REAL ESTATE SYNDICATIONS - THE WHAT AND THE WHY
Hi, it's Kris Benson from Reliant Real Estate. Welcome to video number 7 in our real estate investing educational series. Today, we're going to be talking about why we think you should invest in self-storage. And we will walk you through 3 specific reasons on why it should be a part of your investment portfolio. So obviously, I'm a bit biased. Reliant is a commercial self-storage operator, so that's what we do and it's near and dear to my heart. But, I want to share with you the reasons why we like self-storage as an asset class.
And, I think some things that you can look for and it will translate, no matter what type of investing you're looking to do. So, let's get started with a few statistics on self storage, and then I'm going to give you essentially the three pillars on why self-storage investing is, I think, a critical part of any good real estate investing portfolio. So first some statistics on self-storage. In 2018, it looks like there's going to be just over 45,000 self-storage facilities in the United States. To give that some scale - that's more than McDonald's and Starbucks combined.
Self-storage has really changed from an industry where, if you remember in the late 80s, early 90s, where a self-storage facility was usually in a gravel parking lot behind somebody's house, and you'd have somebody come out of the house when you rent a unit in a stained white T with some spaghetti sauce on the front, renting you self-storage unit.
And so, it's come a long way. It's become a commercial asset class, just like multifamily has, office and retail. And I think there's a lot of reasons for that. But, the scale has grown. And one thing to consider just from an investment standpoint, we get this question a lot is, have we missed the boat? Is it too late?
And I think, with self-storage, our biggest risk right now is new supply coming to market. In 2017 and 2018, both were record-breaking years for new development in the self-storage asset class. So, they had more net new rentable square feet delivered than in the history of the asset class. So, you really have to be thoughtful as to why and where you're investing. But I think what makes storage interesting versus maybe some other asset classes is it's very micro- market specific.
So, typically we find about 70% of our tenants come in that 3 to 5 mile radius. So, you really have to understand what's going on in the micro-market around your facility. And I'll give you an example of one of the things we do during our underwriting process. We look at the 1, 3 and 5 mile radius and then the current tenants who are at that facility, we map them to see where they come from.
And interestingly, there is all kinds of manmade barriers that get created where tenants don't want to drive past. You know, sometimes it may be a highway overpass, you know, it could be a railroad track, literally. And there's not a reason that they don't come. It's just - it's how it works.
And so, what you need to understand is, from an underwriting standpoint, if a new development comes into your market, it's where that new development is and how it's going to impact the current tenant base that you currently have. So, it's really critical as you look at self-storage as investors and for us every day to understand what's happening on the ground, to make sure that we're putting ourselves in a good position to be successful.
So, with that being said, I'm going to throw up a slide behind me on the 3 reasons that I think self-storage makes the most sense for us and for you as an investor why I think it'd be a good addition to any real estate investment portfolio. And, the first one, and you'll hear this theme, as we've talked about in previous videos, but it's the returns. There's a link in the slide that you can see behind us with a link to a data set from the National Association of REITs.
And what that data is, it's a website that tracks all of the publicly traded REITs by asset and sub-asset class. And it's through the last 25 years. So you can see a really nice snapshot of the historical performance of any real estate asset class. If you look at that data specifically for self-storage, in the last 25 years, self-storage has performed at just under 17% a year, which is incredible.
And to give you some perspective, apartments or commercial multifamily did just under 13%. Retail did just about 12% and office, just a little bit over 12% in that same time period. And if you compare that to the equities market, let's use the S&P 500 just as a market index. The S&P 500, in that same 25-year period, did just over 7%. So, it outperformed the equities market significantly and even some of the other asset classes quite well. So, I think from a return standpoint, storage did fantastic. You know, the second part of the question that you should ask is, and that's this - OK, well, what happened in the last market recession? So, we looked at that same data set from 2007 through 2009 to see how storage did. And storage, from those 3 years, lost less than 4% of the market value versus apartments, which lost just under 7%.
Retail was down over 12. Office was down about 8% and the S&P 500, which many of you know during that 2007, 08 and 09 period, was down negative 21%. So, it's interesting. Storage seems to be an inelastic demand curve even when the market downturns take place. And I think that comes from, you know, as Americans downsize, they don't get rid of their stuff. And, it could be a hope for a better day.
So, when I'm going to buy a house again, I need to have this stuff available for me, or it just could be American materialism. And, we don't seem to think that that trend is going to change even as millennials start to come into that more consumerism age. So, you know, the first 2 things: returns outperformed almost every asset class, certainly the stock market. Second, we had recession resilience. So in 2007, 08, 09, lost less than 4%. And then the third pillar of why we really like self-storage is the market consolidation opportunity. So, if you look at the national data, there are 6 publicly traded companies that own about 25% of the self-storage marketplace. So, companies that you probably recognize. There are 5 self-storage REITs. So Extra Space, Public Storage, CubeSmart.
And then, there's a 6th publicly-traded company, which I know many of us know as U-Haul. Most people know it from the moving trucks. They also have a storage division. So, those 6 publicly-traded companies own about 25% of the storage market. The rest of the market is all over the board. So you have, mom and pop operators, who maybe have 1 store or 2 stores and they built it up over the years.
And then you have regional operators like Reliant who have, we have 47 properties, but may have a portfolio of properties. And what this means is, there's an opportunity for a sophisticated operator to come in and essentially consolidate the market and create revenue opportunities in facilities that are being under managed. Then I'm going to give you a quick example of that. So, in our most recent fund that we've launched to our investor base, there's a property in Tampa that we're purchasing that was built by the original owner or is currently owned by the original owner.
He built it in the early 90s and has built it up since then. It's an incredible facility. He's done a fantastic job. But to be honest, you know, he's had some challenges running it as a business. And for example, he's never had a rent rate increase on a tenant who's been with him from the beginning.
So your rate gets grandfathered year to year. Now he has multiple rates. So, if I'm renting a 10 x 10 unit today, I'm paying much more than somebody who rented a 10 x 10 unit, 10 years ago. But, the person 10 years ago still hasn't had any rental rate increases.
So, we look at those opportunities as really strong revenue growth potential for us. And they still exist in self-storage in a variety of different places where, some of the other asset classes, multifamily, etc, has had significant institutional capital injected into it. And so, some of those opportunities have dried up in storage. There's still a huge consolidation opportunity for us as a company. So again, 3 reasons on self-storage. We got: returns, we have the recession resilience and then we have the market consolidation opportunity.
And, that's all we had for the video today. I wanted to give you a sense - a little bit more information about self-storage. Why we think it's a great investment. Our last video in this set is going to be a little bit more about our company, Reliant, so you can learn from our perspective what we believe makes us a great operator and why we think there's some good opportunities to partner with us in the future. So, thanks for watching this video and we'll see at the next one.