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4 Ways Self Storage Is Recession Resistant
As we head into what increasingly looks like a recession, self-storage properties appear to be a strong example of recession proof real estate investing.
When the economy weakens, people and businesses tend to downsize. As a result, many commercial real estate asset types perform less well during a recession. Think of office properties, for an easy example. During an economic downturn, companies often downsize, which reduces their need for expansive office space — and lower demand equals lower property revenues for investors. The same holds true for the retail sector, and many others.
But not self storage.
Self storage, often considered a niche real estate investment, tends to perform better in a recession than many of its peers. Curious why self storage is such a great example of recession proof real estate investing? This article breaks down four main reasons why it pays to invest in self storage.
1. Self-Storage Demand Increases in a Recession
Unlike the other sectors listed above, demand for self-storage space actually increases during a recession. Think about it: People have stuff. Companies have stuff. During a recession, people are far more likely to downsize their living space — or even move in with family, head to a different location to pursue other job opportunities, and so on. Similarly, companies are also likely to reduce their real estate footprints to save money.
So what do they do with all that…stuff? They’ve got to put it somewhere, don’t they? That’s where self-storage properties come into play.
It’s worth exploring the “Four Ds of Self Storage.” That is: death, divorce, dislocation, and downsizing. Downsizing and dislocation we’ve covered. The other two — deaths and divorces — may or may not be correlated with a recession. However, they are relatively constant.
It’s a bit morbid to write it, but regardless of the economy, people are going to die or get divorced. And when that happens, it generally creates demand for self storage at least temporarily — but often for the longer term.
2. Self Storage Has Low Operational Costs
One of the biggest advantages of the self-storage sector for investors, even outside of a recession, is that properties are relatively easy to operate. You don’t always need on-site staff. Tenants are not generally demanding — they just drop their stuff off and return at some point in the future.
Lower staffing leads to lower costs, but it doesn’t end there. Just broadly speaking, the costs of operating self-storage facilities are remarkably low. There are some exceptions, of course — if all your units are climate controlled, that will boost your costs (but also your revenues). Similarly, if you need on-site security, that will translate into higher expenses, too.
But, broadly speaking, the most demanding self-storage assets are less costly to operate than even the lowest-end multifamily, office, industrial, or retail properties. As a result, self-storage net operating incomes are easier to keep in the black.
3. Self Storage Relies on Multiple Tenants
Tying into operating costs, vacancy costs are generally not something to be too concerned over in self storage — as long as your property is relatively well located and offers what nearby residents or businesses need, whether that’s in terms of unit size or amenities. If you had a more-or-less full roster of tenants prior to a recession, it’s relatively unlikely that will change even as the economy worsens.
And when a tenant does move her or his stuff out, it’s not the end of the world. After all, most self-storage properties have enough units where a handful of additional vacancies isn’t enough to push the asset’s finances into the danger zone. This resilience also comes from the low operating costs involved, as mentioned earlier.
4. Self Storage Rents Are Flexible
The last point is to self storage’s flexible rental terms. This is a bit of a double-edged sword, of course. Shorter lease terms mean that a tenant can vacate her unit with little notice, impacting your bottom line. But at the same time, this flexibility offers an amazing opportunity to adjust rents to reflect increasing operating costs and wider market conditions.
Compare the self-storage sector to an industrial warehouse lease. Industrial property leases tend to range between three and seven years. Self-storage leases, on the other hand, generally are no longer than three months — with more and more just operating on a month-to-month basis. Sure, this does add some risk to your rent rolls, but as long as demand for self-storage space is consistent (and it usually is, especially in a recession), you’ll fill an empty unit in no time — and at a leasing rate in line with the market.
Related Questions
What are the benefits of investing in self storage during a recession?
Investing in self storage during a recession has several benefits. Firstly, demand for self-storage space actually increases during a recession. People and companies are more likely to downsize their living space or reduce their real estate footprints to save money, and need somewhere to store their stuff. This is known as the “Four Ds of Self Storage”: death, divorce, dislocation, and downsizing. Secondly, self storage has low operational costs. You don't always need on-site staff, and the costs of operating self-storage facilities are relatively low compared to other sectors. This leads to higher net operating incomes, making it easier to keep in the black.
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What are the risks associated with investing in self storage during a recession?
The main risk associated with investing in self storage during a recession is vacancy costs. If your property is not located in an area with a high demand for self storage, or if it does not offer the amenities that nearby residents or businesses need, then you may experience a higher vacancy rate. Additionally, operating costs can be higher than expected, as self storage properties require regular maintenance and upkeep.
It is also important to consider the "Four Ds of Self Storage": death, divorce, dislocation, and downsizing. These events can create a demand for self storage, regardless of the economy. However, it is important to note that these events may not be correlated with a recession.
For more information, please visit The Four Ds of Self Storage.
How can investors protect their investments in self storage during a recession?
Investors can protect their investments in self storage during a recession by taking advantage of the "Four Ds of Self Storage": death, divorce, dislocation, and downsizing. These events are relatively constant, regardless of the economy, and can create demand for self storage at least temporarily. Additionally, self storage relies on multiple tenants, so vacancy costs are generally not something to be too concerned over. Low operating costs also help to make self storage investments resilient during a recession. For more information, check out The Four Ds of Self Storage.
What strategies can investors use to maximize their returns in self storage during a recession?
Investors in self storage can maximize their returns during a recession by taking advantage of the increased demand for self storage space. This can be done by focusing on the “Four Ds of Self Storage”: death, divorce, dislocation, and downsizing. Downsizing and dislocation are often associated with a recession, while deaths and divorces are relatively constant. Additionally, investors should focus on properties that are relatively well located and offer what nearby residents or businesses need, whether that’s in terms of unit size or amenities. This will help to minimize vacancy costs and ensure that the asset’s finances remain in the safe zone.
What are the most important factors to consider when investing in self storage during a recession?
When investing in self storage during a recession, the most important factors to consider are the Four Ds of Self Storage: death, divorce, dislocation, and downsizing. These factors are relatively constant, regardless of the economy, and can create demand for self storage both temporarily and for the longer term. Additionally, self storage relies on multiple tenants, so vacancy costs are generally not something to be too concerned over as long as the property is relatively well located and offers what nearby residents or businesses need. Finally, self-storage demand actually increases during a recession, as people and companies downsize their living space and real estate footprints to save money.
What are the best ways to finance a self storage investment during a recession?
The best way to finance a self storage investment during a recession is to look for a loan product that offers flexible terms and low operating costs. Self storage investments are generally considered to be recession-resistant due to their multiple tenants, low operating costs, and flexible rental terms.
For financing, you may want to consider a commercial real estate loan, which can provide long-term financing for the purchase of a self storage facility. These loans typically have fixed interest rates and amortization periods of up to 25 years. You may also want to consider a bridge loan, which can provide short-term financing for the purchase of a self storage facility. Bridge loans typically have higher interest rates and shorter repayment terms than commercial real estate loans.
For more information on self storage financing, you can visit Commercial Real Estate Loans.