In the previous article, we explored the use of self-storage as a solution to the vacancy problem of knowledge industry centers, which has recently emerged as a social issue. In particular, we discussed how well knowledge industry centers and self-storage can match from three perspectives: location conditions, convenience of use, and profitability. In this article, we will look at self-storage from the perspective of real estate development and investment. After examining cases from developed countries where self-storage has evolved, we will consider the possibilities in the domestic market.

<Japan Quraz Trunk Room / Source: Quraz>

Growth Ecosystem of Self-Storage in the United States

If we look at the United States, the birthplace of self-storage, there are approximately 52,000 storage facilities operating, which is more than the combined number of Starbucks, McDonald's, Dunkin' Donuts, and Wendy's. The average facility area also boasts a considerable scale, reaching about 2,000 to 3,000 pyeong.

With a penetration rate of 10%, or 1 in 10 households using self-storage, it has become popular enough that facilities are built by a diverse range of entities, not just professional corporations but also individuals. Just as retirees in our country once opened chicken shops, many retirees in the U.S. buy land in quiet areas and build self-storage facilities to secure their retirement.

When creating self-storage facilities, two main forms are used. One is an opportunistic strategy to remodel existing buildings in urban areas into self-storage, and the other is development, which involves purchasing land in surrounding areas and constructing buildings.

A representative case of remodeling a building in the city is Manhattan Mini Storage. Established in 1978, this company is based in Manhattan, New York, where land prices are the highest in the world, owning 18 facilities. They have successfully utilized creative marketing strategies and, with successful operations, were acquired by Storage Mart for over $3 billion in 2021.

Contrary to what the name suggests, the deal sizes are not 'mini'. When they acquired the buildings, the property values were not low, but they appear to have maximized the nuances of operation, similar to dynamic pricing, achieving successful real estate operations.

When I visited a facility in New York's East Village, I was impressed by how many loading docks were created so that cargo trucks could access the facility right in the city center. Some people occasionally ask if self-storage can only operate in rural areas, but this reflects a lack of understanding of the characteristics of the business. Our company is currently operating 80 sites in the mega-city of Seoul.

<Manhattan Mini Storage / Source: Manhattan Mini Storage>

The development of self-storage, which involves purchasing empty land and constructing buildings, is also undertaken by medium to large corporations and individuals. It targets the areas surrounding urban centers rather than the city itself, and it can be astonishing to see the extensive empty lots where self-storage is being developed.

This is understandable since such locations primarily accommodate goods rather than people, so there’s no need to build on expensive land with a high foot traffic. This distinguishes the self-storage sector from residential or office spaces.

Moreover, even though self-storage development in the U.S. is in a matured market, it remains an active sector in the long term. Although we need to look at this year's data, construction spending on self-storage in the U.S. has steadily increased from the early 2000s until last year, and has shown an even steeper rise since the pandemic.

<U.S. Self-Storage Construction Spending / Source: US Census Bureau>

Second, there are lower construction costs. Similarly, since self-storage is not a place where people stay, the construction costs are significantly lower compared to other real estate sectors that require extensive interior design and finishing materials. While residential construction costs in the U.S. range from $1,080 to $2,160 per square meter, self-storage costs only about $270 to $810, making it less than 50% of these costs.

If one is confident in operations, they can cover interest costs with affordable land and construction expenses while also capturing real estate investment returns.

<Self-storage Development Cases in Manhattan's Suburbs / Source: Second Syndrome>

If real estate investment returns are taken into account, self-storage facilities that have been developed need to be sold— but who will buy them? This is where the interesting aspect of the self-storage ecosystem comes in. Self-storage is essentially a locally-based business. Just as large corporations in our country may own significant real estate assets, but cannot own every piece of land, the self-storage sector cannot be monopolized by a few companies, making it fragmented.

Consequently, capital-rich players tend to accumulate developed self-storage facilities one by one. Therefore, M&A activity in the self-storage industry occurs very frequently. The acquirers are sometimes self-storage companies, but also include insurance companies, pension funds, private equity, and REITs.

All are giants in the capital market that seek stable returns. For instance, in the U.S. REIT sector, the proportion of self-storage is about 8%, similar to that of data centers, indicating that it is already a validated sector.

<Self-Storage Market Share in the U.S. by Area / Source: Extra Space Storage>

Activation of Real Estate REITs

Another critical topic when discussing self-storage is REITs. In the chart, Public Storage, Extra Space Storage, CubeSmart, and National Storage are noted as the four major publicly traded self-storage REITs. It is noteworthy that these publicly traded REITs are showing higher returns compared to traditional real estate assets such as residences or offices. Because of these high returns, dividends are also quite generous. Over the past year, these REITs have recorded annual dividend yields of 3.56%, 3.93%, 4.20%, and 5.17% respectively.

The scales of these REITs are also tremendous. For instance, the largest REIT, Public Storage, has a market capitalization of $58 billion, which translates to over 81 trillion won, putting it fourth in the KOSPI index if brought into that market. Last year, its revenue was $4.5 billion, with an operating profit of $2.3 billion, resulting in an operating margin of over 50%. Remarkably, the NOI margin on a same-store basis is 78%, indicating that such figures are achievable due to operating over 3,300 facilities.

Moreover, interestingly, these REITs are not only REITs but also developers, asset management firms, and operators directly managing self-storage facilities themselves. Most have transitioned from merely engaging in real estate investment and development to directly handling operations, or have internalized operational functions by acquiring specialized operating companies.

The structure of Prop-co & Op-co, which has recently gained popularity in the overseas real estate market for real estate investments, can also be viewed as being extended into REITs.

 < U.S. REIT Real Estate Sector Yield Rankings / Source: Extra Space Storage>

Current Status of Self-Storage Development in Japan

Leaving behind the flashy U.S. market, let’s turn our attention to Japan, which benchmarks Korea. In Japan, there are both self-storage facilities occupying a room or a floor in franchise form and those operating as entire buildings. Moreover, among about 15,000 self-storage facilities, approximately 8,000 are classified as outdoor facilities, primarily in container types. In major urban areas, floor-level facilities have emerged, building units in urban outskirts, and outdoor facilities are established in the suburbs.

Last October, I visited Japan as part of a meeting schedule with Japanese companies, and while walking through the streets of the city, I encountered various types of self-storage facilities. In Korea, you might see a self-storage unit on the first floor of a three-story commercial-residential building, or 10-story buildings prominently advertising their services.

Recently, development's share of self-storage in Japan has been steadily increasing. Development began with large companies like Quraz, established in 2001, and thanks to successful results, Quraz was fully acquired by Evergreen Real Estate Partners in 2013.

Since about five years ago, small and medium-sized developers have entered the self-storage development market and are currently very actively leading the market. While they may not have the capital strength of publicly listed REITs like in the U.S., they typically use project finance loans for implementation and manage operations post-completion. Some retain certain assets while targeting capital gains directly, while others liquidate through sales.

Recently, self-storage development has gained a very stable presence in Japan through land acquisition agreements from pension funds, insurance companies, or global self-storage companies even at the land acquisition stage. 

<Classification method of self-storage facilities by Japan's Arealink / Source: Arealink>

Arealink, which operates Japan’s leading self-storage service Hello Storage, is a real estate business company established in 1995. Arealink is developing a revenue generation model through direct investment based on the recognition of Hello Storage, which is number one in Japan.

Storage Mini, which started in 2022, is redeveloping a three-story building with a land area of about 100 pyeong into a facility optimized for storage, and is steadily expanding, focusing on areas outside the metropolitan area with a population of over 100,000. Thus far, it has been confirmed to have sold nine locations along with the land to investors, generating additional development revenue.

A notable aspect of self-storage development in Japan is that cases of remodeling entire buildings, whether small buildings or large commercial properties into self-storage facilities are very common. This appears to be a strategy to enhance the value of real estate assets while covering leverage costs with operating revenues. Such facilities demonstrate that self-storage in Japan is establishing itself as a domain of real estate development beyond mere goods storage services.

Additionally, major Japanese corporations that have grown through real estate development, such as Mitsubishi, are planning to develop smaller plots of land into self-storage facilities as their residence and office developments reach saturation. Our company, as a specialized operator equipped with automation technology, is in continuous discussions with these companies, so we may soon see the mini-storage brand of 'Darac' signboards in Japan.

<Self-storage facility remodeled from a residential building in Japan / Source: Storage King>

Possibilities of Self-Storage Development Projects in Korea

As previously discussed, self-storage is being utilized as a means to maximize real estate value in both the U.S. and Japan. In particular, it can be noted that partners such as REITs and asset management companies are helping to reduce financing burdens.

Darac, which leads the domestic market, is also transforming entire buildings into self-storage facilities to enhance real estate value. The Darac Bucheon Station, located in the station area, has converted a five-story building and the Darac Geoje Station has converted a two-story standalone building that was formerly a model house into self-storage while recording high profitability. These are cases where buildings that faced challenges in attracting tenants or lost potential uses in a bad retail real estate market have transformed back into income-generating real estate.

<Mini-storage Darac Bucheon Station, Geoje Station / Source: Second Syndrome>

Furthermore, Darac is preparing for more significant development projects. We are currently conducting expected revenue projections and planning designs for developing self-storage on a site exceeding 1,000 pyeong in the outskirts of Seoul.

The reason Darac can operate relatively larger facilities is because it can absorb existing demands with over 140 actively expanding branches, and because it is the only operator in Korea with an automated platform. Serious discussions with various asset management firms and overseas LPs interested in investing in domestic real estate are expected to begin soon.

<Self-storage planning and design / Source: Second Syndrome>

One good news is that in June this year, the Ministry of Land, Infrastructure, and Transport announced measures to activate REITs for increasing national income and advancing the real estate industry. The announcement states that REIT investment targets will be expanded to various fields with future growth potential, such as healthcare and data centers. Currently, REITs can only invest in specific assets listed in the real estate investment company law, but now various approved assets by the Ministry of Land can be invested in.

This could open the way for the approximately 98 trillion won of domestic REIT assets to be directed toward self-storage investments.

Additionally, not long ago, the National Pension Service, one of the world's three largest pension funds, announced plans for selecting a domestic real estate investment management company, including self-storage as a New Business in a real estate investment fund worth 750 billion won. As self-storage solidifies its position as a legitimate sector in the domestic real estate landscape, it is expected that self-storage projects under opportunistic strategies or real estate development will accelerate.

<Current status of domestic REIT assets concentrated in residential and office sectors / Source : Ministry of Land, Infrastructure, and Transport>

The domestic real estate market has experienced a decline, predominantly in the retail sector, and recently, even the once stable office market is witnessing rising vacancy rates. Logistics centers are now experiencing oversupply, with data centers and healthcare emerging as alternative sectors. This mirrors trends in U.S. and Japanese markets, suggesting that self-storage might be next in line.

Relatively, Korea's history in self-storage began only in 2017; however, the prerequisites for self-storage, such as urbanization, aging population, and rising income levels, are already reaching competitive levels with the Japanese market.

Thus far, we have examined how self-storage is expanding through overseas examples. We should pay attention to how self-storage is emerging as a sector, driven by government efforts such as those from the Ministry of Land and actions from institutional investors like the National Pension Service.

Moreover, with growing interest from overseas investors in domestic real estate, it is predicted that buildings similar to Japan's Quraz will be developed in Korea soon. It will also be interesting to see which operators will lead the market.