By Michael L. McCune

The self storage industry has grown up over the last quarter century being thought of as the lowest common denominator of real estate. In the not too distant past, everyone in the real estate business thought that those little "tin" buildings just couldn’t really be worth much and they certainly weren’t very pretty! The institutional types would very much rather run the boss out to a new luxury hotel or a mega mall and say "look at what we just bought!" "Think how great the picture will look in the annual report" would always be the words that would accompany such a visit –as they were getting their picture taken with the trophy project. Meanwhile the lowly self storage developer was sitting at his kitchen table with pencil and calculator in hand saying something like " gee these numbers sure look good". Slowly but surely, some of the real estate gurus began to catch on after they stored some of their junk and did a quick calculation of the rent per square foot and estimated the costs in their mind.

During our rather brief elapsed history in the self storage business the perceptions have changed somewhat, but not dramatically. The facilities look better, but no one calls even the best self storage facility a "trophy". Wall Street endorsed some self storage REITs, but now seems to have lost its appetite. There was even a brief time recently when the folks east of the Hudson thought that they might include self storage in portfolios of real estate loans, but that too has now faded to near extinction.

Despite the main stream real estate investors continuing yawn about the self storage business I thought we might take a little time to explore the reasons why they may just be overlooking the best of all real estate investments – self storage! Having had the opportunity to kick around the real estate business for the last thirty years, (working with just about every type of property: office, hotels, land, industrial and retail ) I am prepared to make an argument that self storage may well be the best type of investment you can make in the real estate world and is really the Snow White of the real estate. This is not to say that all self storage is better than all other real estate, but merely that on average the income producing characteristics of well conceived self storage are better than that of other types of real estate. However, before I begin, I must warn you that my "mirror on the wall" only reflects certain attributes, such as: product demand growth, cash flow, return on equity, break even risk, additional capital costs, and other mundane "numbers" kinds of things. If you are looking for the mirror to reflect more subjective criteria, like annual report value or owning a place to have your daughter’s coming out party, my mirror probably will not suit your purpose. So for the balance of this article and the next issue of the Market Monitor, I am going to make only one very significant general argument about the relative merits of self storage investments compared to other types of real estate. Let’s see how this "reflection" compares and see if we think, that like the Prince, we have indeed found Snow White! Next month we will take a little closer look at some different property types and some different criteria in our comparisons.

One significant factor makes self storage a better bet in the long run than a lot of other real estate types -- its market is growing faster than the population. Let me make two statements and then tie them together and you can see the tremendous leverage this gives self storage. First, only about one third of Americans have ever used self storage (the statistics in the business are not very good, but good enough to give you the idea). Secondly, after a period of time, say five years, many self storage facilities report that most of their business, say 80%, is from repeat customers. If you combine these two statements, it is clear that customers are not only discovering self storage, but more importantly, they are also learning to use it again and again. The point is that this type of real estate’s growth is not limited to just the population growth in a market, but gets a great boost from "moving up the earning curve" of the consumer. Lets make some assumptions and see just how this might all work out. Assume that the national population growth is about 1.2% and that the "learning curve" growth is about 2% per year ( just a guess ) or about another 20% of the population would learn to use self storage over the next 10 years. What this translates to is a total growth in demand for self storage of about 3.2% per year or about 267% (3.2% total growth in storage demand divided by 1.2% national population growth) more than those real estate types that depend on population growth alone.

There is also one other factor that probably impacts this formula for growth demand but is harder to quantify and that is the fact that self storage doesn’t require a "body" ( although there may be one occasionally ) to make it useful. Hotels, apartments, offices, and homes all require human beings or they are not very useful or profitable. Self storage, on the other hand, thrives on our fast growing accumulation of "stuff" and our emotional attachment to it. To get a personal perspective on the magnitude of the potential size of this element of the increase of demand for self storage in our society, just think for a moment of all of the things ( important things, of course ) that you are saving for your children compared to what your parents saved for you! This is to say nothing of your own "toys" that you can’t part with that need a resting place until you get back to that particular game. The net result is that the demand for self storage is growing very rapidly and in excess of the rate of population growth, at least for the time being. We also know that fast growth in demand covers a lot of sins in real estate, but it also enhances our ability to earn greater returns on our self storage investments than on other types of real estate.

If you want a little proof that there is an element of truth in these arguments just think back over the last 25 years and see what has happened to rents over this period. The fact is that despite the industry building some 30,000 ( plus or minus ) facilities in that general time frame the rents have continued to go up which certainly proves that the total demand has exceeded the supply and the population growth. Of course you may say that rents have gone up for all real estate types and that is generally true, but when you think of the relative amount of absorption of supply in such a short time the story is truly remarkable!

Next month we will take a look at rates of return and some risk factors and see if the Prince is still interested in this Snow White!