Self Storage Tips from a Banker
I work at a Big 4 bank in their Commercial Real Estate group, and have financed multiple self storage facilities. A couple things I’ve learned:

- SS is a very cyclical business. Many “mom and pop” SS facilities offer short term (month to month) leases which can add volatility to cash flow. Summer months tend to be slow, while winter months tend to see better occupancy. More institutional, large scale SS companies do the best they can to sign 1 year leases to avoid this.
- SS is dependent on macroeconomics. When times are good, people begin establishing households, moving, buying things, etc. to where they need more space. It may seem like an over-generality, but it’s true. We financed a Canadian SS portfolio where SS assets in Toronto and Vancouver were thriving, but assets in Edmonton are lagging. Edmonton, in Alberta, is in the midst of a recovery from an oil-related downturn.
- There is serious potential for ancillary income outside of traditional storage units. We see SS facilities renting out parking spaces (think for storing a boat), having PO Boxes (takes up 0 sf, minimal cost), and make a killing on selling insurance (people are willing to pay X amount for peace of mind their belongings are insured), selling boxes, etc.
- Market rents are inefficient. SS is becoming a more institutionalized industry, which is helping improve this pricing inefficiency. Mom and pop type owners usually aren’t using dynamic pricing models based on competition, which can hurt them. Always know what your competition is renting at and adjust accordingly.

Please ask away!
[{"id": "ey4gsax", "text": "What are the top things you\u2019re typically looking for in underwriting? What valuations are you typically seeing things trade at?", "replies": [{"id": "ey5sdg5", "text": "Location- Access to highways, visibility. \n\nDemographics- Local population, population growth- I like seeing a transient customer base. So, seeing nearby colleges, military bases are great. \n\nTechnology- Climate Controlled Units, surveillance, key card access, ease of use in terms of making online payments basically be a property that was designed for the 21st century. \n\nLastly, the sponsor, manager. Self Storage is more of a operating business like hotels than real estate. So, the manager and the sponsor is critical.", "replies": [{"id": "ey5sode", "text": "OK, this is great info. I\u2019m currently evaluating a deal (as an LP) and it seems like it\u2019s checking all the boxes.\n\nIf experienced management is put in place, would that be acceptable or are you looking for owner/operators?", "replies": [{"id": "ey5srmj", "text": "Experienced management is fantastic, especially if they have a good track record of leasing up units.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ey72s7f", "text": "Sponsor is top. The biggest value added we see is through dynamic pricing models. Mom and pop owners do not use such models, while institutional owners do. Similar to Multifamily dynamic pricing models in which prices constantly adapt to the market (i.e. a specified comp set, seasonality). \n\nAt cliche as it is, location is critical. Location needs to be convenient to the customer (i.e. close to home). \n\nWe see most trades at 6.5-7.5% cap. Have seen portfolios trade as low at 5.5% due to added portfolio premium. I would say a standard  self storage cap is 7%.", "replies": [{"id": "ey72y7w", "text": "Ok that makes a ton of sense. Thanks!\n\nSo, 5.5% caps I\u2019m guessing have a great location, dynamic pricing, all the other things you mentioned + some additional high margin revenue streams: insurance, boxes, trucks, etc.?", "replies": [{"id": "ey742zd", "text": "Urban units (or portfolios) could trade at 5.5% caps. Portfolios almost always add value to a sale, assemblage of a portfolio is lengthy and expensive.\n\nHowever, the bulk of units are not urban, they are near households. These are your common 6.5-7.5% caps.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ey4h2oq", "text": "I thought ss was counter cyclical? People seem less likely to throw stuff out even if they lose their home. More divorces = more self storage?", "replies": [{"id": "ey4kc9i", "text": "As well as downsizing home = more self storage?", "replies": [], "depth": 2}, {"id": "ey4z4xq", "text": "Yeah op is off on that one. Self storage demand is almost exclusively dependent on location and competition.  I appraised several portfolios of self storage facilities throughout the US in 2010 and they were doing great. The product type hadn't really been accepted by institutional investors at that point yet so yields were relatively high, but rents and occupancies were doing very well and hadn't been affected by the downturn.", "replies": [{"id": "ey73voo", "text": "Seasonality would be a better word. Not discounting your experience but I\u2019d disagree. Think of how disposable a self storage unit is, and their typical short term leases. What is easiest to get rid of when a household is tight on money? The $200/mo storage unit that they spent 0% of their lives in, and could easily live without. Extra storage is an added convenience and nice-to-have, not a necessity. That\u2019s my thought process.", "replies": [], "depth": 3}], "depth": 2}, {"id": "ey5897p", "text": "OP is talking about annual cycles (in same the way retail sales, home sales, and apartment leasing have \"busy seasons\" and \"off seasons\"), you're talking about economic cycles...", "replies": [{"id": "ey675ot", "text": "In that case, it would have been better to use the word \"seasonal\". \n\n\"Cyclical\" exclusively refers to the economic cycle.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ey4kr3i", "text": "Institutional money is in everything now. Too much liquidity out there.\n\nYes, SS can be a cash cow! Much like owning the land under a trailer park.", "replies": [{"id": "ey58eba", "text": "SS was one of the few property types that saw growth through the great recession.  Ever since that the industry has absolutely blown up.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ey4nkch", "text": "Keep in mind self storage has become more tech centric to the point that some of the reits are tech companies  first. They understand digital marketing, google ad words and SEO. You want to have good online exposure and be on the first page of google when people google for self storage in your area. This is where companies like Cube Smart has an edge over mom &amp; pop places. And of course visbility and access from the highways are critical as well. And with self storage becoming more institutionalized, the product type and analysis that goes with it has become more sophisticated. For example, a market is considered to be at equilibrium when there is about 5 SF of storage per person. So if your market has less than that, it is underserved. You can look at your market in terms of a 3 or 5 mile radius.", "replies": [], "depth": 1}, {"id": "ey5n9h8", "text": "Any tips on how I can shop around for a mortgage on a property after construction is complete? We have construction financing with a private lending firm and once complete we will be looking for a mortgage at a bank. Located in Alberta, Canada", "replies": [{"id": "ey5rdn1", "text": "Is the property stabilized/leased up? What is the loan amount that will be required to take out the construction loan?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ey61ydv", "text": "What sort of site work are you seeing (is the lot paved with concrete, asphault, or just gravel)?  What are the lending red flags you see in this area?  What sort of loan to value are you selling?  What common metrics are you seeing (as I've heard that most are profitable at about 40% occupancy, and total expenses are usually about 30-33% of the total rent roll, and that lenders typically use 85% occupancy in their projections)?\n\nDo you just do loans on existing facilities?  Or are you doing development loans as well?  Who is getting loans in this area (individuals, local companies, regional players, national players/REITS)?  \n\nWhat do you ask for in your loan application process?  Do you want to see feasibility studies, lots of equity (and do you care if it is from investors or the main owner/developer), etc?\n\nWhat sort of cap rates are you seeing in your area?", "replies": [{"id": "ey75lfq", "text": "We predominantly see our institutional customers (national companies, REITS) buying up mom and pop type facilities. Construction loans on self storage facilities aren\u2019t an easy sell, though there is a market for them with smaller local banks. \n\nThe most common transactions are portfolios. Portfolios (obviously) diversify cash flows and reduce exposure and risk to numerous factors. A well performing portfolio can get 65-70% LTV. Single asset transactions more around 60%. Common cap rates are 6.5-7.5%\n\nUnderwritten vacancies are commonly 15-20%. The most efficient, scaled portfolios have had expense ratios of ~30%. Poorly managed assets can have expense ratios of 45-50%. From my experience, we try to underwrite expenses to 35%.\n\nCash equity in a transaction will ALWAYS be critical to a banks getting comfortable. Skin in the game. The number one  downside protection mechanisms real estate loans have are cash sweeps, which essentially prohibits investors from taking equity out via distributions.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ey9adip", "text": "Id have to challenge that idea on Winter vs Summer. Late Spring/Summer (unless in a counter location like Phoenix, AZ where Summer may be oppressively hot) is almost always your busiest time of the year for lease up. Source: I currently monitor lease-up and other factors on a portfolio of 15 new gen facilities and roughly 35 older gen assets all over the country.", "replies": [], "depth": 1}, {"id": "fc9mqbk", "text": "Demand for SS definitely ebbs and flows with seasons. As a result, it is important to keep an eye on prices. Some facilities will drop their prices during the winter slow season. Websites like [Storloft.ca](https://Storloft.ca) help consumers search for the lowest price.", "replies": [], "depth": 1}]