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Is Self-Storage a Good Investment in Phoenix?

May 3, 2021

Self-Storage Units in a row

In Examining the Intersection of Commercial and Residential Real Estate, we briefly discussed the surge in the self-storage market in Greater Phoenix. The Valley took the number-five spot in the country in 2020 based on investment volume, according to Multi-Housing News—more than 1.17 million SF changed hands for $126.4 million. STORAGECafé projects that the combined Phoenix, Mesa, and Chandler metro area will add another 1.5 million SF in 2021. STORAGECafé also found that 2020 saw a 2.2% rise in street rates, compared to the flat performance during the previous three years.

Clearly, it’s a hot market, fueled by Arizona’s nation-leading population growth rate. A wave of new residents is the primary cause of demand for new storage areas during the migration process—you’ve surely noticed new locations popping up all over the Phoenix area. A second aspect is the trend of adult children between 18-34 living at home—52% as of the most recent statistics—who need space assuming mom and dad don’t have a place to store everything until they move back out on their own. Finally, as the boomers age and move into smaller homes, rental properties, or assisted living facilities, that also portends potential demand in storage properties.

The Advantages of Self Storage as an Investment Asset Class

Self-storage real estate has earned a reputation for solid cash flow and income potential with comparatively little overhead, construction costs, and operational requirements. During times of strong demand, property owners have leverage on rental increases, and month-to-month leases simplify bookkeeping. Plus, as anyone who’s had to manage tenants knows, stored personal belongings don’t call in the middle of the night about a water leak or broken air conditioner. They’re one of the few commercial property types that can be operated part-time in many cases.

Cautionary Notes

While the self-storage boom in Phoenix may make it sound like an appealing investment, would-be buyers should also be aware of the downsides. (Conversely, if you own a self-storage property, now might be a good time to sell and get highest and best pricing!)

  • Heightened competition. Self-storage cap rates are currently the lowest in the industry’s history. Low cap rates are an indication of high values and lower risk, but unfortunately, that also translates into lower expected yield or return on investment.
  • Construction and raw land costs. Although values are high in existing properties, construction of a new self-storage facility isn’t in bargain territory either. Relative to other types of commercial assets they may be cheaper, but labor and materials costs are currently pricey—which will eat into your profitability. Location is paramount, and furthermore, developing your own property requires running the gauntlet of municipal zoning and permitting. It’s not for the faint of heart.
  • Economic uncertainty. Currently, all of the factors are going in the right direction, between a strong economy that’s drawing inmigration and fueling business growth in a virtuous circle. When the Phoenix market cools down, owning a half-vacant facility of storage units will not be quite as appealing. The danger of oversupply is not currently an issue, but it is certainly something to keep an eye on.

Thinking of Buying or Selling a Self Storage Property in Phoenix?

R.O.I. Properties represents investors, owner-occupants, lenders and fiduciaries in buying, selling and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in properties (mainstream or distressed properties), we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Arizona Receiver, Real Estate Special Commissioner/Special Master, Chapter 11 Trustee and Liquidating Agent, as well as REO broker. To put an expert advocate on your side, contact us at info@roiproperties.com or 602-319-1326.

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