America is rapidly changing as consumers embrace new lifestyles and discard those that no longer interest them. Meanwhile, the U.S. economy has become ever more unstable and unpredictable, and the result is more severe cycles than ever experienced in the past. So how does self-storage investing fit into this rapidly changing America? Years ago the term “megatrend” was coined to mean giant shifts in consumer behavior that can impact all American life. Here are the megatrends and the anticipated results:
The Great Migration
This megatrend is the shifting of the U.S. population from urban centers to suburban and exurban areas. Americans are moving to find lower home prices, bigger yards, and greater privacy. And there’s little chance this shift will ever end, as this trend also ties into the new “work from home” movement. The key to success with this megatrend is to only buy self-storage facilities that are away from urban centers and instead in suburban and exurban markets. This is typically a band of property that is between 20 minutes and an hour outward from the city center. The good news is that these are the very storage facilities that are affordable and often include seller financing. That’s simply because most of the urban storage complexes are owned by the six largest storage owners that represent 20% of the total number of storage properties in the U.S., while the suburban and exurban are predominantly owned by moms and pops.
This is the combination of high inflation and a sluggish economy. The dangers are that interest rates on loans are going to go up, and that means you have to buy self-storage properties at lower prices and with plenty of room to improve occupancy and rents. You’ve got to give yourself plenty of room to keep your numbers ahead of higher operating costs and higher interest rates on loans. At the same time, high inflation has been historically beneficial to all forms of real estate, as it’s ranked – with gold and silver – as an asset group that actually holds value well in times of inflation.
Housing starts are plummeting and so are sales. This is the result of higher interest rates and the impact on monthly mortgage amounts. Simply put, people can’t afford to pay high home prices when the interest rates (and total payment) on mortgages basically double. The impact on the storage industry will be that people will need more storage space to accommodate their stuff since they can’t buy a bigger house. This has always been a strong argument for storage investing, as it costs only a fraction per square foot to use a storage facility as opposed to a room in your house.
The Great Resignation
This megatrend revolves around the fact that people are literally walking off the job at rates never seen before. Apparently, Millennials are willing to be unemployed over unhappily employed. Of course, the net result of all of this resignation is financial hardship. And that means that there is a great amount of dislocation in households as people move to live with others or downsize to handle lower household income – both of which have been traditional drivers of storage demand. If you look back at the early origins of self-storage from ancient China (where customers stored goods in giant jars in caves that had 24-hour protection at the entrance) the goal was to safely store your possessions when you were not around to guard them yourself due to housing instability.
The storage industry is just like any other: it has strong points and weak points. The key is to properly align yourself with the right side of the megatrends, and the answer to that is clear. You want to buy storage facilities in suburban and exurban markets – not urban – and only those that have good cash flow with the potential to push it higher. If you stay in that zone you’ll be in good shape. If you buy storage properties in big urban areas with low cap rates and little room to improve occupancy and rates then you are doomed.