Self Storage University Podcast: Episode 81

A Tale Of Two Cities

I recently leased two storage units – one in a city of 2.8 million and one in a city of 4,500. And the results perfectly illustrate where the money is in self-storage investing today and where the money definitely is not. And it’s amazing how the tide has turned.

Episode 81: A Tale Of Two Cities Transcript

You may have read the book, A Tale of Two Cities, back when you were in high school, but now we're talking about a more serious topic because if you're looking at self storage investing, this tale of two cities could have a lot of impact on how you view what the future should be. This is Frank Rolfe, The Self Storage University podcast. I'm gonna tell you the tale recently of me looking at two different storage units in two different cities. Now, I was renting two new storage units, one for my daughter up in St. Louis and the other for my mother who recently moved into a nursing home down in my small town of St. Genevieve. So let's start off with the St. Louis. So I call around to get a a storage unit and I'm able to play off several different places against each other.

And even though we started at about $150 a month, I got them down to 100. 30% off what the list rate was. Why did I achieve that? Because there was too much supply and not enough demand. They all had vacant units, so as a result, they just wanted to get them out the door because something's more than nothing. And even though their budget said, "Oh yeah, we gotta hit 150," the reality was they're not gonna get 150. So just like a gasoline war on some corner in America between the gas stations, here we had these self storage facilities just starving for customers, competing with each other, each one going lower than the next person's rent. Now on the flip side, down there in St. Genevieve, Missouri, an hour out of St. Louis, so we're talking now, population dropped from 2.8 million in St. Louis down to about 5,000 in St. Genevieve. I go to the owner of the storage unit.

There's almost none available in the town. I cannot even find more than one that has an availability. And they're completely firm on the rate of $100 a month. So one was starting at 150 and I got 'em down to 100. The other was at 100, and I couldn't budge them at all. Why was that? Well, because there was more demand than supply in St. Genevieve. So in the big city we had the complete opposite effect. We had too many units, not enough customers. The other, we had too many customers, not enough units. So what was the lesson learned from that adventure? Well, the first lesson learned is there's a real problem with institutional storage investors and who have bet way too big on the big cities. What's happened is they've massively overbuilt.

Millions and millions of square feet have been constructed in those big cities in self storage just since Covid started several years ago. As a result, now they are glutted with space. Even if they had not built new space, I think they probably would have a weakness. But with all the new facilities that were built in the big city, it's a blood bath. They just don't have anywhere near enough demand to meet the monster supply. So what's happening is they're just eating each other, trying to get the occupancy clawing all over each other, and it's a very, very bad position to be in. There's just nothing in the world more alarming than when you've got a whole lot of vacancy and so do all of your competitors, because how in the world will you ever get full. If your budget was X, and now I've got declining occupancy coupled with declining rents that's a suicidal combination.

And these big companies, these big institutional investors are stuck in those locations because they can't sell the stuff off. They built these multi-story storage facilities that are now worth less than what they paid only recently. And as a result, it's their problem. They've no option other than just to hang in there, scratch and claw their way to the best occupancy they can, probably not be able to supply return to investors. They'd ultimately have the thing go into foreclosure, or better yet, they claw their way and hold the thing for a decade just to try and sell the thing for what they have in it. It's not a very appetizing combination, but that's where they're at.

So what happens then? Well, since they're so stuck with those properties in the big cities, not to mention all the things they've built, they really can't readapt the business model, even though clearly it's not working well for them. And then you look at those small cities where you have the correct supply and demand relationship, and their things are working great, they're beating occupancy, they're raising rent. So, how did they escape the problem? Well, they escaped the problem because the industry on the institutional side was just too obsessed with big cities, and down in the smaller areas they've never ventured there, so they never really built much down there. It's ruled mostly by moms and pops. Now, it's amazing how things have changed, because not too long ago, if you owned a self-storage facility in a small city, the folks in the big city would laugh at you.

They would say, "Look, I've got this big multi-storey thing and it's worth so much more than you. Why are you even wasting your time down in those small cities, while I'm just doing great. I'm raising my rents, I'm beating my occupancy. Look how much more value I've created." And now it has completely gone the other direction. Now the people in the smaller markets, they're the ones who are beating their budgets on occupancy. They're the ones who are beating their budget on rents. And now they're laughing at the folks in the big city saying, "Look, what a mess you've made of it all." Now, do I ever see that really changing? And the answer is, not really. I don't. America is filled with mega trends. They're all around us. There's population mega trends. There's movement mega trends, there's the age of the population mega trends.

You've got baby boomers who were the largest part of our population, but have now dwindled some, and millennials are actually bigger. You've got people moving out of certain states towards other states. And then of course you've got the simple fact that people are leaving the cities. Giant net exodus out of cities like San Francisco, Los Angeles, Chicago, and New York, and they're not coming back in all likelihood. If you look at the population cycles in America, they take really long times to make big shifts. We were originally in agricultural society where everyone basically lived on the family farm and they ventured into the big city. And it took what, a century to do that?

Now you have a reverse phenomenon going on, people leaving the big city because they're tired of all of the crime and the urban unrest. So what are they doing? They're moving out outward as fast as they can out into small towns, out into smaller markets, outlying areas, ex-urban markets, because that's where they can find the serenity and and lack of crime and better home prices. And I don't really see that trend changing. So you're gonna see weakness in those big cities, storage facility operators for years, decades perhaps. And all of the opportunity will be in those smaller markets, those mid-sized to small markets. There's suburban and ex-urban markets where the supply and demand is favorable, where people are actually beating budgets in both occupancy and rents. And that is exactly where you want to be in self-storage going forward.

This is Frank Rolfe, the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.