What is the future outlook for the self-storage industry?

The future outlook for the self-storage industry is generally positive, as demand for storage space is expected to continue to grow. Some of the factors that are expected to drive growth in the self-storage industry in the coming years include:

Population Growth: As the population grows, demand for storage space is expected to increase, as people need more space to store their belongings. As of 2020, there is only 10.6% penetration meaning that 1 in 10 US households use self storage. There is an immense opportunity for that penetration rate to increase agnostic of population growth itself.

Urbanization: As cities become more densely populated, many people are downsizing their living spaces and turning to self-storage as a solution for their extra belongings.

E-commerce: The growth of e-commerce is expected to drive demand for self-storage, as more and more people order goods online and need somewhere to store them.

Innovations in Technology: Advances in technology are expected to continue to shape the self-storage industry, making it more convenient, efficient, and customer-friendly.

Investment Opportunities: The self-storage industry is seen as a relatively stable investment opportunity, with low default rates and predictable rental income. Self storage has the highest return on investment in comparison to any other real estate asset class. From 1994-2017, storage returned an annual average of 17.43%. Based on that annual average, $100,000 invested in 1994 would be over $4,000,000 today. Self storage is recession resilient. From 2007-2009, self-storage dropped -3.8% in comparison to the S&P’s -22.0%. This was the smallest drop of any real estate asset class. Self storage had some of its best performing years during the COVID-19 Pandemic when some other real estate asset classes performed poorly. According to Trepp, a Commercial Mortgage Backed Securities research firm, of the 1,700 CMBS loans made to self storage in the first 3 quarters of 2020 only 3 were delinquent– that is a 0.17% delinquency rate . During the same time multi-family was defaulting at a rate 1,800% higher or 18x that of self storage.

While there are some challenges facing the self-storage industry, such as increased competition and changes in local zoning regulations, the overall outlook is positive. As long as demand for storage space continues to grow, the self-storage industry is expected to remain a thriving sector of the economy.

What is the typical insurance coverage for self-storage units?

The typical insurance coverage for self-storage units can vary depending on the specific facility and the type of insurance being offered. Some common types of insurance coverage for self-storage units include:

Liability Coverage: This type of insurance protects the self-storage facility against claims related to injury or damage to property that occurs on the facility's premises.

Fire and Natural Disaster Coverage: This type of insurance covers losses related to fires, earthquakes, hurricanes, and other natural disasters.

Theft Coverage: This type of insurance covers losses due to theft or damage to stored property. Much of the liability lies with the renters in regards to their belongings as the leases can limit the value of items stored and require renters insurance.

Business Interruption Coverage: This type of insurance covers losses related to the interruption of business operations, such as those that may occur as a result of a fire or other disaster.

It is important for self-storage facilities to carefully review their insurance coverage and make sure that they have adequate protection against the specific risks they face. Some facilities may also require their tenants to purchase insurance coverage for their stored property, in order to provide additional protection. Tenants should be aware of the coverage that is included with their rental agreement, and should consider purchasing additional insurance if necessary to fully protect their belongings.

What are the typical security features for self-storage facilities?

The typical security features for self-storage facilities can vary depending on the size and location of the facility, as well as the perceived risk of theft and vandalism. Some common security features for self-storage facilities include:

Controlled Access: This may include gated access, keypad or keycard entry systems, and on-site security personnel.

Surveillance Cameras: This may include both interior and exterior cameras, which can be monitored remotely or recorded for later review.

Lighting: This may include well-lit aisles and areas around the facility, and motion-activated lighting in certain areas.

Alarm Systems: This may include alarm systems that are connected to an alarm-monitoring company or the local police department.

Locks: This may include individual locks for each storage unit, or master locks that allow access to multiple units.

Fences: This may include perimeter fencing around the facility, as well as individual fencing around individual units.

Management Presence: This may include on-site management or staff members who are available during business hours, or who live on the premises.

It is important for self-storage facilities to have a comprehensive security plan in place, and to regularly review and update this plan as necessary. The specific security features that are required will depend on the location and size of the facility, as well as the specific risks that are faced. In addition, facilities should educate their tenants about the importance of securing their units, and should provide information about recommended locks and other security measures.

What are the most important factors in buying a self-storage facility?

The most important factors in buying a self-storage facility are:

Location: The location of the self-storage facility is critical in determining its success. Factors to consider include population density, economic conditions, competition, and accessibility.

Occupancy and Rent Rates: The occupancy and rent rates of the facility will have a direct impact on its revenue and profitability. It's important to research the current and projected market conditions to determine the potential for growth.

Operating Costs: The operating costs for a self-storage facility include utilities, insurance, maintenance, marketing, and management. It's important to have a clear understanding of the operating costs before purchasing a facility, to ensure that the revenue from the facility will be sufficient to cover these costs and generate a profit.

Physical Condition: The physical condition of the self-storage facility is also an important factor to consider when buying. Factors to consider include the condition of the buildings and grounds, security features, and any necessary repairs or upgrades that may be required.

Legal and Regulatory Environment: The legal and regulatory environment of the self-storage industry can vary widely by location. It's important to research and understand any local zoning, permitting, and licensing requirements before buying a facility.

Management Team: The management team is critical to the success of the self-storage facility. It's important to have a clear understanding of the management structure, experience, and skills of the current management team, or to consider hiring a management company if necessary.

Financing Options: The financing options for a self-storage facility can vary widely depending on the type of facility, its size, location, and financial condition. It's important to research and understand the financing options available and to work with a lender that has experience in the self-storage industry.

What sort of fees do self storage syndicators collect?

Self-storage syndicators typically collect the following fees:

Acquisition fee: A fee charged by the syndicator at the time of acquisition, usually a percentage of the total acquisition cost.

Property management fee: A fee for managing the day-to-day operations of the self-storage facility, typically a percentage of the monthly revenue.

Asset management fee: A fee for overseeing the overall performance of the investment, typically a percentage of the monthly revenue or net operating income.

Development fee: A fee for overseeing the construction and development of a new self-storage facility, usually a percentage of the total development cost.

Disposition fee: A fee charged by the syndicator at the time of sale of the facility, usually a percentage of the sale price.

Performance fee: A fee based on the performance of the investment, usually a percentage of the returns generated by the investment.

Capital calls: A fee charged to the investors to cover unexpected expenses or to provide additional funds for the operation of the self-storage facility.

It's important to note that the fees and their structure vary from syndicator to syndicator and from investment to investment, so it's important to carefully review and understand the terms and fees associated with any self-storage investment opportunity.

What is the difference between a limited partner (LP) and a general partner (GP) in real estate syndications?

In a real estate syndication, the limited partner (LP) and the general partner (GP) are two distinct roles that are critical to the structure and operation of the investment.

Limited Partner (LP): The limited partner is an investor in the syndication who provides capital to the investment. They have limited liability, meaning they are only responsible for the amount they invested and are not responsible for the day-to-day operations of the investment. They receive a share of the profits and distributions, but they do not have a say in the decision-making or management of the investment.

General Partner (GP): The general partner is responsible for the day-to-day management and operation of the investment. They have unlimited liability, meaning they are responsible for any debts or obligations incurred by the investment. They are also entitled to receive a portion of the profits and distributions, but their primary role is to manage the investment and make decisions on behalf of the limited partners.

In a typical real estate syndication, the GP is usually a professional real estate developer or management company that has the expertise and experience to manage the investment effectively. The LP is usually made up of individual investors who want to invest in real estate but do not have the expertise or experience to manage the investment themselves. The GP and LP work together to achieve the investment goals and maximize returns for the limited partners.

What is the difference between Reg D 506(b) and 506(c) syndications?

Reg D 506(b) and Reg D 506(c) are two different exemptions from SEC registration requirements for private offerings. The main difference between the two is the method of marketing and advertising the investment to potential investors.

Reg D 506(b): Reg D 506(b) allows companies to offer and sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors, but with some restrictions on advertising and general solicitation. In other words, under 506(b), companies cannot use publicly accessible means (e.g. advertisements, public websites) to advertise their investment offerings, but they can approach potential investors through personal and other non-public means.

Reg D 506(c): Reg D 506(c) allows companies to engage in general solicitation and advertising of their investment offerings, but requires that all investors be accredited. In other words, companies can use publicly accessible means to advertise their investment offerings, but they must take reasonable steps to verify that all investors are accredited before accepting their investment.

In general, Reg D 506(c) is considered a more flexible option for companies looking to raise capital, as it allows for a wider range of potential investors and greater marketing and advertising flexibility. However, the requirement to verify that all investors are accredited can add additional administrative costs and responsibilities to the investment process.

Which real estate asset class performs best in a recession?

It is difficult to determine which real estate asset class will perform best during a recession, as real estate markets are influenced by many factors, including the overall economy, local market conditions, and the specific asset type. However, the following 4 asset classes are generally considered to be more resilient during a recession, with one clear winner.

Essential use properties: Properties with essential uses such as supermarkets, drug stores, and grocery stores tend to be more resilient during a recession as people still need to purchase necessities even during tough economic times.

Multi-Family Housing: The demand for rental housing typically remains relatively stable during a recession, making multi-family housing a relatively safe investment during tough economic times.

Industrial Properties: Industrial properties such as warehouses and distribution centers are often less affected by a recession, as the demand for goods and services continues even during a downturn.

Self-Storage: Self-storage facilities are considered to be the most recession resilient real estate asset. People may need to store their belongings due to downsizing or other economic factors. Historically, self storage has performed the best of any real estate asset in recessions. From 2007-2009, self-storage dropped -3.8% in comparison to the S&P’s -22.0%. This was the smallest drop of any real estate asset class. Self storage had some of its best performing years during the COVID-19 Pandemic when some other real estate asset classes performed poorly. According to Trepp, a Commercial Mortgage Backed Securities research firm, of the 1,700 CMBS loans made to self storage in the first 3 quarters of 2020 only 3 were delinquent– that is a 0.17% delinquency rate . During the same time multi-family was defaulting at a rate 1,800% higher or 18x that of self storage. Self storage has the highest return on investment in comparison to any other real estate asset class. From 1994-2017, storage returned an annual average of 17.43%. Based on that annual average, $100,000 invested in 1994 would be over $4,000,000 today.

It is important to note that real estate performance during a recession can vary widely depending on the specific asset and market conditions. Additionally, a recession can result in a decrease in property values, which may impact real estate investors negatively. It is always advisable to conduct thorough research and consult with a professional before making any real estate investment decisions.

What questions should I ask a syndicator?

If you are considering investing in a real estate syndication, it is important to thoroughly vet the investment opportunity and the syndicator. Here are some key questions you should consider asking:

What is your track record and experience in the real estate industry?

What is the investment strategy for the specific property or portfolio?

How is the investment structured and what are my potential returns?

What is the timeline for the investment and expected exit strategy?

How will capital be raised and how will investor funds be used?

What is the risk profile of the investment and how is risk being managed?

Who will be responsible for managing the property and what is their experience?

What is the plan for addressing potential challenges or market downturns?

How will distributions and profits be allocated and paid to investors?

What is the fee structure for the syndicator and any other third-party providers?

What is the current market demand for the specific property type and location?

Are there any potential liabilities or concerns that the syndicator is aware of?

It is important to thoroughly research the investment opportunity and the syndicator, and to consult with a financial advisor before making any investment decisions.