Small And Large Buyers Of Self-Storage Are Now On Equal Footing

Traditionally, larger buyers of self-storage facilities always viewed themselves as having an edge when it came to lending and negotiating. They thought they could get lower interest rates and better terms than smaller buyers and use that as a weapon against them. However, the Covid-19 changes to the self-storage industry have rendered a new era in which the big companies have no advantage over the small.

The “Great Re-Shuffling” Impact

Zillow.com coined the phrase “The Great Re-Shuffling” recently to describe the post-Covid impact of millions of households moving from urban markets to suburbs and exurbs (those towns beyond the suburbs). This is causing severe damage to the larger storage owners who invested in urban markets and are now watching their customers leaving in droves – which is already creating environments of widespread occupancy decreases and rent declines. Meanwhile, smaller storage owners who have always focused on suburbs and exurbs are seeing a spike in demand and rates.

Systematic Over-Building by Large Players Finally Comes Home to Roost

Larger self-storage owners have been on a wild building spree for the past several years, having added around 2 billion square feet of storage space to urban markets just in time for the Covid-19 pandemic, urban unrest and the “Great Re-Shuffling”. These obligations are like an anchor that larger operators will have to carry around for a long time (perhaps forever). As a result, smaller operators are free from this investment baggage that larger operators will suffer under and reduce their ability to buy.

The Decline of CMBS Debt Options

Covid-19 and the uncertainty in the financial markets have resulted in many CMBS (commercial-mortgage backed securities, also known as “conduit” debt) lenders to take a break from making new storage loans. Without CMBS debt, larger owners must focus on regular banks, just as smaller owners do. So the debt options are, for the moment, about the same for both large and small storage buyers. In fact, probably the best lenders for storage right now are small local lenders that have confidence in their markets and offer flexible terms based on the deal.

The “Committee” Approach

One of the great failings of larger storage owners is the simple fact that they are large. As a result, they tend to work from a “committee” approach and most deal makers do not actually have “skin in the game” as far as a personally vested interest. As a result, they are low in energy and slow as molasses. The smaller buyer – who is personally involved in the deal – will move faster and with more enthusiasm and does not have to answer to a “committee” or seek their approval. This means that the smaller buyer can actually out-negotiate the big buyer.

And Don’t Forget About “Bonding”

One of the most important attributes in deal making with mom and pop sellers is “bonding” which basically means forming a relationship with them such that they “like” you and want to help you. When this happens, price is not always the first priority. And in this regard the small buyer always beats the larger one, as moms and pops rarely forge relationships with “employees” of big companies. They identify with people like themselves: entrepreneurs who have “skin in the game”.

Conclusion

The Covid-19 pandemic has ushered in an interest new era for self-storage in which the playing field has been levelled between large and small buyers – and maybe even tipped to the smaller operator’s favor. We see many of these “megatrends” lasting long after the Covid-19 masks come off down the road, and will create a new environment in which many smaller deal makers will prevail.

Frank Rolfe has been an active self-storage investor for around two decades, with self-storage units in many states throughout the U.S. His nuts and bolts knowledge of what makes for a successful self-storage facility has led to a three-decade career without a single failed property.