Self-storage, as an industry, is not doing well right now. But at least it’s better than apartments. In this Self-Storage University podcast we’re going to review why Self-Storage deals have an advantage on the performance of apartments – which are in even greater trouble.
Episode 159: Better Than Apartments Transcript
I've been telling you for years now that urban self-storage was in trouble, and of course, I was exactly correct. Storage industry has been bloodied by lower occupancy and lower rents due to two key reasons. Number one, massive overbuilding, and number two, a diminishing demand. Young people don't have a whole lot to store, and people don't really like those urban storage, which are multi-story, where you can't just pull up with your pickup truck, roll up the door, and throw your things inside. But despite the fact that urban storage has gone down the drain, suburban has hung in there, as has exurban. But let's talk about the good feature to self-storage right now, which is no matter how bad it seems to do, even in the big city, it's still better than the way apartments are going. This is Frank Rolfe with the "Self Storage University Podcast." We're going to talk for a minute about what we've learned about apartments and how the fact that despite what storage has done, it's still better than multifamily.
So why would you want a self-storage facility over an apartment complex? One key reason is just that the management side of it all. In the world of apartments, you have to worry about such things as fixing toilets, roofs, foundations, and a tenant base, which is constantly coming and going and seeming to wreck the property in between every rotation. But in the self-storage industry, you have none of those things. You don't have toilets. You don't have any plumbing at all, in fact. Many self-storages don't even have a light bulb in the units. So as a result, you don't have a lot of things to break, and your management is much reduced.
So that's a positive. Additionally, when you have a multifamily property, you've got a lot of variables that are very hard to predict. There are a lot more apartment units being built than there are self-storage, and the style of apartment has changed over time, with floor plans becoming more obsolete. And apartments go down from Class A to Class B to Class C, but self-storage makes no such transition.
So once again, storage is superior to apartments in that regard. But the big problem they're having in apartments right now is debt. 8% of all apartment complexes right now with loans are in fact in default. Now, why is that? Self-storage isn't doing great, but it's doing a whole lot better than that 8% number from apartments. In fact, there's more apartment loans in default right now than there are office buildings as far as quantity, and we all know how bad office is. So what's going on there? Well, the big problem you have, number one, with many apartment buildings is the expense ratio.
Typically, with a self-storage facility, your expense ratio is going to be maybe 30%, in some cases, 40%. But right now, the average apartment expense ratio is running 52%, which means they get to take in less than half of every dollar that they have in total revenue, and so that's certainly a problem. Self-storage is definitely keeping more of their money that comes in in their pocket than the apartments are. And additionally, apartments are facing big CapEx issues over time, much more massive than self-storage facilities. What can go wrong with a self-storage facility? Well, the roll-up door can break. You might have to do something with the roof.
But in apartments, all kinds of things happen. You can have a water break on the third floor, and it destroys the unit on number three and number two and number one. All of those kinds of features can really, really damage your investment greatly. And that, in many cases, is what driven some of these apartments into default. You've also got this big rampant problem in the apartment industry that people who have been cheating on their applications.
What they've done is they've learned how to take AI to create false applications saying that they have great credit or that they have the down payment, but in fact, they have no such thing. People are getting these tenants into apartments who can't afford to pay. And the world of apartments has a completely different evictions process than that of self-storage. In self-storage, if you don't pay the rent, you can effectively seize what's inside and sell it at auction. In apartments, you have no such ability. The best you can do is get a writ of possession and throw those things out on the street.
So the bottom line to it all is that even though self-storage is doing lousy in the big cities, it's still probably doing better than apartments. Now, what will the future hold? Well, none of us know. If self-storage starts to have an acceleration in lower occupancy and lower rents, it could end up in the same boat as apartments. But so far, the trends are not suggesting that.
But yet, none of us really know the direction. What's the solution? Don't do urban self-storage. Look at self-storage only in suburban and exurban areas and even super commuter markets where you have the traditional one-story storage, the old classic with the roll-up door. Those are the things that customers want. Those are the things which have stable occupancy. But don't mess with the multi-story, particularly climate-controlled things in big urban markets, because frankly, I think at the end of the day, they simply are not going to work.
It's my belief most of that was built just at the pleasure of the investors because they liked it. They liked the way it had ease of management, stacking the storage units one on top of each other, but it was never built upon customer preference. And the proof is in the pudding based on the performance of those types of units. But despite the fact that there is weakness in the storage industry in many of those big cities, despite all of that, it's still true, it's still better than apartments.
This is Frank Rolfe, the "Self Storage University Podcast." Hope you enjoyed this. Talk to you again soon.