% occupancy.  Self-storage customers are typically short-term and use the facility as an interim solution.  Several factors should be considered when considering occupancy risk.  The manager of the property can have a major impact on occupancy.  Lack of properly trained and monitored property management will result in unfavorable results.  An intensive initial feasibility study is a necessity to assure the demographics support a facility.  Within this feasibility study, evaluation of competition is required prior to the development of a facility.  On-going reviews of all factors affecting occupancy risk require review on a recurring basis to insure success.  

Price – Self-storage prices are volatile and depend on current market conditions.  Oversupply of self-storage space is the most common factor that negatively effects pricing.  A complete initial and on-going review of the competition must be done on a regular scheduled basis.  A well trained property manager is a critical factor in setting and determining the most effective pricing.

Interest Rate Effect - Investors must consider the effect current interest rates may have on the value of any investment property. When interest rates rise the value of the investment declines to potential buyers. To achieve maximum total return on investment and a healthy return, a self-storage owner may want to consider staying in operation longer than planned. When interest rates fall the value of the property will rise and create a selling opportunity.

Investment Liquidity - Investors need consider the liquidity of a self storage asset and the ability to sell a development.  How liquid the investment is depends upon the current interest environment, current market demand, occupancy, and location appreciation.

Expenses - Investors should be aware of expenses associated with the operation of a self-storage facility.  How experienced is the management of the facility?  Have all expenses been addressed such as advertising, wages, insurance, taxes, utilities, repairs, maintenance, management fees, and office equipment and supplies?

Location - The success or failure of a self-storage facility is largely dependent on location.  A well-located property is more likely to survive an economic slowdown and/or oversupply in the market.  Traffic patterns, visibility to passing traffic, and good access are factors to take into consideration. 

Benefits

Low Overhead - Self-Storage facilities have lower operating and maintenance expenses than other types of income generating properties.  There is very little upkeep and maintenance associated with a self-storage.  

High Success Rate - Self-Storage facilities have a much higher success rate than other types of income generating properties.  The success rate for a self-storage facility is 92%.  Other investment properties such retail strip centers can have a failure rate of as much as 53%.

Rental Rate Appreciation - Nationwide over the past two years rental rates have increased from 6% to 8.5%.  Asking rates are currently approximately 91 cents per square foot.  Further evidence of a strong market is evident in the amount of concessions being offered.  According to self-storage magazine, as of the 3^rd quarter of 2006, 27% fewer facilities offered concessions than in the last quarter of 2004. 

Growing Demand - Approximately 10 million or approximately 9% of households and 1.4 million commercial businesses are renting space from a self-storage facility.  This represents an increase of 6% from a decade ago. New investors in the self-storage sector such as REITs and institutional investors are increasing transaction volume at a rapid rate.    

Lower Break Even Occupancies - Normal break even for a self-storage facility with 75% to 80% debt service is from 60 to 72% percent occupancy.

Investment Liquidity - An investor has options and flexibility in the self-storage market.  Let’s take for example an investor who develops a facility with a four year exit strategy.  If at the end of four years, external interest rates have risen causing the value of the facility to decline, the investor could hold the property while enjoying a steady income stream.