The last time we had a major recession in the U.S. was the same year that the Toyota Corolla was the top-selling car and “Umbrella” was the top song: 2007. That was 13 years ago. Since that time, many investors became complacent and spoiled by an economy that was always going up. Then came the Covid-19 pandemic and everything changed.
Covid-19 has been like a stress test for the storage industry – the medical test that determines the condition of your body based on putting extreme strain on it. A successful stress test determines that your body is in good working order, and an unsuccessful one lands you in the hospital needing immediate angioplasty. And Covid-19 has done just that to many self-storage markets: it has proven that they cannot succeed in times of recession.
What makes some self-storage markets weak?
The markets that have crashed during Covid-19 for storage investors have similar characteristics. First, they are in areas that had an extreme number of “non-essential” employers, such as Las Vegas. Second, they had massive oversupply going into the pandemic, and Covid-19 was just the straw that broke the camel's back when there were already problems starting to surface from too much storage construction. Finally, these are the same markets that were considered “hot” back in February – markets that everyone loved and were buying at low cap rates and building with abandon. Markets like Austin, Texas and Parker, Colorado.
How can you spot these markets?
It’s pretty simple. Think about markets that rely on the non-essential industries of tourism and entertainment. Then overlay on top of that markets that the “experts” thought were ripe for aggressive development and acquisition in 2019, such as those shown in this article. When these articles were written, Covid-19 was not even a risk on the radar screen. But when you match high levels of storage construction and acquisition with employment bases that have little to do with essential jobs, the result is sheer catastrophe.
How can you protect yourself from weak markets?
The good news is that you may not have purchased a self-storage facility yet. If that’s the case, you now have been spared making a bad investment in a market that has little future – the ones that failed the stress test. And it is now more apparent than ever that storage is not an investment that goes up perpetually but is subject to gravity and that market selection and being a smart shopper, in the end, are essential traits that are a big part of success. The lesson learned is that you should never run with the herd and invest in markets just because others tell you to. Instead, do your own research and make your own decisions independent of the “experts” who write articles such as this. It’s a safe bet that those who read this article and bought in Las Vegas are probably upside down on their mortgage now. If you look back through our past articles, you will also see that we predicted a collapse in these markets months ago.
Covid-19 spared many self-storage investors from making huge financial mistakes. It put a stress test on markets that gave real-life results to what had only formerly been considered “bulletproof” economies that have now crashed. In many ways, the pandemic will be looked back on as a positive step for self-storage investing as it gave visibility to what was impossible to predict accurately before.
For more truthful information on how to identify, evaluate, negotiate, perform due diligence on, re-negotiate, turn-around and operate storage facilities, then consider our Self-Storage Investing Home Study Course.