Ever wonder about that 5′ x 5′ self storage unit that you rented for $110/month to store all that crap you never use?
This week Cory and Adam welcome Pat Wood, formerly one of the, if not THE authority in self storage appraisals and consulting to discuss why this asset class has seen a huge run in the past couple of years. Pat breaks down what the self storage asset class is, why there seems to be so many popping up as of late, and what investment angles exist if you wanted to partake in the success of this booming industry. He sheds some light on the science behind the self storage business and why some locations work much better than others, plus what other types of business are now being paired up with self storage to offer a diversified investment option.
Anyone want a cash wash before you drop off your items to your self storage unit?? After this episode, you will never look at that overpriced storage locker the same way ever again!
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Please tell us about yourself.
I started my career in commercial real estate as an appraiser and then moved into the self storage world. I became the director of The Canadian Self Storage Valuation Services and did that for about six years. Recently, I joined William Wright Commercial on the brokerage side.
It seems like self storage has been on fire for the last 5-10 years. Can you tell us what self storage is and why there is a huge boom?
Self storage started as a way of land banking. People had land and didn’t know what to do with it. So the idea was you’d put up a prefab unit to avoid paying the bank for the land until you were ready to develop it. But the storage units began making so much money that it wasn’t feasible to redevelop the land. We now have multi-unit, climate-controlled, high-security units that are one of the biggest asset classes in Canada.
It used to just be single storey facilities. What’s the trend now?
Multi-level buildings are the norm now due to demand and due to land value. A friend of mine built a self storage facility in Vancouver and paid $12 million for half an acre of land. Those numbers only work if you go multi-storey. He went five stories tall and that’s what you’ll see in any major urban centre. In places like New York, you’ll see ten-storey facilities to get your revenue back because land costs are so high.
Who rents these units?
The most expensive storage in North America is a facility in San Francisco or Kitsilano, depending on what the Canadian dollar is at. A 5×5 unit at those facilities rents for $125/square foot. So the revenues are huge.
Typical clientele is 75% residential consumers. It’s now shifting to 50/50 with commercial users as areas begin to develop. Commercial space is hard to find in Vancouver. So if you need to keep supplies close to where you live, self storage allows you to have an office/warehouse for way less than you’d pay for an industrial space. You can get out with 30 days notice and if your business expands, you can rent the locker next door.
During covid, we saw a lot of businesses with inventory issues who used self storage because their warehouses or storefronts were closed. So it’s really a nice flex space.
How easy is it to build a self storage facility?
In a major centre like Vancouver, it’s incredibly difficult. Even if money is no object, it may still take four years to open a facility with the zoning challenges.
The discount on a non-lease facility versus a lease facility used to be 30-40% but now it’s less than 10%. Now if you start leasing and hit 15%, you can sell it for a full stabilized value because these facilities are so difficult to build. So you’re running your numbers as if it’s fully occupied.
Why is zoning so restrictive?
A big issue is that self storage doesn’t provide employment. A storage facility may only have three employees. But cities forget that workers can run their businesses out of storage lockers. Some businesses can’t run without the self storage option.
Are there other ways to get around the zoning challenges?
Usually in Canada, we look to the US to see what they’re doing. We’re starting to see mixed-use buildings with storage. In Miami, we’ll see a ground floor that is office or retail, a restaurant on the roof, and the rest of the building dedicated to self storage. You can build a beautiful building, create employment with the restaurant and retail, and then do whatever you want. The city is a lot happier with that.
What are some of the other benefits of going into self storage?
Nothing is recession proof but storage is one of the most recession resistant industries. Storage use actually goes up at the beginning of a recession as people sell their homes or close their businesses. Once people start moving, they need storage as well.
The storage industry is also completely unregulated by the government. The Canadian Self Storage Valuation Services is trying to help with that but there are no restrictions. If you think you can raise your rates by 20%, have at it. And we see that in very hot markets. You can grow your revenue way faster than expenses and you’re not burdened by governmental oversights.
How long are self storage leases?
Typically you’ll sign a 30 day lease agreement. Some facilities now have a weekly lease option. The lease renews on the last day and you have to give them 30 days notice to vacate. There are no standard lease agreements. You are subject to all price increases.
These new facilities will have over 1000 lockers, so that’s 1000 tenants. So even if one sector of the economy crashes, that’s probably less than 10% of your facility.
So this revenue stream could grow 10-20% annually as long as there is continued demand?
What are other challenges of self storage outside of zoning?
You run into situations where too many people think it’s a good idea and build at the same time. Places like Abbotsford, Las Vegas and Phoenix are oversupplied with storage. So occupancy is hurt and you can’t raise your rates. But because our population keeps growing, this problem will eventually fix itself.
The other challenge is management. Self storage is an operating business and you need to manage it every day. You can’t just lease it out and walk away. Storage is a more involved and active business.
What kind of occupancies do these places run?
Whenever someone tells me they have occupancy over 90%, I tell them they need to raise their rates by 10%. Stabilized occupancy is around 88-90%. You always want that last 10% available so you can raise your rates to street value and bring your existing customers up to that new rate. If you’re at 100%, you can’t generate that revenue growth as quickly.
What about insurance? Who is responsible for that?
In BC, insurance regulators are very difficult to deal with. In other provinces, you can buy content insurance over the counter. In BC, most facilities offer a standard $5000 protection plan with your rental. If you want more, they’ll tell you who to call.
Most people think their storage unit is covered under their homeowner policy but find out anything stored off-site for more than 15 days isn’t covered. So that’s something to be aware of.
But other than some theft in the older facilities, these new facilities are very hard to break into. So you’re just insuring for things like water or fire damage.
What are the costs for improvement and start up costs with self storage?
The nice thing about storage is you’re not worrying about toilets, kitchens and carpets in each unit. You need the roll up doors, cameras, etc. But your start up costs are much lower than what they’d be if you were building a multi-family building. You also don’t have to refresh the units as often.
Where should someone create a facility? Do people consider driving out of the city for a cheaper storage unit? What are the differences between urban and rural units?
In the urban environment, we see a smaller average unit size, just like in housing. People who buy small condos downtown need a place to store their golf clubs and Christmas decor.
People are inherently lazy. They don’t want to drive from Vancouver to Chilliwack to get something out of their storage locker. The first rule of real estate still applies when building a storage facility: Figure out where people are going and get there first.
You have to have a longer vision and look at the 5-10 year plan.
How competitive is this space?
Very. Everyone is friendly and works together but it’s a very competitive landscape. And it’s a very fractured market. We have the top 8 companies that own about 30% of the storage in Canada and then all the mom and pop shops below that.
When will we see the American REITs coming up here?
The REITs will get here. But they need purchases of over $500 million USD and there just aren’t portfolios of that size available. It’s a hard spot for them to jump in. But it will happen. Their next logical step is to come across the border and that will change the Canadian landscape significantly.
What is the best avenue for the average investor to get involved in self storage?
There are a few different ways in depending on your amount of capital. Small facilities in BC are going to go for $2-2.5 million and that will give you a good return. Nationwide does an income trust model where you can invest with them. I’m a big fan of what those guys do.
Looking at stocks, Canadian traded SVI is the largest storage company in Canada. They know what they’re doing and they’ve taken that stock up from pennies to $4.85.
Building is tough. It’s a long road but it’s not impossible. If you’re looking to acquire, the majority of deals happen off-market. Find a knowledgeable self storage broker; give me a call and we’ll see if we can find some property for you.
Is demand for self storage the same across Canada?
It’s certainly an asset class that has gotten attention everywhere. I like Alberta. BC is incredibly hot. Anywhere in Ontario, Montreal and Quebec City is good. The Maritimes have taken off as well with their population boom. Anywhere with a growing population will need storage in the future. So it is hot across Canada. Even in places that aren’t “hot,” there’s a normal level of demand.
Do you just follow the housing market when deciding where to place self storage facilities? Are we looking at places like Kelowna and Victoria where the population is growing?
The larger companies are very sophisticated and already in the Victoria and Kelowna markets. As long as housing and population growth are strong, you’re going to do fine in the long run.
Is there a market that is up and coming?
In Metro Vancouver, the Tri-Cities are still underserved. There are not a lot of storage options around Port Moody and Pitt Meadows. Chilliwack is always a strong market but there are new facilities planned. Delta also has a lot of unfulfilled demand and so does Tsawassen.
Outside of Metro Vancouver, Kelowna is pretty set. Vernon and Penticton just got new facilities. We’re going through a building boom, which we get every 5-10 years. If you want to build, you’ll have to go to small communities that are growing, like Fernie. I know someone in Fernie who is trying to sell their facility.
You have to make sure someone hasn’t beaten you to the punch or else it’s going to be a bad day.
What would that self storage facility in Fernie cost?
$4.6 million would do the deal!
What advice do you have for someone who wants to get involved in self storage?
Hire the right experts and listen to them.
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