Self-storage facilities typically provide measurable value creation potential for an investor through income and risk dimensions that positively impact value. While it is necessary to understand both the income and risk dimensions to arrive at an accurate value conclusion for a given self-storage facility, this article will only focus on the income factors of self-storage facilities in an effort to better understand the value creation potential for self-storage facilities and what a self-storage facility is worth.
Moffit-Gigowski (M-G) Value Potential Index, self-storage facilities have a
value creation potential score of 6.9 out of 10. Among special-purpose real
estate properties, self-storage facilities are one of the highest
value-potential properties, comparing favorably with mobile home parks.
important income value drivers for self-storage facilities are exogenous by
nature. They include product necessity and real property intensity. Let’s begin
with the exogenous, or external, income drivers for self-storage facilities.
Product Or Service Necessity
affordable storage options whether the economy is contracting or expanding. In
fact, one in 10 people use self-storage. With little new self-storage
construction, demand may outpace supply due to population growth alone. This
demand for self-storage drives the investment vehicle toward the high end of
the product necessity scale.
above, we are seeing a trend of limited supply in some markets as occupancies
have increased along with incremental increases in monthly rental rates. While
the self-storage industry is likely approaching maturity, there are a number of
markets that have a relatively high demand for self-storage; but, due to
current zoning restraints, other facilities may be unable to enter into these
markets. On the whole, occupancies appear to be stabilizing in the 85 to 95
percent range, with publicly-traded REITs and professionally managed
self-storage portfolio owners establishing and maintaining a goal occupancy
above 90 percent. The industry is still highly fragmented.
barriers to self-storage industry entry exist due primarily to limited
regulation of the industry. While state and national self-storage associations
have worked with local and state governments to define current laws and
regulation, the relatively weak regulatory environment has allowed for easy entry
into the self-storage market.
Real Property Intensity
decades, investors utilized the self-storage industry in an effort to develop
awkwardly shaped land that was not easily developed with most other real estate
intensive businesses due to the shape or geography of the particular land
parcel. Today, however, self-storage investors have become increasingly
particular about the potential land they look to develop and the types of
existing facilities they are willing to purchase in an effort to complement
their existing self-storage facility portfolios. The real property intensity of
the self-storage facility is mostly driven by the nature of the product; it is
a real estate product that is defined mostly by multi-unit storage structures.
Generally speaking, the self-storage real estate drives the facility’s income,
and, because of its permanency, the real property creates stable, sustainable
Required Intellectual Capital And
unique processes are necessary for a successful self-storage facility. However,
the economies of scale realized by the public REITs and the large,
multi-facility portfolio competitors have established intellectual property in
their particular processes, such as call center structure, real-time rental
pricing structures, market research software, and online marketing strategies. Basic
development and property management acumen are the primary intangible
requirements for self-storage investment success.
Now that we’ve reviewed
the external income drivers to self-storage facilities, let’s review the
secondary income determinants. The most important of the internal income value
drivers include real options, brandability, and economies of scale.
The typical self-storage
facility consists predominately of real property assets. High-quality,
well-maintained self-storage facilities in a desirable, high growth,
metropolitan location typically describe the asset requirements of successful
self-storage facilities. There are no patented assets or special, protected methods
needed to operate a self-storage business. Thus, while proprietary assets can
define the success of many types of businesses, and proprietary processes may
help larger, multi-facility self-storage owners streamline operations,
proprietary assets typically do have significant influence on the value of
multi-unit self-storage portfolios.
economies of scale have divided mom-and-pop self-storage facilities from the
professionally managed multi-facility portfolio owners and REITs that currently
dominate the online marketplace. Facilities owned by Public Storage, for
example, are seen across the U.S. and have dominated online self-storage
geographical footprint, online presence, and consistent branding across more
than 2,000 facilities, have established expectations. Self-storage consumers
feel more comfortable with their storage investment when reasonable
expectations are established and met consistently.
self-storage facility owners have established themselves nationally within the
industry, most self-storage facility competitors are similar enough to their
price-sensitive consumer base that rental rates and move-in promotions also
play a significant role in driving occupancy rather than the brand name alone. Even
more important is the access to marketing and search engine optimization that has
given the REITs a definite advantage in maintaining consumer awareness and
promoting their brands through competitive move-in promotions and online
Real Options An individual
self-storage facility can serve as an investment vehicle attached to a real
option. This real option is the future opportunity that the real estate may be
converted into a more profitable alternative use. At this moment in time, a
self-storage facility may be the highest and best use for the subject real
estate and property improvements.
However, at some
point in the future, market demand may change such that the real option of the
current asset may be a future opportunity to convert and develop the real
estate into an alternative investment vehicle that will maximize investor value.
This may require demolition and removal of the current fixed assets and
construction of, for example, a retail shopping center or apartment complex.
Other locations where the real property often enjoys embedded real options
include commercial interchanges, commercial corridors, and executive
Economies Of Scale
While bigger is
not necessarily better, a portfolio of 100 facilities generates significantly
greater cash flows per unit of storage than a portfolio of 10 self-storage
facilities. Access to capital enables investors to grow portfolios and, along
the way, streamline operations. This, in turn, cuts expenses and creates value
for the shareholders. Management, administrative, marketing, and maintenance
expenses are often significantly lower, per rentable square foot, for larger,
multi-facility self-storage companies, since these larger companies, sometimes
with national exposure, are able to decrease cash flow and occupancy volatility
over a greater income-generating base.
companies also have greater access to cheaper capital for capital expenditures
and routine maintenance requirements. Overall, multi-facility self-storage
owners achieve greater financial returns than fewer, or single-facility,
It is important
to keep in mind that all income value driver determinants are not created equal.
Further, the income generated by a self-storage facility is only as good as its
corresponding context of risk.
writes and consults in health care administration, real estate intensive
valuation practices, and entrepreneurship. Her research interest is in
organizational value building. She has co-authored books, articles, and case
studies on valuation and entrepreneurship.
Timothy Moffit is chair of the Department of Economics and Business at Kalamazoo College in Kalamazoo, Michigan. He received his doctorate degree in business administration with a specialty in finance from Nova Southeastern University and his master’s in business administration from the Amos Tuck School at Dartmouth College. His teaching and research interests center on valuation theory and the analysis and understanding of financial statements.