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SELF STORAGE INVESTING

Educational guide to self storage as a commercial real estate asset class

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Self storage has generally grown into a distinct commercial real estate asset class over the past several decades, attracting both institutional and private investors. This is a general educational overview of how self storage investing generally works. It is not investment advice, and any specific acquisition should be evaluated with a financial advisor.

The Self Storage Operating Model

Self storage facilities generally generate income by leasing individual storage units to a large number of tenants on relatively short term, often month to month, agreements, which generally differs from the longer term leases typical of office or industrial property. This short term structure generally allows an operator to adjust rental rates more frequently than most other commercial property types, though it also generally means occupancy can shift more quickly in either direction.

Why Investors Are Generally Drawn to Self Storage

Self storage generally appeals to investors because of its relatively low ongoing maintenance requirements compared to multifamily or office property, its historically resilient performance across different points in the economic cycle, and its ability to generally serve a wide customer base, from residential customers going through a move to small businesses needing extra inventory space. A Las Vegas facility located near a growing residential submarket generally benefits from the same population growth that supports demand for multifamily and retail property in the valley.

Operational Considerations

Running a self storage facility generally involves ongoing marketing to fill and re fill units as tenants move out, a rate management strategy that generally adjusts pricing by unit size and demand, and generally lighter physical maintenance than a multifamily or office property, though security and climate control features generally add their own operating costs for facilities that offer them.

Self Storage and 1031 Exchange Buyers

Self storage generally qualifies as real property for 1031 exchange purposes when held for investment or business use, and it is generally considered by exchange buyers seeking a property type with different tenant dynamics than a typical retail, office, or multifamily replacement. This overview is general and educational, and any specific self storage acquisition should generally be reviewed with a financial and tax advisor before a purchase or exchange is completed.

Evaluating a Self Storage Facility's Fundamentals

Beyond occupancy and rate trends, a Las Vegas investor evaluating a self storage facility generally looks closely at the property's unit mix, the balance between climate controlled and standard units, existing management systems for gate access and billing, and how much competing supply exists or is planned nearby. A facility with a strong location but weak unit mix, for example too many large units relative to local demand, generally underperforms a comparable facility with a unit mix better matched to its market, even at similar occupancy levels.

Self Storage Compared to Other Passive Property Types

Relative to a triple net retail property, self storage generally involves more active rate and occupancy management, since rents generally are not fixed by a long term lease, but relative to multifamily, self storage generally involves considerably less intensive tenant relations and turnover work. This middle position generally makes self storage an option some Las Vegas exchange buyers consider when they want more income growth potential than a fixed rate NNN lease but less day to day management intensity than a residential rental property.

Third Party Management for Self Storage

Many self storage owners generally hire a specialized third party management company to handle day to day operations, including rate setting, marketing, and on site or remote customer service, which generally allows the owner to hold the asset in a relatively passive manner despite the more active rate management the asset class generally requires compared to a fixed lease NNN property. A Las Vegas investor considering self storage as a 1031 replacement generally should factor management fees into the underwriting, since these fees generally reduce the property's net operating income relative to a self managed scenario.

Frequently Asked Questions

SELF STORAGE INVESTING FAQS

How does self storage income generally differ from a typical commercial lease structure?

Generally self storage relies on a large number of short term, often month to month, unit leases, rather than the longer term leases typical of office or industrial property.

Why do investors generally find self storage appealing?

Generally because of its relatively low maintenance requirements, historically resilient performance, and ability to serve a broad customer base.

Does self storage generally require significant maintenance compared to other commercial property?

Generally less than multifamily or office property, though facilities offering climate control or enhanced security generally carry additional operating costs.

Can self storage generally be used as replacement property in a 1031 exchange?

Generally yes, self storage generally qualifies as real property for 1031 purposes when held for investment or business use.

Does population growth in the Las Vegas valley generally support self storage demand?

Generally yes, in growing residential submarkets, self storage demand generally benefits from the same population growth that supports other commercial property types.

Does self storage generally require more active management than a triple net property?

Generally yes, since rents are generally not fixed by a long term lease, self storage generally requires more active rate and occupancy management than a typical NNN property.

Can self storage income fluctuate more than other property types?

Generally somewhat more, since short term leases generally allow occupancy and rates to shift more quickly than longer term commercial leases, in either direction.

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