Inflation is soaring.
Interest rates are high.
The stock market is in flux.
Financial fears loom deep in peoples’ minds.
The American economy is currently experiencing a moment of decline, prompting savvy investors to diversify their funds into commercial real estate—a hard asset class with a historically lower risk profile and more stabilized returns.
But the pandemic, and the economic havoc it wrought, drastically altered the commercial real estate landscape across virtually all sectors, and exposed existing cracks that have lessened their investment appeal.
This has all created the conditions for alternative real estate—and particularly, self-storage real estate—to thrive.
Perennial popularity
Self storage has seen consistent gains in popularity since the 1970s—in fact, according to one survey of Americans, 38 percent declared themselves to be self-storage users in 2021. And the number continues to balloon.
Self storage is a popular asset class for a few reasons, including population growth, increases in American consumerism, greater reliance from small business owners, its use as a staple tool during life events—moving, divorce, death, downsizing, relocation, etc.—and the mere fact that self-storage facilities are more prevalent throughout the country.
Though self storage has been on the rise, more than three quarters of facilities in the U.S. are mom-and-pop owned and operated. Only in the last 15 years have Wall Street and institutional investors begun to see the opportunity to control and consolidate the industry.
This fresh investment has prompted self-storage facilities to modernize, maturate and transition into a more attractive and accessible commercial real estate asset class.
The investment opportunity
Self storage carries big appeal for institutional and retail investors alike. Here’s why:
- It’s recession resistant due to its consistent usage during big life events—good and bad.
- It’s a hedge against inflation due to its short-term, 30-day leases, giving owners a much shorter time horizon to meet the market in whichever economic condition it’s in.
- There’s little government regulation, meaning fewer building requirements and a far easier eviction process.
- There are consistent returns—from 2009 to 2018, facilities averaged an annual ROI of 16.9 percent, higher than office, industrial, retail or multifamily during that time.
- There’s stable occupancy, with the national rate averaging 91.5 percent in the first quarter of 2020, and 96.5 percent as of the third quarter of 2021
- There are barriers to entry, resulting in a scarcity of supply throughout the country.
Self-storage real estate is easy to manage, maintain and monetize, making it a sneakily obvious choice for investment. Aside from consistently robust returns, the real benefit for passive investors lies in the tax advantages this asset class delivers.
When you get into self-storage real estate through an investment vehicle, you’re buying into an LLC. This grants you pass-through income, allowing you to claim the tax benefit of depreciation.
What’s more, you can use your depreciation as a tax shield on your other investments. So, if you’re profitable somewhere else—say you sell your stocks and have to pay 15 percent on long-term capital gains—you can protect that tax basis by carrying over the depreciation benefit from your self-storage investment.
Through these unique advantages, you can see how, no matter how much you actually put in your pocket, you’ll almost never have to pay taxes on your investment.
The time is now
There’s a limited time in the life cycle of an asset class where it’s financially advantageous to buy in. For self-storage real estate, the time continues to be now—but not for long. Institutional investment is quickly taking over the industry, and opportunities for retail investors will become more and more limited.
A long-term investment in self storage is a great strategy for investors who want less risk, more stable returns and solid appreciation at the end of the tenure.
While this uncertain period may be unnerving for many, self-storage investors should be excited for what is to come. Episodes of market volatility are a normal feature of long-term investing and even provide many opportunities for those who can weather the storm.
Ryan Gibson serves as chief investment officer and co-founder of Spartan Investment Group, a real estate company that specializes in self-storage investments. He’s responsible for investor relations and capital raises.