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February 2nd, 2015

Memo From Frank & Dave

What drives the self-storage business? Is it America’s appetite for material items? Is it the sentimental artifacts that the Baby Boomers and others can’t bear to part with, yet don’t want to display in their homes? Or is it the general upheaval in the housing market, from forecloses to transfers to travelling looking for work in a weak job market? The answer is: all three. Self-storage has proven to be very recession resilient because it appeals to so many different needs and cuts across all levels of demographics, from rich to poor. Nobody knew how self-storage would perform during the Great Recession, which began in 2008, but it has done a superior job. What’s the future of the industry? Like any good income-generating investment niche, simply more of the same.

Why Fancy Is Not Always The Best Market Segment


The Concorde was, in its time, the most expensive form of air travel to ever exist. A ticket from New York to London cost around $10,000 in 1996 dollars. This supersonic passenger aircraft flew at twice the speed of any other passenger jet, and reduced travel times by half. It immediately became the standard ride of rock start, celebrities and CEOs alike. However, it was never profitable and, in 2003, was discontinued worldwide. There’s a good economic lesson from the Concorde for all self-storage owners and potential owners.

To hit the bulls-eye, you have to shoot for the middle

The reason that Walmart has been so successful is that it aims to hit the entire U.S. market, and does not veer off into the lowest (Dollar Store customers) or the highest (like Chanel). If your product reaches the rank and file consumer – all 250 million or so of them – you have a giant customer base to work from. If you only appeal to the upper end, as the Concorde did, your customer base is extremely limited from day one. There are self-storage facilities that only cater to wine storage, for example, which is such a limited market it would make the Concorde blush.

Margins are key – if you lose money on every customer, you can’t make it up in volume

The Concorde was never profitable. Ever. It relied on government subsidies to operate. There was a vague hope that, one day, there would be enough people wanting to fly that it could turn a profit. But if you look at the numbers, even when the plane was full it lost money. Some self-storage operators are in this same boat, having operational costs that are massively too high. You have to be able to have decent margins if you want to make money in self-storage.

There is little room for error when you pay big amounts and carry huge debt loads

The Concorde cost a fortune to build, and this giant 800 pound gorilla of debt kept it from ever being financially solvent. There are self-storage facilities in California and other markets where the cost to get the land, zoning, soft-costs, build the facility, and carry the debt until occupancy was achieved leave virtually no room for ever making a profit, regardless of how well you operate it. Braniff Airlines tried to operate the Concorde for a while, thinking that it was just the European airlines that did not know how to make money, and lost their shirt with it, too. When you load too much debt on any asset – regardless of your sales – it is doomed to be crushed in losses.

Being a pioneer is far from the safest investment path

Self-storage was based on the basic nuts-and-bolts function of offering a storage space at a low cost. Those early form facilities are often the most profitable, because they deliver the simplest value for the consumer of being able to back up their car and dump those goods to store. The safest path to profitability in any industry is the one most travelled, in which there is a track record of success and a master plan of how to get there.


Self-storage is not a complicated industry. Neither is air travel. The Concorde was the greatest financial disaster in commercial aircraft history, and serves as an example to all investors of what not to do.

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