Tag: self storage

In my previous post, I discussed what I believe are some of the most important pros and cons of investing in self-storage real estate.

As with most real estate sectors, self-storage features some terms that are particular to this property type — specifically in how owners describe occupancy: Unit Occupancy, Physical Occupancy, and Economic Occupancy. Let’s review them:

Unit Occupancy

Unit occupancy is the most straightforward of the three. It refers to the number of occupied units at a self-storage property, expressed as a percentage of the total. For example, if a facility has 100 units and 75 of them are filled, then the unit occupancy is 75%. This metric provides a quick snapshot of the facility’s occupancy status but doesn’t account for the varying sizes of units or the revenue that’s generated by each unit.

Physical Occupancy

Physical occupancy, while similar to unit occupancy, takes into account the rentable square footage of each unit. This is the number of occupied, rentable square feet at a facility, also expressed as a percentage of the total. Physical occupancy offers what is probably a better picture of vacant vs. occupied space than unit occupancy because it considers the actual space being utilized. 

Economic Occupancy

Economic occupancy compares the actual rental income being generated in relation to the gross potential rent of that property. It takes several factors into account, including turnover periods between tenants, concessions and rent incentives, and late or unpaid rent. You might think of this metric as a sort of inverse cousin to the Vacancy and Credit Allowance that you see on an APOD (Annual Property Operating Data) for a typical income property.

A 100-unit storage facility with 95 units rented has a physical unit occupancy of 95%, but its economic occupancy might be lower (and concerning) due to factors such as short-term discounts, concessions, and delinquent rent. 

An Example

Let’s say we have a self-storage facility with 100 units, and we want to calculate the unit occupancy, physical occupancy, and economic occupancy for a given month.

Unit Occupancy:

Unit occupancy refers to the percentage of units that are rented out, regardless of how much of the space is being used.

At the end of the month, we find that 90 of our 100 units are rented out. So we can calculate the unit occupancy as follows:

Unit Occupancy = (Number of rented units / Total number of units) x 100

Unit Occupancy = (90 / 100) x 100

Unit Occupancy = 90%

Physical Occupancy:

Physical occupancy refers to the percentage of total rental space that is being used.

Let’s say that the average unit size in our facility is 100 square feet. That means we have a total of 10,000 square feet of rental space (100 units x 100 square feet).

At the end of the month, we find that our renters are occupying a total of 8,000 square feet of space. So we can calculate the physical occupancy as follows:

Physical Occupancy = (Total rental space in use / Total rental space) x 100

Physical Occupancy = (8,000 / 10,000) x 100

Physical Occupancy = 80%

Economic Occupancy:

Economic occupancy refers to the percentage of total potential rental income that we are actually receiving.

Let’s say that we charge an average of $100 per month for each unit. That means we have a total potential rental income of $10,000 per month (100 units x $100).

At the end of the month, we find that our renters are paying a total of $7,000 in rent (70 rented units x $100). So we can calculate the economic occupancy as follows:

Economic Occupancy = (Total rental income received / Total potential rental income) x 100

Economic Occupancy = ($7,000 / $10,000) x 100

Economic Occupancy = 70%

So in this example, we have a unit occupancy of 90%, a physical occupancy of 80%, and an economic occupancy of 70%. 

Conclusion

Understanding these three types of self-storage occupancy—unit, physical, and economic—is important for investors seeking to maximize their profitability. By monitoring and managing these three types of occupancy, you can keep an eye on your business’s financial health and optimize your bottom line with informed decisions about pricing, collections, and possible expansion.

— Frank Gallinelli

FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.

 

Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved

Photo by Steve Johnson on Unsplash

What is self-storage real estate?

Simply put, self-storage properties are built to contain many, often hundreds of individual storage spaces of varying sizes. It’s a booming market, forecast to be worth over $64 billion by 2026.

Individuals and businesses rent these spaces to store possessions like furniture, clothes, equipment, business records, inventory – just about anything one can imagine. The top five reasons people use self-storage are for moving purposes, lack of space at home, change in household size, downsizing, and business purposes.

These facilities have become increasingly popular among real estate investors for several reasons:

Steady Income

Perhaps the most compelling reason for investors to turn to self-storage is the likelihood of a steady revenue stream. The demand for storage units increased to 14.5 million in 2022, up by 970,000 since 2020, with owners seeing an annual return on investment of almost 17% over a nine-year span.

Recession-Resistant Investment

Self-storage real estate has proven to be notably resilient during difficult economic times. For example, census data show that self-storage revenue increased steadily during the pandemic and occupancy averaged 96.5% in the third quarter of 2021 compared to 91.5% in the first quarter of 2020. As people relocated and downsized, or needed to make room for home offices, they needed space to store belongings.

Even during the Great Recession of 2008, while most REITs suffered losses, self-storage showed a positive 5% return.

Lower Operating Costs

Compared to other income-producing property types, operating costs tend to be lower for self-storage units, typically around 35% of revenue. These spaces do not experience use as intensive as apartment, office, or retail properties, and have far fewer amenities. No late-night calls for clogged plumbing. On average, property taxes account for almost one-third of the expenses for this property type.

Stable Cash Flow

With a large number of relatively small units, the loss of an individual tenant does not typically impact cash flow the way it would with the loss of an apartment or commercial tenant. Also, when a unit does go vacant, it can usually be ready for a new tenant immediately, saving both the rollover time and cost usually needed for other types of space.

Advantageous Leases

Month-to-month leases are the norm, so owners can adjust rates quickly if market conditions change. Some owners take payment by automatic credit card or ACH billing, reducing the chances of default. No property owner relishes the prospect of an eviction, but in many states, the process is, at least, less difficult and time-consuming than it would be with an apartment or commercial tenant. And you may be able to recover at least some of your economic loss via a lien that permits you to auction off a unit’s contents.

Of course, anything worth having or doing comes with some challenges. Here are a few:

Market Saturation

One potential risk in the self-storage sector, as in virtually any area of real property, is the risk of oversupply.   To be sure, an essential part of your planning is to evaluate whether the market where you plan to invest is becoming saturated. This can occur if there is a spike in the construction of new facilities, if supply is starting to outstrip demand, or if institutional investors are beginning to dominate your market. Your due diligence needs to be focused to be on the lookout for these warning signs as you evaluate your long-term plans.

Management

While you probably will not have a lot of the management duties that are a familiar part of owning properties that are occupied by real people, there are still some hands-on considerations with self-storage real estate. Think of the property as your own retail establishment. You will probably need to have a person on-site during business hours to control access to the facility, deal with walk-in customers wanting to sign up, or make equipment like hand trucks or platform trucks available for use. Self-storage facilities in the U.S. employ, on average, 3.5 employees per facility. https://alansfactoryoutlet.com/blog/self-storage-industry-statistics/

Security

We doubt that you’ll keep the Hope Diamond or your Mickey Mantle rookie baseball card in your self-storage cubicle, but folks often do store valuable stuff. These facilities need to ensure that they have robust access-control systems in place and video surveillance. They also need to maximize security of the storage units themselves. Tenants will usually provide their own locks, but the units should be built with reinforced walls and doors to make them less vulnerable to forced entry.

Conclusion

The self-storage real estate sector, with its potential for high returns, recession-resistant demand, and relatively low operational costs can offer compelling investment opportunities. It’s also important to acknowledge that challenges exist, like hands-on management responsibilities, robust security demands, and the possibility of market saturation. Investors who approach this sector with careful due diligence and a realistic understanding of the pros and cons should find themselves in a position to capitalize on the growing demand for self-storage facilities.

— Frank Gallinelli

FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.

 

Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved

Photo by JOSHUA COLEMAN on Unsplash