Yardi recently published an interesting article titled “National Self Storage Report” that captures the pulse of the self-storage industry. What I find interesting about the study is that a core tenant of the storage industry is truly still intact.
Who Uses Self-Storage?
Storage units are utilized by two types of consumers. First, business owners. Second, everyday people who are dealing with routine and customary life events.
What’s a life event? A new career in a new town. Closing your store’s retail footprint due to COVID and putting equipment and inventory into storage. Upsizing or downsizing your home. A marriage, or a separation. The loss of a loved one, or the excitement of adding a little one to your family. These life events just happen, and they can’t be stopped. Similar to changing the motor oil in your car, now and again we just have to deal with a life event.
Rates on the Rise
The part of this that really grabs me is that Yardi states that rent rates for a typical 10×10 were up in the trailing 12 months between 10% and 12% for non-climate and climate-controlled units. Now, candidly, the report was generalizing. Yardi does not identify by class (A vs. C), nor does the report identify properties by state.
For purposes of this brief article and in general terms — storage owners and investors did really well during the second half of 2020 and the first half of 2021, during which time the economy was being hammered by COVID. You’re doing something right if you can maintain the same cost structure but raise your top-line revenue number simply because the market will bear it.
And to overkill it with the yellow highlighter here, in the second half of 2020 the economy was simply not doing well. Storage is often discussed as being a recession-resistant asset class. At least it is until it isn’t. Let’s not kid ourselves — nothing is bomb-proof.
How Long Will This Last?
So where does this take us next as investors? Will it be a flame-out? Or will the space be durable, sustainable, and continue its macro trend?
The increase in the value of an asset like a self-storage facility is determined by the following formula: Increase in Net Operating Income (NOI) / Cap Rate (cap rate at exit) for the asset. Because of the institutions’ appetite for portfolios of assets, some portfolios of assets are being liquidated in the high 3 or low 4 cap ranges. That’s bananas!
But will that end anytime soon? I think very likely not. Remember, when interest rates peaked in 1982, the P/E on the Dow was less than 7. And that peak in interest rates was a Fed Funds rate of 18%. Ouch! The asset size of the 401(k), 403(b), and 457(b) marketplace is gargantuan, and those plan administrators can now for the FIRST time buy portfolios of strong stabilized and cash-flowing real estate assets. From here it seems plausible that both bond values and stock values have a solid chance at a decline.
My best guess is that ERISA plan allocations (think Department of Labor and retirement plan funds) will continue to come out of both the stock and the bond market and move into tangible real estate assets for decades. Remember, those plans had for the most part a 0% allocation to direct ownership of commercial real estate until August of 2020. I think we are just starting the move.
If the stock market lost 40% in the .com bust and more than 50% in the great recession, when comparing standard deviations of a stock portfolio compared to the standard deviation of a syndicated real estate portfolio, you tell me which is more volatile and which may have a higher compound average annual return.
To really drive the above point home, take a look at the stock chart of FRI, an S&P REIT Index Fund from February to March of 2021. That’s a bloodbath. From my perspective, that was due to the inflation scare we had this spring. Soon after, we first heard the newly invented term “transitory inflation,” and the yield curve has since reversed its move. What happens when it moves again, without reversing?
The Future of Self-Storage
Back to the question regarding the trend in self-storage. We just identified that one of the largest pockets of investable assets, corporate retirement plans, is now able to move into the CRE market, and their current allocation is near 0%. We also identified that life events drive occupancy at self-storage locations to increase, which in turn drives lease rates higher.
Does it seem plausible that the industry may become overbuilt? Sure. An equally reasonable assessment would be that not all regions will experience the same saturation growth and that investors can drill down using Marcus & Millichap’s Research (available for free), which focuses on the industry by region. Interested in the Texas market for self-storage? Read M&M’s work first, and then examine the due diligence work of your favorite sponsor.
Nobody ever said investing in private securities was as easy as holding cash in an FDIC-insured bank account. You can and should go find those pockets of strength and growth and make modest investments, varied by region, duration, and year of maturity.
If you have more than your age with a percent sign behind it of your net worth allocated to the stock market, take note. That may be much more risk than you realize. Former Merrill Lynch research strategist Bob Farrell is a legend on Wall Street. I encourage you to read his 10 Rules for Investing. The implications of rule #4 are profound, and while stock prices are still high, make sure your stock allocation is where you need it to be. Please be careful as you wade in the waters of risk and return.
About the Author:
Ted Greene is part of the Investor Relations team at Spartan Investment Group. Spartan syndicates self-storage assets for investment. Ted had 24 years of experience in the financial services industry as an investment advisor and Chief Compliance Officer before joining Spartan. Ted can be found on LinkedIn at www.linkedin.com/in/ted-greene-dontbeafraid or reach him at firstname.lastname@example.org.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.