The Moral: Don't Follow The Herd

Self-storage REITs (the backbone of passive investment in the storage sector) have been taking major hits recently due to faulty strategies and overzealous building. The disappointments will continue forward for the foreseeable future. One article declares:

  • Self-storage REIT stocks drop after Extra Space Storage issues soft (2020 guidance, underscoring "a continued deceleration across the space," according to Citi.
  • Raymond James analyst Jonathan Hughes points to "familiar headwinds of new supply pressure, property tax hikes, and elevated marketing spend."
  • Bloomberg Intelligence analyst Lindsay Dutch said excess supply does not seem to be easing and points out that EXR's NOI outlook — negative 0.5% to positive 1% for 2020 — is the "worst since 2009."
  • Other stocks following EXR's decline — Public Storage, CubeSmart, National Storage Affiliates Trust, Life Storage

So what are the lessons learned from this debacle for self-storage investors? Many.

Passive investment in the storage sector is probably a bad idea

I’ve never met anyone who made any money investing passively in self-storage. That’s probably because most funds buy self-storages at low cap rates in saturated markets that guarantee poor performance. The folks that I know that have actually made money in storage bought the properties themselves and avoided what the “herd” was doing. I had dinner recently with an individual that had built up a income of $1 million per year from a portfolio of 10 storage facilities they had bought in smaller, overlooked markets at high cap rates. In the end, it’s all about money, not about how pretty the photo of your storage property is or where that dot is on a map.

Beware of “hot” markets

There are some storage markets that get all the headlines. These are the troubled ones. The industry has overbuilt these markets at a phenomenal pace. There always seems to be a feast or famine mentality on storage markets – the idea of moderation seems to be foreign. You will fare better with a properly priced property in a stable market than an overpriced deal in a “hot” market.

Big companies can make big mistakes

Big companies are more insulated from reality than smaller outfits. A single-investor as complete “skin-in-the-game” when it comes to failure. They can lose everything with one bad deal. The big company has no such risk – they don’t own the property and they don’t feel the pain if the deal goes bad. There are storage operators that literally build or buy into markets that are already failing simply because they are after the acquisition and management fees and could care less what happens to the investors’ capital.

Oversupply is a huge problem

Nothing can make the job of a self-storage owner more difficult than battling oversupply. It’s the kiss of death for occupancy and rent gain. Since the industry gets in trouble with oversupply in some markets on a continual basis, they are well versed if giving reasons as to why it’s not that bad a situation – but they are ludicrous. The simply fact is that supply vs. demand is one of the strongest rules of economics and self-storage is governed by these same laws.

Follow the path less travelled

If you want to make money you will be much better off avoiding the “hot” markets that attract over-development and resulting revenue uncertainty and instead focus on solid markets that seldom grab headlines. Sam Zell – the most successful real estate investor in U.S. history – once said “when everyone else is looking left, look right”. Being a contrarian is a good plan in self-storage: don’t be afraid to follow the path less travelled.

Focus on profitability, not hype

The mark of a great investor is exceptional financial returns. Ignore all other factors and focus strictly on the numbers. A high-yielding storage facility in Indianapolis is infinitely better than one that barely treads water in Denver. Your selection of markets and properties should be based on scientific metrics and not emotional appeal gleaned from headlines.


The storage industry has made a mess of certain markets with overbuilding. Stay away from these markets. Don’t listen to those who want you to run with the herd. The money is in following the path less travelled.

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.