While copper and soybeans are some of the best-known commodities to trade, self-storage facility owners are also dependent on commodity pricing of their units. And there are certain winners and losers in this trading environment. In this Self-Storage University podcast we’re going to review the future of the storage commodity and pick the winners and losers.
Episode 124: Lessons Learned From Commodity Traders Transcript
The top 10 commodities that are traded in the world are oil, natural gas, gold, coal, iron ore, copper, soybeans, aluminum, wheat, and platinum. But there's another commodity that's maybe of even more importance to you, and that's a commodity known as self-storage space. This is Frank Rolfe with the Self-Storage University podcast. We're going to talk about the commodity of self-storage, where it's going, the strong spots, and the weak spots. Now, what sets the price of a commodity? And it all revolves around a simple formula of supply and demand. Gold, for example, has gone up from about $300 an ounce back in the '80s to around $3,000 an ounce today. Why would that be? Why would gold cost 10 times more per ounce today than it did, say, 40 years ago? It's supply and demand. There isn't that much gold produced, but there's more demand today for gold. People have started investing in gold because they see it as an inflation hedge. They use gold in some industrial processes. There's gold in jewelry. So for whatever reason, the demand for gold went up, and as a result, the price followed because the supply was limited. In fact, on all commodities, that's just it. That's the whole ballgame is supply and demand. And people who predict the future of trends in these commodity prices, that's what they're studying, is do they see demand going higher or going lower? Do they see supply being rigidly fixed, or do they see it expanding?
Now, self-storage itself is a very simple thing. It's kind of like a commodity. It's not fancy. It's not special. It's just like coal or iron ore. This is something that's pretty much plain Jane, the same anywhere you go, nothing that exciting about it. But when we start talking about the value of storage as a commodity, we must immediately turn our attention to supply and demand. So let's first talk about supply. The self-storage industry shot itself in the foot in a big, big way during and after COVID. They built way too many new square feet of storage in markets that couldn't really support it. But it's not true across the board. If you look at the bulk of the supply that's been built over the last five years, it's all in big urban markets. That's where most of the supply was built. Not in suburban, not in ex-urban, mostly just in big cities. And we all see that if you drive around a big city. You see all this new storage popping up. A lot of it multi-story, climate-controlled kind of stuff that most people just... That's not even their preference. They'd rather have the ease of just pulling up, opening the door, and moving things directly from their car in. Not having to go out and get a dolly or a two-wheeler and going up an elevator and all of that kind of stuff. But as far as supply comes and goes, that's your danger suit in self-storage are big cities. You've seen very, very little increase in supply in suburban and ex-urban markets.
So now let's flip over to the demand side of it all. What's the demand for self-storage? Well, what we've seen in recent times is a slackening of demand once again in the big cities. People in the cities are realizing since times are tough, we're maybe in a recession, maybe not, but American consumers throughout the nation are cutting back on their expenditures. And many of them are saying, Gosh, you know, I don't think I really need that $100 or $200 a month storage locker anymore. I'll just go ahead and sell off the old Christmas tree ornaments and shut the thing down. And that is a suicide combination when you have oversupply and lower demand. Now, on the flip side, in a lot of suburban and ex-urban markets, you have a different kind of consumer. These are people that were perhaps smart enough to get out of the big city, out there searching for a lower-priced single-family home, maybe better schools, certainly lower crime. And they're more affluent. Today, the suburban and the ex-urban shopper is a richer shopper than the urban shopper. And as a result, where the urban shopper is looking at how can they cut expenditures, the suburban and the ex-urban really aren't. They're actually out there accumulating goods that need to be stored, buying a bigger Christmas tree with lots more ornaments, and needing places to put those items.
So when you add it all together from a supply and demand threshold, the commodity of self-storage is weakening and will probably continue to weaken in urban markets. I don't really see any sign of that ending. The overbuilding was too severe, and the demand is diminishing too quickly. But your suburban and ex-urban markets are an entirely different story. There, your commodity is much stronger, much more likely to rise. Now, I live in a small town in Ste. Genevieve, Missouri, only about 5,000 people here. And right now, our self-storage is pretty much sold out. I know this because the self-storage that I had in a building that used to be a gas station is being redeveloped into another use. So I had to get out of there and I found almost nowhere I could find to replace it. That's despite the fact they built any number of new self-storage facilities in my small town, even a climate-controlled one. But yet they're all full. Every door has a lock on it. Also, in suburban and ex-urban markets, you don't have that many units that you then lose occupancy due to nonpayment. Every lock on there is because there's no issue with paying rent. Landlord hasn't had to do anything with them, put his own locks on there, because every month they pay like clockwork on time.
So when it comes to commodity predicting, here's my theory. Urban, weak. Suburban and ex-urban, strong. Now, how will that shift the industry? Well, I think it will in many ways, because most of your larger storage operators, of course, are focused on urban markets. That's where they want to be. They want to be right in those tensely urban downtown centers. And the problem is they built their whole business around that. That's where all your public storages of America are. They're all in those big urban core areas. And I think over time you're going to see perpetual weakness in that commodity. You'll see maybe lower stock prices and storage rates, and you'll certainly probably see reduced net incomes and profitability and value in any operator of those urban storage. But in suburban and ex-urban, I see nothing but things getting progressively better and stronger. And that is the best place, if you're going to get into the storage business, to go, is in those suburban and ex-urban markets. The competition is lower, because the big guys, they don't really venture that far out.
And plus, they're too mired in their own problems with all their declining occupancy and declining rents in the big city. But in suburban and ex-urban markets, you can actually provide a product that people want. Because another problem with the industry is it got off of its moorings, its foundation, when it went from the good old back your car up to the orange door and roll it up mode to this whole multi-story mode. And it's unlikely to ever change. I think the convenience factor of pulling the old car up clearly outweighs the concept of the convenience of a multi-story tower of storage that takes you forever and a day just to move the Christmas tree box from the inside of your unit into your trunk. So the bottom line is, think of all storage simply as a commodity. Don't buy anything unless you look at the value of your space, your single locker. And if you're not convinced that you see that number going up, if you don't feel good about the rents escalating over time or the occupancy remaining stable or increasing, don't buy that storage facility. And I think when you look at it as a commodity, the answer will be simple. Stay away from the urban areas, stick with suburban and ex-urban markets. This is Frank Rolfe with Self-Storage University podcast. Hope you enjoyed this. Talk to you again soon.