Although urban storage owners are broadcasting positive spins on their current occupancy, there are some very bad trends ahead for this segment of the storage industry. In this Self-Storage University podcast we’re going to identify some of the pending issues for owners in dense urban centers and contrast that with what’s trending in suburban and exurban markets.
Episode 46: More Bad News For Urban Storage Owners Transcript
Everyone has heard the term "fake news", but we're not used to hearing it in the self-storage industry, this is Frank Rolfe for The Self Storage University Podcast, where I talk about some of the wrong stories that you're hearing in the industry right now regarding how great things are, and heralding storage and its wonders in a post-COVID world. The problem I have with these articles is that they take short-term functions and make them into projections of long-term success, but they're missing out on basically all the megatrends in the industry. And I'm afraid people are going to see this information, read this information, think of it as the gospel truth and get themselves into lots of trouble. Let's start with the fact that right now, in most of your urban core centers with self-storage, people are in fact seeing increases in occupancy, but what they're seeing it from as they themselves admit, is people who are abandoning their housing and moving out of the city and leaving their things behind to come claim them later, and people who were in the cities are moving things into storage to make way for home offices and classrooms.
Well, let's just pick that a point for a moment. So what we're saying here is people are leaving things behind. Well, if they're leaving them behind, at some point, they will come and retrieve them, so to me, that's a very short-term phenomenon of occupancy. And COVID at this point has pretty much ended as a major news story, everywhere across America you're seeing masking mandates and schools re-open. So people are already demanding that those who have jobs return to the office and children are returning to schools across America, so no reason to keep that room vacant for the office or the classroom, and when they get that monthly bill in for storage, people are going to realize that probably they should bring those items home because they no longer need that function in their house. But there's other things that scare me about the urban storage model. One of them is inflation, if we are gonna be on a 8% or so annualized inflation rate, it's gonna be very, very hard to push rents in those urban markets where the rents are already so high.
So if we have to raise rents only 8% a year just to track inflation, just to break even, to actually make money, you'll have to go far higher, can you get those higher rents in those urban markets that already have issues with over-building? It's questionable. Also, there's a giant trend right now in those who are about to bring out all kinds of storage strategies to utilize abandoned buildings. Abandoned office buildings, abandoned shopping malls, all of the abandoned properties in these urban areas that we all know and see, we drive by it all the time, there's a large number of people bringing out large private equity-funded groups to tap into that area and re-configure it back into self-storage. The self-storage industry has a long history of over-building, it's its own worst enemy at times and I'm afraid they're gonna take a lot of this vacant space, imagine how many million square foot malls there are out there that are basically abandoned, and bringing that online is going to create an enormous burden on the supply.
Also, as we all know, they're developing new ways in urban markets to do storage itself, groups like PODS bring you your storage unit, you fill it up in your own driveway, and then they take it away, and they take it far away, and they take it in areas that you don't necessarily have the competition of regular storage. So it's one more way that they will be dumping more and more storage capacity out there, but in a way that can't really be tracked if you simply look at how many storage facilities there are in the immediate area because the storage leaves the immediate area.
The biggest problem, of course, is new construction as always, people are already announcing new projects to build new storage facilities and new expansions based on nothing but false data of now suddenly in a post-COVID world, the demand is ticking up slightly. We all know the industry massively overbuilt in the year 2016, that whole era, and so the industry has been suffering from a huge supply and demand issue since then, and to build much more new storage is only gonna exacerbate the problem.
And of course, the big mega trend is that many, many people are simply leaving those urban centers and moving out in suburbia and exurbia. They learned from COVID that there is more to life than living in the city, they decided they wanted to go to areas that were safer and cleaner. And they're not coming back. When you add it all together, what's happening is you're seeing a change in the industry, in my opinion, from an urban industry as far as profitability to more of a suburban and exurban and outlying areas. Now, why are the megatrends there any different than they would be in the urban center? Well, number one, that's where people are flowing, they're flowing to suburbia and exurbia, but also in those markets, you have very significant market differences, you do not have over-building, most of the large chains own nothing in those areas, and you can still buy properties for moms and pops, who typically offer really good prices and often really good terms.
Additionally, there's a lot of room to improve those properties out in the suburban and exurban areas, so you can buy a property at a good price, and then you can expand it to the value even higher. There's a number of properties every day that transact in the suburban and exurban areas but only at a fraction of the number that you see in those urban centers. So that's where the opportunity is, because most people are not looking there. Sam Zell, he's not a storage owner but the largest owner of apartments, office buildings and mobile home parks, once said, "When everyone's looking right, look left." Right now in the world of storage, although people love to write magazine articles and love to think about multi-story storage facilities in those big, old, gritty urban centers, really the opportunity is in suburbs and exurbs, the old original one-story self-storage with roll-up doors. You can pull your car right up to your unit, not having to go into an elevator and loading your things on a dolly, the stuff that really most Americans think of when they think of storage, and you can provide it at a really good price because in those suburban, exurban areas, you can buy them at rates that still allow you to deliver your product at a reasonable price, and additionally because it's a low price, you can still raise rents in line with inflation and not make the burden so high that people have trouble paying for it.
The bottom line to it is that you just gotta think for yourself and think independently, there are many large storage groups and associations who have to pander to the largest owners. That's who really pay the bills, that's who pays the dues. However, that's probably not the important key when you are an investor, because you are not looking for public relations knowledge, what you're looking for is the ability to make money. I've always been a big believer that to make money, you have to focus on the megatrends and be on the right side of them. It's too hard to roll up against the current of the river, you want it to propel you forward for profitability. So simply align your boat in the right direction, think independently, think for yourself, feel with your gut instinct where the opportunities are in storage right now in the United States, and follow that path. This is Frank Rolfe for Self Storage University Podcast. Hope you enjoyed this, talk to you again.