Self-storage investing is not bullet proof, and there is no Kevlar vest to protect you if you do not plan accordingly. Although self-storage did well during the 2008 Great Recession – the implosion of the single-family market – it has done nearly as well in weathering the Covid pandemic which began in March of 2020. And there are already lessons to be learned.
Decline in rent levels
The pandemic has caused nationwide self-storage rent levels to drop by around 6%. This is due to storage owners trying desperately to compete not to lose customers to their competitors, or to simply walk off their units entirely. Since inflation is going up roughly 3% annually, that means that storage owners are losing around 10% in total rents, which is a crisis. The lesson learned here is that you should always buy a storage facility based on sufficient discounting of current rents to weather such a storm. The days of taking seller numbers for rents as a safe platform are over. They should never have been assumed to be without risk to begin with.
Decline in occupancy
The pandemic is also causing self-storage facilities to show a spike in vacancy. This is caused by people not wanting to add to their household budget by adding a new storage unit, as well as those trying to cut their budgets by letting their existing one go. And the timing could not be worse as the industry just added around 5 billion of new vacant space over the past several years as the result of a new construction frenzy. Everyone knew the over-building would be a problem but the pandemic has made it into a crisis. The lesson learned here is to focus on markets that are not ripe for a ton of new storage building.
Death blow to a major user
Roughly 25% of all storage space in the U.S. is rented to small businesses. They’re not storing household items or Christmas trees, but parts for their business. And the pandemic has caused a record number of businesses to go under. The result is catastrophic to those storage owners who rely on this major user for their income. And this is not likely to improve in the years ahead, as many of these small businesses are gone for good and unlikely to just start up again when the masks come off.
Where things improved instead of worsened
There is a niche of self-storage, however, that has suffered none of the above factors. And that’s the mom and pop suburban and exurban owners. As millions have fled the big city to avoid urban rioting and the closure of all forms of entertainment, they have landed in suburbs and exurbs and have moved their self-storage items to those markets. This has actually increased occupancy in suburban and exurban storage properties. And rents have not budged due to supply and demand – they have actually gone up in many markets. And the small businesses that went bust in the big city are not a part of the storage world in the suburbs and exurbs and, in those cases where small businesses do have units, those businesses did not get destroyed in the quarantine and rioting in the same manner.
Why recessions always have winners and losers
The biggest lesson learned from the Covid-19 pandemic is that the future of smart self-storage ownership is in America’s suburbs and exurbs. The old-fashioned parts of the nation where things never got too pricy or ridiculous in their budgets. Where Americans are moving by the millions to enjoy a higher quality of life outside the big city. And where you can still get good deals on storage properties from the original mom and pop builders, at revenues that only go up rather than down. These are the properties that the institutional owners mock for the simple fact that they don’t own any of them. But if you look at the actual financial returns – based on purchase price – of the suburban and exurban storage owners vs. those of the largest portfolio chains you’ll notice a huge discrepancy of performance. Despite all the B.S. of corporate P.R. departments, the old-fashioned properties in the old-fashioned markets have attained dominance over the “hot” markets and multi-story offerings.
When the tide goes out, you find out who’s been swimming naked. The Covid-19 pandemic has created all sorts of lessons learned about the storage industry and it looks like the smaller owners in suburban and exurban markets are who had their swimsuits on the entire time and were in the right position when the storm blew in.