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Investments Self-storage units become a specialty investment

Practically everybody has a horror story about investments in the stock market. Everyone has probably met more than their share of ex-millionaires lately.

If volatility in recent trading markets has the public spooked, or worse yet, investors have had to endure a “painful lesson,” it may be time to examine some reasonable alternatives , specifically, investment in commercial real estate.

Today, San Diego’s real estate holdings remain strong even in a weak economy. This is in stark contrast to the events of 10 years ago when the U.S. economy experienced a recession. Real estate, and commercial real estate in particular, hit the skids. Rents were low, vacancy rates and interest rates were high and it took years for the market to recover.

Presently the local real estate market is much better equipped to handle downturns in the economy. A broad base of “clean” high-tech industry, particularly in the North County, a significant demand for residential housing and a change in personal investment patterns have contributed to this stability.

The investor seeking to diversify his or her portfolio by investing in real estate typically looks at office, retail and residential properties , including single and multi-family , or the management of a portfolio involving securities including mortgages and real estate investment trusts (REIT).

Real estate has a tangible quality to it and it is for this reason that many investors, particularly those soured by the volatility of other markets, have turned to it as means to build equity, achieve a decent rate of return and seek shelter from taxes.

Still, many investors are turned off by real estate because they do not have the time or inclination to become landlords and property managers.

However, with a little guidance, a passive investor can achieve the benefits listed above, without engaging in a full-time career in real estate.


– Storage Demand Fairly Consistent

Here are some facts regarding self-storage units. On average, a facility with stabilized occupancy will experience a 100 percent turnover during the year, losing 8 to 9 percent of its tenants each month. The upside is that the facility will gain new tenants to fill those vacancies at about the same rate.

Often, self-storage developers and operators use the total population in a five-mile radius from the proposed site to determine market need. Population estimates for a five-mile radius are usually multiplied by a factor of seven square feet per capita to arrive at the market area demand.

Interestingly enough, storage demand remains fairly consistent whether the residential real estate market is strong or depressed. A strong residential real estate market, and ensuing higher prices, support storage space demand due to increased sales transactions (temporary storage) as property owners trade in on equity.

Similarly, many homeowners question the wisdom storing belongings at $2 to $10 per foot at home when comparable external storage rates are slightly over a dollar. The same logic holds true when the residential market is soft and people are on the move.

A full 65 percent of our business comes from residential needs with commercial business accounting for the remaining 35 percent of revenues. Unlike residential users, commercial accounts tend to lease for longer periods of time.

Another significant factor to consider is that a well-managed self-storage unit is in a class by itself when it comes to occupancy rates versus the financial breakeven point. Experience shows that self-storage units can manage to operate even at a low 50 to 60 percent occupancy rate.


– Investor Preference

Essentially there are two philosophies when it comes to developing self-storage units: “build and hold” or “build and flip.” The choice really depends upon your overall long-term investment strategy.

However, based on experience, a well-located, quality self-storage facility is one of the best real-estate deals going and definitely worth holding on to for the long term.

The average rate of return to investors from REITs in the self-storage industry runs somewhere between 9 and 11 percent. Privately funded/owned projects are stronger performers, if managed well.

A mature property can achieve a rate of return from 14 to 16 percent. The key is to conduct extensive due diligence regarding location, demand, competition, construction and management.

Whether you build a new facility or invest in an existing one, mini-storage makes for a good, solid investment. Though the turnover is greater than that of residential rentals, the overall wear and tear is less , with good management and marketing playing a key role in mitigating this factor.

For typically market heavy portfolios, a venture into this unique form of commercial real estate can help diversify holdings and offset sudden downturns in the market.

Marquardt is president of Marquardt Development Companies, a Rancho Santa Fe-based developer specializing in the planning, site evaluation, construction and management of self-storage units.

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