Self Storage University Podcast: Episode 78

The Strengths Of Storage Revisited 50 Years Later

The self-storage industry began its self-promotion in the 1970s, at the time that Public Storage started its ascent. But has the storage niche been living up to the original premise? In this Self-Storage University we review one of the early sales materials from the 1970s to see what has proven correct and what is already out of date.

Episode 78: The Strengths Of Storage Revisited 50 Years Later Transcript

I collect up a lot of different things to write articles from and speeches and podcasts. And recently I unearthed something which I found interesting, it was a 1970s item where they were trying to raise money. So they were trying to find investors for self-storage back in the '70s. And in one of these, it talks about the top 10 reasons why you should invest in self-storage. So I thought it would be interesting for us to go through these top 10 items to see how the industry has held true to its original motivations, that people had back when it began to invest in it, to see if it's still remaining true to itself. So here were the top 10 reasons to invest in self-storage back in the 1970s. The first one was simplified building structures. Now that one, the industry has varied from pretty substantially, because back when this was written, self-storage were all one storey, not climate controlled.

So it was a very simple building. And of course today, now it's changed, a lot of self storages in urban markets are often multi-storey. A lot of them now have climate control, and they have other features such as elevators and different items to make it all work. So that's actually a lot more complicated than what they promised people back in the '70s. Are there implications from that. Yeah, it means the buildings are more expensive, more expensive to maintain. It's probably another reason why I still prefer the old original, the one-storey roll-up door, the classic model. So on that one item, they haven't remained completely true to form. People have been changing the model up a little bit. The next item is a short construction period enabling rapid initial rentals. Well, I guess that has remained true, but again, not quite like it was in the '70s, today to build something takes much longer in the planning phase.

There's lots more issues with storm water retention and items like that. So I'd have to say it hasn't held true on that item completely, it does definitely take longer to build than it did back in the '70s. Everything takes longer today than it did back in the '70s. The third item, low operating expenses and non-energy intensive. Well, low operating expenses is true, you don't have all the different repair and maintenance items you would with an apartment complex for example. So it has remained true to that. Now, non-energy intensive, again harkens back to what kind of self-storage facility you have. If it's climate controlled, then that's not true. You would have a lot of energy cost, but if it's not climate controlled, then yes you could still be there. Number four, month to month lease is highly responsive, which means you can move quickly to mark your rents to market.

And that has still remained pretty much the standard in the industry is the good old month-to-month tenancy roughly, so it's held true to that. Number five, adjustable unit mix due to movable partitions. For the most part, that is true. The modern self-storage isn't quite as simple as as old original ones, where you could just simply move the walls around. Today, you probably would have a little more difficulty, a little more complexity in doing that. But the basics are true. You can adapt to your market, if your market is all about 10 by 10s and your current self-storage facility is built construction in 10 by 20, we can change that. We can change the type of thing that we have going on to fit what the market demands are. So we're kind of still true to that.

Next, not labor or maintenance intensive, well, that is definitely true. That has not changed since the '70s. Most self-storage facilities, if they have a onsite manager, they just have typically one with no great maintenance staff, because there's really nothing that goes on besides the roll-up doors and the occasional security light. So that still remains as it was back in the '70s. Number seven, high building rent-ability near 100% for single storey. Yes, that's true. You can in a good market with lots of demand, you can rent the whole darn building up. So nothing there has really changed much. Now the competition today is much more fierce than it was in the '70s. So you may not have everything filled, you may file some degree of vacancy, 'cause you're competing with a whole lot of other storage providers. Next, many tenancies spreading vacancy risk factor, definitely true. If I have a 100-space self-storage facility and I lose one tenant, I only lose 1% of my revenue.

Look at all the other forms of real estate by comparison, look how attractive that is. If you own a strip shopping center, and you have five tenants and one leaves, that's 20% of your revenue. That alone, just that one vacant, may bankrupt you. I've looked at P&Ls on retail centers in the past, they're horrified. You cannot survive with even one vacant space. And how often do you think one vacant space occurs in a retail center today? Well, you're correct, pretty much all the time. Even worse, if you have a big high-rise office building, you have some big law firm in there, that one law firm, let's say takes two storeys or three storeys of your building, it could easily be 30%, 40%, 50% of your revenue. What if they default? What if they move out?

So the fact that your risk is spread over a very large number of units, representing a very small percent of risk is just as attractive today as it was in the 1970s. Number nine, basic function resistant to economic shifts. Now that's an interesting one for us to talk about because in self-storage back in the '70s, there was not that much self-storage, and the users of self-storage were very devoted to it. Today, of course, the industry has changed. You have some people who store their own personal goods, you have businesses that use storage. Part of it is necessity, people feel like they have to house through things, but part of it's a luxury and luxuries can often be cut. So that's something we will all have to watch in the next recession, whenever it may occur, is how much of the industry is in peril.

Because people, rather than keep paying that $100 a month or so, instead elect to chop that off the budget and take whatever's in their unit, sell it off on eBay. So that's the part we don't really know for sure. Now during the 2007 and 2008 Great Recession, self-storage did well, but, of course, that was a long, long time ago. Nearly 20 years. In that period of time, billions of square feet of storage have been built. So no one can truly, with 100% certainty say, "Ah, well here's how it will perform." We don't really know that. My bet is, as with all things, it'll be on a case-by-case basis. Some storage facilities, people will find that almost every unit in that storage facility is deemed to be a necessity for the person who's storing. And there'll be others, where we have a lot more folks who are seeing it more as a luxury that they can cut.

Finally, number 10, cash-flow-oriented real estate investment, that is still as true today as it was back in the '70s. Self-storage facility is totally based on income, it's an income property. You don't buy a self-storage for something like a house and hope it will go up in value, because people like it, it looks better or the location changes. No, it's a commercial property based on income. And as we all know, as the world has unfolded, income is a very valuable thing. Now, during that entire era from almost 2008 to current, when interest rates were zero or 0.25%, if you could get 10% returned on a self-storage facility, that was like 40 times per year of what you could get at a CD. The income was king. Now that CDs are paying more, 4% or 5%, that ratio has now changed, but it's still two for one.

So there's no question that what keeps self-storage interesting to investors is the fact that it's based on cash flow and it does produce cash flow. And that alone will keep self-storage in a good spot regardless of what happens in the US economy. The bottom line to it is in most cases, self-storage has remained true to its original roots. Now, if you look back on many other industries, take the retail industry or the lodging industry for examples, they haven't held true at all. Pretty much everything people did in the 1970s, today they do the reverse.

You've seen what hotels look like in the '70s, they weren't even hotels, they were mostly motels, places like Howard Johnson's. I remember when people built La Quinta and they thought it was a big deal. So some real estate sectors have changed a lot. Self-storage have remains pretty static, remains pretty steady, it's a pretty simple thing. And even though we tend to try and complicate it over time by introducing climate controlled and multi-storey facilities, it still remains fairly much true to its roots. This is Frank Rolfe, The Self-Storage University Podcast. Hope you enjoyed this. Talk to you again soon.