America is filled with uncertainty, yet many storage owners have the mistaken idea that these challenges are quietly behind them. In this Self-Storage University podcast we’re going to review many of the headwinds the self - storage industry is facing and how to best position yourself to survive these shocks.
Episode 125: The Calm Before The Storm Transcript
Back in 1900, there was a beautiful day out in Galveston Island. The sun was shining. The weather was moderate. The surf was pounding. And many, many people thought this was the perfect day to go to the beach. Little did they know that the Great Galveston Hurricane was lurking right over the horizon. The worst natural disaster in American history. 10,000 people were killed in that hurricane. But if you read about how it was back then, everyone thought it was just a perfect day. Even when they sent out people to warn those on the beach, get off the beach. There's a terrible thing heading our way. The people said, nah, they just ignored them because they said, no, it's nice out here. And that's just human nature. Right now we have so much instability in America, yet many people feel it's okay because it all seems relatively calm. But I'm here to tell you that there actually is quite a bit floating around out there that could be very negative for everyone involved. And you've got to be ready and understand that you may need to take action, significant action based on the way things turn out to protect your investments and maximize your income.
Now, what are the events I'm talking about? Well, let's start off with the economy. We all know there's something terribly wrong. All of the gauges, and I urge you to go online and look into the many charts and graphs produced by different economists in America, every single one of them point to the basic concept of recession. Every single chart. There's nothing that says that good times are ahead. Just look at some of the symbols people are giving you, some of the secret codes. Warren Buffett, who said the great period for America is now over. And then to back that up, he's announced he's retiring at the end of the year. There's lots of people who keep trying to spread the word, just like they did in Galveston, that maybe the economy is in for some real trouble. And don't depend on the stock market. It's been a chronic catalyst for bad information. Look at the headlines right before the Great Depression. It was nothing but rosy. The main headline of the New York Times was Harvard-Yale game coming up this weekend. Isn't that exciting? That was literally the day before the Depression began.
So the first problem you have out there is more than likely we've got an economic recession coming up. Then, of course, you have all the unsettling going on in the Mideast. You have all the conflicts between Israel and Iran and Israel and Gaza. There's just all kinds of problems going on. And you know that somehow some of this will filter back to America in some form or fashion, yet people aren't really putting that into their psyche. We have protests everywhere anymore on every topic. Our country is so divided that if one group likes something, the other group is absolutely horrified and wants to go to the streets to protest against it. The last Treasury auction had so few buyers that the US Government had to quietly buy most of the Treasuries themselves. That's a terrible sign. We have $36 trillion of debt in America and counting, yet no one even wants to buy our debt. That is a development we haven't had perhaps ever before. We don't really know the impact of the tariffs yet. Hopefully it'll be a good thing for America, but we don't really know yet. And the bottom line is I've probably never seen as much uncertainty going on as I see right now.
And with that uncertainty comes risk. So here's where I see things going in the months ahead. First, I see a recession coming. Q1 was negative. They originally said 0.02% negative. Then they recently revised that more than double, 0.05% negative. All you need is two negative quarters in a row to be labeled recession. And I'm pretty confident that the second quarter is going to be worse for America's economy than the first. And if they then threw out the recession word, it's a self-fulfilling prophecy. When you use recession, everyone stops spending and then you freefall. I've seen it before many times in my lifetime. I've been through at least four major recessions, and that's the trigger. It's typically when you just say the word recession, everything goes bad. You also have the potential for stagflation out there because with all the Mideast issues, it's possible you'll see oil prices go up, and that could lead to what is called stagflation. That's the combination of a stagnant economy and inflation. We haven't seen it since the time of Jimmy Carter, but it's very possible as history always repeats the same cycles. We could be seeing it again.
You also have the commercial real estate loan apocalypse out there. It doesn't get a lot of press because most Americans don't own commercial real estate. But there's $2 trillion of commercial real estate loans coming due by 2027. And the early indicators are it's going to be a bloodbath. In the office category alone, the government has classified almost $500 billion of debt as being a loss for those lenders. What does it mean? It probably means out of that $2 trillion, you might see $1 trillion of write-offs. And that could cause many of those banks to collapse. During the Texas saving a loan crash, there were 3,000 banks that failed. Compare that to the whopping three banks that failed within the last couple years. Remember, people went crazy on that. They thought it was a panic. There was blood in the streets on three banks. Imagine 3,000 banks just in Texas alone. We also know that Jerome Powell seems to be one of the great laggards in lowering interest rates. He stubbornly wants to hold to higher rates just to make Trump mad because Trump criticized him during the campaign trail and still does. So he doesn't really care about the US economy.
All he really cares about is not giving Trump what Trump wants, which is lower rates. So every week he has a new excuse why he can't lower the rates. Even though many other countries have done so, he has not lowered the rates, not one iota in the entire year of 2025. So how do you prepare for all of these problems? What can you do to help better your position going into all of this? Well, the first is you've got to count on a recession. And we don't really know how storage will work in a recession. Some people say, yes, we do. We know because back in 2007, 2008, self-storage did well. It held up to that recession. That was a different industry back then, not nearly as much supply. There have been literally billions of square feet built of storage since then. And we don't know with that much supply in the market exactly what's going to happen when the next recession hits. It means you can't stick your neck out that much. Don't take a lot of risk right now because we don't really know what the economy is doing or where it's going to go.
If you already own a self-storage facility, you have to stay very defensive. Don't spend a lot of money. Don't do anything you don't have to do. Literally, don't create any cost unless you have to do it. This is not a good time to do any big CapEx items because you may need to use that money in store if you lose more occupancy than you thought that you might. Also, give yourself plenty of time to refinance. What will happen when we have the commercial lending apocalypses will be what's called the flight to quality. That's where the lenders all get nervous and they say, uh-oh, I don't think I want to have anything to do with any marginal loans. I only want to do the nice, safe ones. And safe ones are defined as high occupancy in very stable markets with not a lot of supply so that you at least have some kind of moat around your property protected from competition. You're not going to find that in an urban area at this point. Most of the safer storage deals that I'm seeing are going on in suburban and even exurban markets, places where you don't have mounds of new self-storage roll-up doors.
So be very careful on placement and only get involved in solid things because you need to have high levels of quality to be highly attractive to the lenders. And if you're going to be refinancing your properties anytime soon, you definitely want to steer those into non-recourse debt. It takes a lot of risk off the table when you're able to swap recourse lending for non-recourse lending. The bottom line to it is it's alarming to me that so many people are not understanding the predicament that we're in. They seem to feel that this era of calm at this moment means that we're over the hump, that we're away from the risk. But the truth is we're merely in the calm before the storm. This is Frank Rolfe with Self Storage University podcast. We'll talk to you again soon.