Storage Wars: The Phantom Menace
Are self-storage facilities recession-proof?
By G. Jason Goddard and Bill Marcum
The comedian George Carlin sometimes wondered why the other guy’s stuff is junk while our junk is
stuff. Of course, the difference is that stuff is for keeping and junk is for throwing away. Ultimately,
people need a place to keep their stuff. Owners of self-storage
facilities seem to have taken this to heart,
given the dramatic rise in self-storage facilities across the United States over the last few decades.
Perhaps to some extent the growth of the industry has been fueled by the perception that it is recession-
proof, or even countercyclical. In this article, we examine the self-storage industry in an attempt to verify
whether it is
immune to the vagaries of the business cycle.
Self-storage property is defined as “real property designed and used for the purpose of renting or
individual storage spaces to customers for the purpose of storing and removing personal property on a
self-service basis” (Self Storage Association, 2002 A). Alternatively known as mini-storage property, it is
composed of small units ranging in size from 20 to 500 square feet. Smaller units typically are leased by
individual customers for personal use on a monthly basis, and the units often are climate-controlled. Self-
storage property is categorized either as a type of industrial warehouse or is considered a special
Brief History of the Self-storage Industry
Personal storage facilities first appeared in China about 6,000 years ago. At that time, people began
storing their belongings in clay pots that were placed in public, underground storage pits. The modern,
conventional concept of personal storage began to take shape in 19th-century England, when banks
were often called upon
to safeguard valuables for clients embarking on extended voyages to the far
reaches of the massive empire. As their vaults became stuffed, bankers began
renting drayage company
lofts in an effort to relieve the overcrowding (Self Storage Association B, 2002).
Self-storage facilities arrived in the United States in the early 1950s and 1960s to meet the needs of
migrant oil workers in Texas as well as retirees and job seekers in search of a warmer Sunbelt climate
(Correll, 2003). Even so, fewer than 7,000 self-storage facilities existed in the United States by the mid
1980s. Today, there are approximately 50,000 such properties in the United States, and in the
immediate aftermath of the financial crisis, self-storage occupancy generally increased as a result of the
movement of individuals from houses to smaller, rented apartments (Wall Street Journal, 2011).
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Self-storage property is considered an attractive investment option, because the rental fees per square
foot are among the highest of any real estate investment alternative. Such fees are possible because
tenants are not concerned with comfort or living space and regularly lease units as small as 5 feet x 5
feet, allowing extraordinary occupancy density. Over the last two decades, however, competition has
intensified and saturation points have been reached in many metro markets.
Today, the industry is highly
fragmented with most investors owning two or three facilities (Chappell, 2011).
Delineation by Size and Class
A self-storage facility is an operating business that reflects the design needs of the neighborhood that it
serves. Depending on the needs of the general population and the size of the land parcel, the facilities
vary from as small as a single 10,000-square-foot building to a site with several buildings combining to
over 100,000 square feet. Construction styles vary from block concrete structures surrounded by barbed
wire fencing, to landscaped, modern
metal and block buildings that include keyless entry, security
cameras, and climate-controlled units. Investors often build self-storage facilities in
phases. This strategy
is well positioned with the utilization of the facilities,
as the next phase of construction serves as a vehicle
and large-equipment storage yard. Successful self-storage properties usually have the desirable
combination of low construction costs relative to high-income concentration per square foot.
While the self-storage industry is highly fragmented in terms of ownership concentration, typically the
larger, better-capitalized firms construct more modern facilities that include climate control with an office
building on site. Small investors often specialize in the acquisition of older facilities that are not equipped
with more modern features. These older
properties are more often than not located in less urban settings
and may represent the prototype first entrant of self-storage in the area. When a small investor owns
property near a larger player, it is not unusual to see rental rates fall as the better-capitalized, large firm
attempts to drive out the rival. Consequently, the amount of storage space a given market can support is
a crucial element in determining the viability of a project for investors and, of course, lenders.
Projecting Demand for Self-Storage Space
It is difficult to obtain reliable data for identifying equilibrium in a self-storage market. Demographic
information alone is not particularly telling, because the sheer presence of consumers is not necessarily
indicative of demand. This caveat notwithstanding, the primary competitive market area for a given self-
storage property is most commonly considered to be three to five miles from the property’s location
(Correll, 2003). To measure the potential competitive demand for space, an investor should obtain an
estimate of the average rentable square feet of storage space per person, relative to the current
population within the market area. This estimate should then be compared with the existing supply of
units. Square footage per capita is not an infallible metric, because some communities can utilize more
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storage space than others given a tendency to own recreational equipment and the lack of basements
enclosed garages for residential property in a given market area. Other demographic factors such as the
age and mobility rate of the local population, as well as the employment status and income level, are
other important considerations (Self Storage Association, 2002 B).
Unless there are third-party service providers that concentrate on self-storage occupancy in a given
market, obtaining current market estimates of rental and expense rate information often is a problem.
Investors, appraisers, and lenders invariably find themselves canvassing market participants to survey
the current situation. The absence of quality third-party data sources for self-storage, especially for
properties outside of metro areas, has led to lenders showing caution in approving new, “out of the
ground” projects. The inability to accurately project future supply and demand for storage units is
certainly the phantom menace for any lender or investor partnering in new construction. A seemingly
stable self-storage market could unwind quickly if too many new facilities are built at once. Given the
forecasting difficulties, lenders may be more willing to provide financing when an investor is adding a
second or third phase to an existing facility, if the existing units provide at least a break-even debt
The debt coverage ratio is break-even when the project’s net operating income equals the annual debt
service on the loan. This often occurs for subsequent phases of a project because the construction
costs, on a per-square-foot basis, are lower as a result of the fact that foundations and other
infrastructure improvements were funded during the initial phase. In cases
where an existing facility does
not provide the lender a break-even debt coverage ratio, even strong occupancy rates and quick
absorption of completed units in the past may not allow a lender to provide new loan financing,
especially in a market exhibiting strong competition. Generally, lenders need to see a successful track
record of operating performance before committing funds to the self-storage property sector.
The difference between an underperforming and a successful self-storage property often is dependent
upon the quality of the on-site management. The presence of an experienced, full-time, on-site manager
can do wonders for the property’s occupancy rates. Additionally, effective on-site management can
generate cross-selling opportunities, and many self-storage facilities produce a significant level of
revenue from the sale of moving supplies, locks, and packing materials.
Furthermore, good management
can identify potential problems by remaining
apprised of nonperforming units (renters) and collecting late
fees and insufficient fund (NSF) charges. Effective on-site management also improves the return on
advertising dollars—thus understanding why customers use a self-storage facility allows for a more
targeted and effective advertising strategy.
Know Thy Customer
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The primary customers of self-storage facilities are adults in transition. Specifically, people in the
of downsizing or increasing their living quarters often employ storage on a short-term basis. In the
aftermath of the subprime mortgage crisis, self-storage occupancy rates increased as families moved
from houses into smaller apartment units. Furthermore, families staying in their current home may utilize
self-storage space to shelter recreational vehicles or collectibles.
In the years preceding the most recent recession, the concept of house flipping was pervasive in the
media and in practice. In the wake of the financial crisis, TV programs featuring house flipping
techniques have been augmented by shows featuring bottom-fishers who purchase the contents of self-
storage units via an auction after a renter has defaulted on the monthly rental payments. The typical
rules of these auctions require the potential bidders to peruse the contents without actually entering the
unit in question. The speculative profits usually hinge on the discovery of relatively valuable collectibles,
furniture, and other unusual bulky items.
Seasonal consumers such as college students and vacationers represent another large segment of the
self-storage market. Students often forgo lugging furniture and nonessential belongings back to an
already furnished home during the summer break, opting instead to temporarily store the items in a safe
location, while people that regularly vacation in a particular locale often choose to store
items. As a result, resort communities and college towns are hotbeds of self-storage activity.
Small businesses sometimes employ self-storage facilities to warehouse inventory, supplies, equipment,
and essential records. Climate-controlled units are especially amenable to firms
that intend to employ the
facility on a long-term basis. Attorneys sometimes use self-storage units to maintain property when a
client’s estate is in transition as a result of litigation or death.
Armed services personnel are regular consumers of self-storage units, especially when the U.S. is
engaged in active overseas military operations. In fact, over the last two decades, a significant
of the construction of self-storage space has occurred just outside of military bases. Of course, this is in
response to the demand created by soldiers and naval personnel who have been called to deploy. In
these markets, storage facilities tend to be countercyclical because occupancy rates generally increase
during deployments, a period of time that negatively affects most other businesses in the community.
The Storage Auction Process
Some simple, anecdotal evidence refuting the notion that self-storage property is recession-proof is
readily available on popular television and in short books. These outlets typically focus on the
speculative purchase of storage unit contents via a rapid-fire auction process. While the white-hot
spotlight of reality TV has contributed to the relatively recent, popular awareness of this cottage industry,
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these stressed sale auctions have actually been around since the late 1970s.
In the late 1970s, a number of states passed laws allowing self-storage proprietors to place a lien on the
contents of units that were arrears in rent. In fact, a few states allow
proprietors to seize the contents of a
unit as quickly as 40 to 50 days after the unit goes into arrears. Regardless of their rights, however,
many self-storage property owners typically wait 90 to 120 days before pursuing the auction process,
which begins with a mandatory classified legal notice in the
local newspaper at least twice within 14 days
of the auction. Of course, the recent surge of publicity of storage unit content auctions has increased the
number of bidders at the auctions. Inexperienced participants often unwittingly increase bid prices,
allowing the property owner to acquire an amount that is closer to the outstanding rent on the unit.
Unfortunately, at least for the property owner, a self-storage auction rarely generates enough cash to
cover the outstanding debt; in fact, it is much more common that less than half of the balance will be
collected via the auction process.
Interestingly, any funds collected in excess of the cumulative, outstanding rent via the auction, must be
returned to the original owner of the unit’s contents. Consequently, the auction is more of a “debt
recovery event” than a profit-generating alternative for self-storage facility owners. In most cases, the
renters whose units end up in an auction have not voluntarily walked away from their property—they
typically face significant economic challenges. Regardless of the circumstances, communication
between the owner of the unit’s contents and the facility owner are severed. Ironically, the death of a
unit’s renter does not usually result in the liquidation of a unit’s contents by auction; family members or
estate settlement procedures usually handle the situation.
The existence of self-storage contents speculators suggests that changing economic circumstances
affect the renters of storage units, which, in turn, affects the owners of the units. While self-storage
investments may enjoy an element of countercyclicality, they are not immune to the turbulence of a
“The Ayatollah of Climate Controllah”
We got the title of this section from a sign for a self-storage facility located in the Winston-Salem, N.C.,
area several years ago. Of course, the owner was trying to convince passing drivers that his units were
reasonably impervious to the whims of nature. Evidently, all he really managed to do was irritate people.
The next day the sign was replaced with “Come on in, we’re cool.”
Obviously, we were looking for a way to work that sign into this article. Here’s the hook: some investors
exhibit an almost religious fervor when it comes to the belief that self-storage properties are “recession
proof”—impervious to the whims of the economy. While not offended, we would nonetheless, like that
sign to be taken down.
The belief in the resilience of self-storage investments is nothing new and can be traced back to the
Great Depression when the moving and storage industry was thought be a safe haven in the storm
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(Hess, 1973). Today, the thought is that people will always need storage space and this is true in a deep
recession. During the bad times, people become more transient – in search of work or even displaced—
and need a place to “keep their stuff.”
In fact, self-storage facilities have fared relatively well in the aftermath of the financial crisis, but
occupancy rates and operating performance have faltered, especially in contrast to the boom years.
Many metropolitan areas currently have a glut of self-
storage space (Cushman & Wakefield, 2011). All in
all, while a case can be made for some degree of countercyclicality, many markets are suffering,
suggesting that the investment return performance of these properties is cross-sectionally variable and
anything but a sure thing. In the face of the optimism surrounding self-storage properties, we stand by
the belief that what determines value is the quality, quantity, and durability (QQD) of the cash flows of a
potential investment. This means that the key to success is due diligence—gaining an understanding of
the current and expected future market conditions is paramount.
Self-storage projects are similar to apartment projects in that leases typically are written on a monthly
basis and operating expenses are evaluated on a per unit basis. Naturally, climate-controlled units
generate a premium rental rate, but the expenses associated with their maintenance also come at a
premium. Per-unit comparables for occupancy rates, rental rates, and expenses should be viewed in
light of the quality of the property’s construction, the percentage of units that are climate controlled, and
the implications of an increase in the supply of units in a given market to the operating performance of
the property. Given the issues noted earlier regarding difficulty in compiling aggregate market
information, self storage properties with a long track record of success should be viewed in a more
favorable light than the “Johnny come lately” variety. New construction, or properties without a track
record of success, can be more negatively influenced by the phantom menace of new construction and
an uncertain future.
G. Jason Goddard is vice president at Wells Fargo in Winston-Salem, N.C. He is also adjunct faculty at
Wake Forest University, UNC-Greensboro, and the University of Applied Sciences in Ludwigshafen,
Germany. He also teaches at the RMA-ECU Commercial Real Estate Lending School in Greenville,
N.C., each May. Bill Marcum is Citibank faculty fellow and associate professor of finance, Wake Forest
University, Winston-Salem, N.C. The authors are finalizing a forthcoming book, soon to be published by
Springer that analyzes investment real estate in the aftermath of the recent market decline.
Chappell, C. (2011). REIT website, “Self Storage REITs Building Momentum in 2011,”
http://REIT.com/Articles/Self-Storage-Building-Momentum-In-2011.aspx?p=1, accessed June 7, 2011.
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Cushman & Wakefield Self Storage Industry Group website, “Market Equilibrium by Core Based
Statistical Area Based on the 2011 Self Storage Almanac,”
http://www.selfstorageeconomics.com/pdf/2011cbsa.pdf , accessed December 10, 2011.
Correll, R. (2003). Market Analysis and Valuation of Self Storage Facilities. Chicago: Appraisal Institute
Hess, J. (1973). The Mobile Society: A History of the Moving and Storage Industry. New York: McGraw-
Self-Storage Association (2002 A). Building Codes and the Self Storage Industry. Springfield, Va.
Self-Storage Association (2002 B). Self Storage Standards and the Modern Community. Springfield, Va.
Wall Street Journal (2011). “REITs Make about Face,” March 30, 2011, p. C11, U.S. print edition.
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