The Self-Storage Investor Dilemma: REIT or Develop?
For the casual observer, the self-storage industry can seem puzzling. Why do people rent space to store their "junk"? But for savvy investors, this puzzle has a very clear answer: profound, structural demand. The need for space during life's transitions—downsizing, moving, inheriting, or expanding a business—is a constant, making self-storage one of the most resilient asset classes in real estate. The public market has taken note. Major Real Estate Investment Trusts (REITs) have driven valuations for stabilized facilities to all-time highs. But for the accredited investor, the realquestion isn't if self-storage is a good investment, but where in the value chain the greatestopportunity lies.The answer is clear: the greatest risk-adjusted returns are not in buying what the REITs own,but in building what the REITs need.
The REIT's Dilemma: Growth Requires Mature Assets
Publicly traded REITs are under constant pressure to grow their earnings per share and net asset value (NAV). To do this, they need a steady stream of fully operational, cash-flowing properties. These mature assets can be immediately accretive to their funds from operations (FFO), providing an instant boost to their portfolio.
This creates a powerful synergy. REITs excel at large-scale operations and capital markets execution. However, the slow, arduous process of ground-up development—from land acquisition to lease-up—is often misaligned with their quarterly reporting cycles. The waitfor a property to reach maturity is, in a word, unsustainable for their growth model.This is where the investor-developer steps in.
This creates a powerful synergy. REITs excel at large-scale operations and capital markets execution. However, the slow, arduous process of ground-up development—from land acquisition to lease-up—is often misaligned with their quarterly reporting cycles. The waitfor a property to reach maturity is, in a word, unsustainable for their growth model.This is where the investor-developer steps in.
The Developer's Advantage: Harvesting the "Illiquidity Premium"
The investor’s role is to act as the essential engine of the ecosystem: to develop and mature the property. This process is not for the faint of heart. It requires patience and expertise, but it is precisely these barriers to entry that create the exceptional returns.
Consider the timeline:
• Year 1: The Entitlement Maze. The single biggest hurdle is often securing zoning and local permits. This process alone can take a year or more, requiring significant upfront capital and expert navigation of municipal governments. This step weeds out unprepared players.
• Years 2-3: Construction and Lease-Up. Once shovels are in the ground, the focusshifts to efficient construction and beginning the critical process of filling the facilitywith tenants.
• Years 4-5: Stabilization and Maturity. The property reaches stabilized occupancy, proving its cash flow potential and establishing a clear NAV.
This entire journey averages five years. For many, this timeline is a deterrent. For thestrategic investor, it is the source of an "illiquidity premium." By providing the patient capitaland expertise to shepherd a project from raw land to a stabilized asset, developers arecompensated handsomely.
The proof is in the performance. Firms that have standardized this process have generatedremarkable results. For example, Joel Duncan of Direct Equity Source illustrates thepotential. Last year’s fund (2024) that invested $8 million is already at $24 million AUM, inits march toward a successful exit. The magic isn't just in the bricks and mortar; it's in arepeatable model and a powerful network that efficiently manages each stage of thecomplex development cycle. Direct Equity’s operators have completed 90 properties(assets) and have 5 more at closing with a REIT at writing. Experience is driving value inprofits. This model has proven its worth over the long term, with established funds likeTriple-A Self Storage averaging a 19% IRR, and achieving an impressive 29% IRR over thelast decade.
Consider the timeline:
• Year 1: The Entitlement Maze. The single biggest hurdle is often securing zoning and local permits. This process alone can take a year or more, requiring significant upfront capital and expert navigation of municipal governments. This step weeds out unprepared players.
• Years 2-3: Construction and Lease-Up. Once shovels are in the ground, the focusshifts to efficient construction and beginning the critical process of filling the facilitywith tenants.
• Years 4-5: Stabilization and Maturity. The property reaches stabilized occupancy, proving its cash flow potential and establishing a clear NAV.
This entire journey averages five years. For many, this timeline is a deterrent. For thestrategic investor, it is the source of an "illiquidity premium." By providing the patient capitaland expertise to shepherd a project from raw land to a stabilized asset, developers arecompensated handsomely.
The proof is in the performance. Firms that have standardized this process have generatedremarkable results. For example, Joel Duncan of Direct Equity Source illustrates thepotential. Last year’s fund (2024) that invested $8 million is already at $24 million AUM, inits march toward a successful exit. The magic isn't just in the bricks and mortar; it's in arepeatable model and a powerful network that efficiently manages each stage of thecomplex development cycle. Direct Equity’s operators have completed 90 properties(assets) and have 5 more at closing with a REIT at writing. Experience is driving value inprofits. This model has proven its worth over the long term, with established funds likeTriple-A Self Storage averaging a 19% IRR, and achieving an impressive 29% IRR over thelast decade.
The Inevitable Exit: A Built-in Buyer
The upside for the developer is crystal clear: the REITs need what you build. Once a property is mature and cash-flowing, it becomes a highly sought-after commodity for majorREITs looking for guaranteed yield and immediate NAV accretion. This creates a predictable and competitive exit environment, turning years of patience into a substantial capital event.
What Does It Take to Succeed?
This model, while powerful, is not a passive investment. It requires a partner with a specific skill set:
1. Proven Expertise: A track record of taking projects from land acquisition through to a successful sale is non-negotiable. Look for a team that has navigated the entire cycle, not just one part of it.
2. Local Knowledge: Zoning battles are won with deep community and municipal relationships. This is perhaps the most critical and underestimated component.
3. Operational Discipline: Building the facility is only half the battle. Efficientlymanaging the lease-up and stabilization phase is what maximizes final value.
4. Patience and Alignment: Your capital partner must be structured for the long term,with incentives fully aligned with investors through the entire five-year journey.
The current environment, where demand for storage space remains strong and REITs areeager acquirers, may not last forever. The window of opportunity for this specific strategy isopen now for those with the capital, patience, and the right partner to execute.
For the accredited investor looking to move beyond crowded public markets, theopportunity in self-storage development is clear: embrace the complexity, harvest theilliquidity premium, and become the essential supplier to the industry's largest buyers.
1. Proven Expertise: A track record of taking projects from land acquisition through to a successful sale is non-negotiable. Look for a team that has navigated the entire cycle, not just one part of it.
2. Local Knowledge: Zoning battles are won with deep community and municipal relationships. This is perhaps the most critical and underestimated component.
3. Operational Discipline: Building the facility is only half the battle. Efficientlymanaging the lease-up and stabilization phase is what maximizes final value.
4. Patience and Alignment: Your capital partner must be structured for the long term,with incentives fully aligned with investors through the entire five-year journey.
The current environment, where demand for storage space remains strong and REITs areeager acquirers, may not last forever. The window of opportunity for this specific strategy isopen now for those with the capital, patience, and the right partner to execute.
For the accredited investor looking to move beyond crowded public markets, theopportunity in self-storage development is clear: embrace the complexity, harvest theilliquidity premium, and become the essential supplier to the industry's largest buyers.
Securities offered through our partners are only suitable for Accredited Investors, who are familiar with and willing to accept the high risk associated with private investments. Prospective investors should not construe the contents of this website as legal, tax, investment or other advice. All prospective investors are strongly advised to consult with their own tax, legal and financial advisors.