Self Storage University Podcast: Episode 32

Why You Can’t Trust “Research Reports”

The self-storage industry is highly consolidated by large REITs such as Public Storage. As a result, these titans like to buy “research reports” to help explain the current industry statistics for investors (which, not remarkably, typically just happen to support their business strategy). But for smaller investors, these reports may be lacking some of the information that reflects your business model as opposed to a REIT. In this Self-Storage University podcast we’re going to discuss this issue and how to protect against getting the false impression on some key items.

Episode 32: Why You Can’t Trust “Research Reports” Transcript

The Self Storage industry is chock full of research reports. But do they really tell you what you need to know? This is Frank Rolfe, the Self Storage University podcast, we're going to talk about the flaws, and the issues with embracing and taking these research reports that float around the Self Storage industry, as fact.

Now, they do give you good indications. But clearly in many times the information is skewed. Why is it so? Why would people produce research reports which are not actually accurate? Well, it's simple, because the Self Storage industry is dominated by a few large players. And, of course, those large players which are typically REITs, have stock which trades on the stock exchange. And they want to always have that trending higher, that's the people get compensated, who run the REITs. And it's not just the large REITs, there's also many smaller REITs and larger owners. So they all seem to have a vested interest in making things look perhaps better than they might actually be.

On top of that, the people who reproduce the reports, while they also need to make a living, and those large companies who pay their bills. So as a result, they know that for someone want to buy their research reports and publish them and send them out to investors, they're only going to do so if they give them what they want, which is the ability to perhaps skew the stats to look good. Now, it's not hard to skew stats, people learn this over the years, there's all ways that you can take and report information and make it look sometimes maybe better than would actually be and still tell the truth. But a lot of is in your presentation.

I pulled up one such research report, I thought I'd just review with you some of the tricks that they use. This is for a very large research reporting firm for the Self Storage industry. Now the first thing is titled, "Year over year rent change for 10 by 10 foot units." Now if you look at the graph, it looks impressive. There's bar graphs showing what would appear to be huge increases in rent. But then if you look at the little numbers on the bottom of the chart, what do you see? It shows you the scale, and those huge increases in revenue, well, they're on a scale of only 2%. And if I look really close, I'll see is actually only 1%. So I look at Dallas Fort Worth, which on this chart would look like it's doing amazingly well. I see the revenues are up over the past year 1%. That is not that impressive. Then if I look up above, I see Los Angeles, well, Los Angeles appears to be doing fantastic. This bar graph is much, much larger than Dallas Fort Worth, well, they must be doing super, super duper. But then if I look at the bottom, and I look at the key of what that means, well, Los Angeles, which is performing better than any market, according to this research report, is only up 3%.

Now let's get a reality check for a minute. That means if you have a $100 rent for that 10 by 10 foot unit, which is kind of a industry norm, then that means in Los Angeles, we're writing this report, let people know things are doing stunningly well. Our rents have gone from $100 to $103. Hardly reason to get so excited. And then if you look farther down the report, you'll see other markets aren't doing very good. Here's Tampa, Florida. It's doing terrible. Because again, they've had the same bar graphs, and it's down 2%. You also notice what's kind of interesting about the report is, I wonder why it is that they show only the markets mostly that are doing well. They're showing all these markets that are up 1%, half a percent, 2%.  But they only included a couple markets doing poorly. Well, now we're a large country, right? We have 50 states, and there's a large number of cities in each state, how in the world that all the other ones doing poorly get left off? Why is it only the good ones? These are the kinds of shenanigans people do with research reports to try and make things look better than they actually are.

Now, here's another one. This is called "Sales volume and price per square foot." Well, it looks all kinds of impressive is showing you a bar graph showing that things were just rosy going into 2020. We're just doing great. But if you look at the report closely in the very right hand side, the thing just falls off the chart. Post COVID sales volume and price per square foot, it looks it's so bad it doesn't even have a bar graph. So what happened there? Well, if you look at the chart and you don't pay attention, you'll see this giant pinnacle, this giant peak that happened, right basically during COVID the start of COVID I guess because a nation was doing incredibly well. We had very high occupancy of almost everything, the housing market was strong. So you would visually see that and say, Ah, well, things are doing terrific unless you notice the line goes almost dives almost vertically off of that peak. Once again, giving you kind of a rosy visual, but not really that strong.

And then you have another graph that shows you under construction and plan percent of existing inventory. Now what this is showing you is how much new inventory is being built. You would think this is a positive the way they've tried to portray this. It's a bunch of bar graphs again, and oh, gosh, it looks like things are going great. And then you realize, wait a minute, though, the more supply you have, the lower rents will be and lower occupancy will be because in supply and demand, the greater the supply, unless demand goes up equally that means you'll have reduced prices and reduced occupancy. So this graph, although it looks like things are going terrific you actually then realize it's all awful. Phoenix is up 14%, 13% in one year of inventory. Tampa is up nearly 10%, same with Nashville. So what gives? Well, again, they're trying to give you this warm, fuzzy feeling that things are doing terrific. You looked at the bar graph and didn't read the actual items or what is showing you think this means good things. But unfortunately, no it doesn't. It doesn't mean good things.

If you go on down it basically again, it talks all about the outlook for 2021, and how great things are going to be. But then it has a million disclaimers in it. It talks all about, hey, we think things will be great. But there's all these millions of things that could derail it completely. So what does this research report really do? It makes you feel good. But it really doesn't paint maybe the fair portrayal. Now why is this a problem for self storage investors? Well, if you read too many of these reports, and they're just all over the internet, you can find a report that would support almost any business plan. Does it really accurately reflect what can happen to you as an investor? The answer is no. It really is just showing you the information you would need if you were giant, if you were a public REIT, but it is for the individual investor, this isn't information that you would actually can use. In fact, you have to wonder where this information actually comes from.

So let's talk about that for a moment. If I am building a research report like these on the internet, where do I get my data? Well, I'm not going to go call around every mom and pop Self Storage owner in America, I'm only going to call just the big ones. Because I know they'll answer the phone and they'll tell me what I need to know. But that means the information is horribly skewed. I'm not going to get correct information on occupancy or rents, if I call nothing but large players, and I avoid all the small. Another item you'll see is that there's a complete absence of any data regarding any market other than those top tier markets. If you're not looking for Los Angeles, or Dallas, what do you note then? Well, you note there's just no information whatsoever. There's nothing in here for any smaller metros. In fact, nothing less than the top markets in the US are even addressed in these reports. It's got a line item for Nashville, doesn't have anything for Memphis. It's got a line on here for Los Angeles, nothing on there for Bakersfield. Got Dallas/Fort Worth doesn't have Texarkana. So the bottom line is if you're trying to invest in just the largest cities in America, then I guess this report might do you good. But for most people, that's not where you're focusing. In fact you better not be focusing there, you probably won't make any money there.

I've been talking for a while that the only future in the storage industry at the moment thanks to COVID and the changing migration patterns of Americans is in suburbs and exurbs. Those are the areas where you can actually find rising demand. You can buy something inexpensive, raise the rents, properly manage it and make money. You can't do it in the city core. People are fleeing cities at the speed of light. However, these reports are basically focused just on those cities. You can pull up at any moment any report showing the population is declining in Los Angeles. People are leaving Los Angeles by the bushel basket. They're tired of the poor quality of life, street people, crime, pollution, COVID, you name it, it's no longer an attractive environment. But that's the only market it's showing on this entire graph.

So the moral to it all is when you get data it needs to be accurate pertaining to you. Don't look at other people's data and make broad generalizations. They want you to do that. That's not smart business, no smart investor would do that. Take these charts that you can find online at face value. They may give you some general trends, some interesting data. But never ever would you want to make investments based on these type of research reports. If you do that, I can almost guarantee you, you will have a world of woe. Because all those rosy projections that you see or at least you thought you saw, they're not even rosy if you actually read the disclaimers and the items in the bottom, the keys of what these actual data even means. But these always show everything to be positive and doing well. And any smart investor knows that's not the truth. That's not how the world works, things aren't always getting better. You're not always seeing higher rents and higher occupancy. So just be very, very careful when it comes to research reports. This is Frank Rolfe, the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.