Cris Burnam is the CEO of StorageMart, a self-storage business team deploying technology with over 100 collective years of experience. In this episode, Cris shares his thoughts on how interest rate increases have impacted self-storage deals, what makes self-storage recession-resistant, and the opportunities he sees for this asset class in 2023.
Cris Burnam | Real Estate Background
- CEO of StorageMart, a self-storage business team deploying technology with over 100 collective years of experience.
- Portfolio:
- 21M sq. ft.
- 200K units
- 285 locations throughout the U.S. and Canada
- Based in: Columbia, MO
- Say hi to him at:
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomv Reed, and I'm here with Cris Burnam. Cris is joining us from Columbia, Missouri. His company is StorageMart. It's a self-storage business team deploying technology and over 100 plus collective users. Experience in self storage. They currently operate over 21 million square feet. That's 200,000 units in 285 locations throughout the United States and Canada. Cris, could you please tell us a little bit more about your background and what you're currently focused on?
Cris Burnam: Sure. This is a family business originally, and we've always been very entrepreneurial. Over the years we've been in a number of businesses, but we've always just done better in storage, and that became what we ultimately focused on. I started in the business literally when I was about 10 years old, and after I finished school, I came back at work for my family and ultimately built the company to where it is today.
What we're focusing on right now is preparing for the next real estate cycle. We're ending a period where money was on sale, and cheap debt was everywhere, and as a result, there were a lot of folks that rushed into our business, perhaps prematurely, or didn't quite understand what they were getting into, and now suddenly, more austere times I have shown up... And we've always found that when those events line up, folks like us, which have access to long-term patient capital, and have a track record of operating very well, have access to funds to allow us to grow when others frequently do not... So we're looking at consolidation, and are there other storage players that perhaps we can purchase and bring into our fold. So we think that the tough times that we're seeing in real estate, or at least a lot of folks are forecasting they'll see in 2023, could be a good opportunity.
Slocomb Reed: So preparing for the next market cycle, and currently more austere times means that because you have a very long-term minded debt structure, it puts you in a good position business-wise, operationally, possibly to acquire other storage owners and operators who don't have your debt structure and your operating savvy. Is that a good summary?
Cris Burnam: Yeah, that's a good summary. I wouldn't say just debt; I would say also debt and equity. Both of those are mother's milk to real estate. And having long-term patient capital, along with access to reasonably priced debt are pretty fundamental building blocks to any real estate company... And that's something we've spent a lot of time thinking about and planning. So we feel like we're well positioned for any consolidation that might be occurring as we go through the downturn in the real estate cycle.
Slocomb Reed: Cris, I want to avoid predictions about what a downturn will or would look like; asking more generally - so this is a family business. You do not qualify as a spring chicken, and your family was in it when you were very young, so you've seen some cycles already. Speaking generally, how does a market cycle downturn, or recession, if I can say the word - how does it generally impact self storage?
Cris Burnam: Well, self-storage is a unique business, in that in good times, business is really good in self storage. And in bad times, business is reasonably good in self-storage. I'm not going to say that we're recession-proof, but we are kind of recession-resistant, in that people will need us in good times and in bad times. So while, say, the retail space or office space might go through some pretty severe contractions and expansions, depending on the business cycle, self storage is really kind of a resilient product. People use us when they're moving up in life, and when they're moving down in life. So clearly, we do better when the economy is better. But we probably do a little less worse than a lot of other real estate types when things get tough.
Slocomb Reed: Right now anyone involved in the single family game pretty much anywhere in the country will tell you that transactional volume is down. In more volatile markets, the ones that saw the crazy appreciation recently, they are now seeing property values fall... And in places where I am, like Cincinnati, Ohio, where the appreciation was not as extreme as it was in parts of Florida, Arizona, Texas, we're not seeing prices go down; we're seeing them stay level. But again, the transactional volume is significantly lower. So you have way fewer people moving... Have you seen that impact demand for self storage?
Cris Burnam: Absolutely. And it's interesting, we came off of a real high post COVID. COVID was very good for self-storage. People were doing all kinds of real estate transactions, renovating their homes, buying new homes; all of those things were occurring, and we really came off of a huge high from COVID. We're now seeing that COVID premium unwind, as people are moving less. New house activity is down, building permits are down... None of that is particularly good for our business. So yes, it's absolutely slowing down, and we thrive off of transition. When Americans are moving, we do well. And if you look at statistics over the last three years, more people moved than roughly any other analogous time period in postwar history; phenomenal amounts of people moved. At one point in time there was something like 46 million people changed zip codes over about an 18-month period of time, compared to pre-COVID times, that would have been about 30 million people. So that was a huge surge in business for us, starting to unwind now... And probably becoming a little more normal, quote-unquote. And from a valuation point, there was a huge cap rate compression that's occurred in self-storage over the last five years, as we went from being the junkyard dog of real estate to the shining star of real estate, particularly from an institutional investor perspective... Because they've realized that over the last 20 years the self storage business has actually led the entire real estate universe in total return. And that's starting to get a little more respect from the pension fund crowd, if you will.
Slocomb Reed: I know some mobile home park investors who are not going to give up that junkyard dog moniker that easily. But you're right, there's been some significant growth... Have you seen during that time - you talked about debt and how vital good debt is to any real estate investing venture... Have you seen that better debt has come available over that time span to self storage investors?
Cris Burnam: Oh, absolutely. That's part of what has made the last three or four years so good in the storage business. Now, the party's over, somewhat. And with the increase in interest rates, particularly over the last six months, it's making new deals very hard to get done using traditional debt. And what's really interesting, first time in my entire career we've headed into negative debt yield territory. And what I mean by that is, when you're looking at making an investment, typically when you add some debt, you juice your returns up here. Lately, you've been getting better returns doing all cash investment, and not bringing any debt, where actually your debt's become so much more expensive that it's actually lowering total returns on deals... And that's a pretty new phenomenon. I've never seen that occur in my career. So you're two or three years out in your proforma, and the debt you've added is actually costing you more than your equity is. Kind of a crazy thing to happen, and a lot of folks are still trying to make sense of that.
Slocomb Reed: The party is over somewhat... Cris, you seem like the kind of person who's very qualified to put numbers behind that. Can you tell us with some metrics what's happening in self storage right now?
Cris Burnam: Sure. Occupancies are probably down about 5% overall from their peak. In our business you never run 100% occupied. Peak COVID, the industry was at about 95%. Today, it's at about 90%. Five years ago I would have told you that 85% was full occupancy. Nowadays, we're thinking maybe it's 90, maybe it's 95, somewhere in there, but occupancy is definitely a little bit softer.
Fortunately, we're starting to see new starts, construction starts [unintelligible 00:10:32.06] really one of the Achilles heel to self storage is it's not very hard to build these things. And supply can really get out of hand if you're not careful. And we've seen markets get significantly overbuilt, particularly say back in the last cycle 2007, 2008, 2009, there was a massive wave of new supply that came on and really created pain for three or four years. We were expecting that to happen [unintelligible 00:11:04.00] about 2020. Then COVID came along and bailed us all out and filled up a lot of empty storage facilities. Now, with the increase in interest rates, and everyone's cost of money is about doubled, we think we're gonna see fewer construction starts. And that means '24, '25, 2026 look like they could be pretty attractive years in our industry.
Slocomb Reed: Because while demand will be increasing, supply will not have kept pace?
Cris Burnam: That's the idea. And really, bankers are getting a lot more conservative right now on the next construction loan that they do. And when we say the party's over, if you own a full self storage facility right now, you can still monetize your investment, you can sell it lightning quick; there are folks out there that would be buyers. But if you have a piece of dirt that you're thinking about building a self storage facility on, finding construction debt and construction equity today might be really, really hard to come by. And you might not like the price and the terms on that construction debt.
Slocomb Reed: Those seem like good market factors for someone like you to be looking to acquire less than optimally performing facilities. Are you seeing a lot of that? You said if you have full occupancy that there's a laundry list of buyers waiting there. Are you seeing already -- we're recording a the holiday season 2022. Are you seeing that there are distressed sellers right now?
Cris Burnam: A handful. But to be certain, nobody is a seller by choice right now. There are sellers by necessity. And that happens in every market, and we really call it the three D's: divorce, death and dissolution of partnership. Folks that are facing those three things tend to be sellers. I would add to that folks that are facing a bullet on their loan, and are coming up on an ugly refi might also be sellers.
Slocomb Reed: A bullet also known as a balloon.
Cris Burnam: That's right.
Break: [00:13:19.02]
Slocomb Reed: So considering the acquisitions that you all are looking to make moving forward into what could be serious headwinds for self storage, what are your size requirements for a facility and what are your location requirements?
Cris Burnam: Well, let's talk about location first. I want to be able to see Walmart and smell McDonald's. We need great real estate in this industry, because the difference between a so-so storage facility and a great storage facility is usually the visibility in the location. So that's first and foremost. After that, it really needs to be at least 50,000 square feet to be optimal in operating size, but it could go all the way up to say 200,000 square feet. But that's a little unusual. So probably the sweet spot is between eight and $12 million for, say, about an 80,000 square foot facility. And that would be in most major markets; it might not be in a gateway city like New York or Miami; those will typically command a little higher price. But somewhere in that range would be a sweet spot.
When you get to the smaller markets... If you have a property in Paducah, Kentucky, you're not going to get the kind of cap rate that they're gonna get if you're in Cincinnati, or certainly if you're in Dallas, Los Angeles, Phoenix.
Slocomb Reed: I'm based in Cincinnati, I'm an apartment investor... Do you all have any facilities here in the Cincinnati area?
Cris Burnam: No, we don't. We've actually scouted Cincinnati several times, looking for opportunities, but you've got a topography problem in Cincinnati; there's a lot of hills, not a lot of good building sites, and you've got certain areas that are heavily blue collar, and then heavily gentrified, and finding that right location is kind of tough. So Cincinnati is an unusual market; it's kind of dominated by the moms and pops still. And that's why we think it's attractive; we just haven't been able to scratch anything up.
Slocomb Reed: As a Cincinnati investor, I take all of that as a compliment. Thank you very much. The reason I say that is that this has been a market that's been very difficult for non-local investors to break into in a variety of asset classes, for a variety of the reasons that you mentioned, and a couple that you didn't. Getting off my soapbox now though, are there any parts of the country that intrigue you, especially right now?
Cris Burnam: Our focus is we want to get a cluster of properties wherever we go. So if we're going to come to a market like Cincinnati, I don't want to go there for one deal; I want to go there because I think I'm ultimately gonna get 10 or 12, or 15 stores, because that kind of scale makes management so much easier, and it actually keeps your cost structure down.
That being said, we certainly like a lot of the Midwestern markets, because they're just incredibly stable. Indianapolis, Kansas City, Milwaukee, Des Moines have all been great markets for us. But I've gotta tell you, 40% of my portfolio is located in Manhattan. Not Manhattan, Kansas; Manhattan, New York City. They have such a sizable investment, we have to be very city-oriented as well. So we like New York City. We love Miami, a lot of dynamic things happening there. We still like major metropolitan areas in California, although it's getting a little more problematical doing business in the People's Republic of California... And there's a few other spots that are out there. But anywhere that there's some dynamic factors going on in the marketplace; Chicago would be an example of a market we tend to stay away from. There's not a lot of net growth, real estate taxes there are confiscatory; you have to work four or five months a year and 100% of your gross income goes to paying your real estate tax bill. I've gotta tell you, it's tough to make money in places like Chicago. So we're careful about where we go to, but we want to see solid demographics, a good population base, hopefully some job formation and household creation [unintelligible 00:18:28.11]
Slocomb Reed: Cris, I'm going to hijack this interview for just a moment and ask a couple of questions that I know our Best Ever listeners can gain value from. This is really all about my own personal curiosity. I've been a host of this podcast for over a year now; just over 150 of my episodes, my interviews have aired, and that's a lot of experience across which I've only ever heard of one investor who was actively pursuing Chicago, whoever did a deal in Chicago. And it was an apartment deal. Being a Cincinnati investor now who primarily grew up in Ohio, has spent the majority of my life living in the Midwest, for a couple of years growing up in Chicago, I have a tendency to look up to Chicago as one of the larger, greater, and then like guttural level better metro areas. I have heard so many investors over the past year talk about how difficult or bad Chicago is, and why they tried to avoid investing in Chicago and places like Chicago. You mentioned two reasons... I want to dive deeper into this Chicago question because I want to really understand... I, culturally, socially being a Midwesterner, I love Chicago. I like visiting Chicago. I took my wife there as a surprise Christmas present when the musical Hamilton first appeared in Chicago. You said a couple of things here... One is fairly flat growth, economically and by population, and the other is very high property taxes. Can you dig into those two a little bit, and let me know, are there any other reasons why you're avoiding Chicago?
Cris Burnam: Sure. It breaks my heart to avoid Chicago, because I'm with you, Slocomb. I think it's one of the greatest cities in the world. And I spent 15 years developing properties in Chicago. And we still own properties there, but we're not looking to grow our portfolio.
The first problem was Chicago is their government is in shambles, and the only way they've been able to finance it is through extraordinarily high real estate taxes. We have some facilities in Chicago that are paying three, four, five hundred thousand dollars a year in real estate taxes, and properties might only bring in, say $1,005,000 in gross income.
Slocomb Reed: Wow.
Cris Burnam: So you can imagine, 30%, 35% of your gross income immediately goes to pay real estate taxes. It's crazy. Then they have this game that they play called reassessment. They come in and they give you an assessment that they know is probably 30% or 40% too high, figuring that there might be some people out there that don't appeal it. But everybody appeals it. So you have to pay that higher assessment for two or three or four years, until your appeal goes through, and then you win, and then you get half or three quarters of it back, and then you're fine for a year, and then boom, here it comes again.
So there's this assessment game that's played, and it's really unsavory as an investor, because you don't have that predictability. I don't mind paying high taxes if I know what it's going to be. It's when you don't know what it's going to be. That's what I think is the problem there.
Then the second thing is people are leaving Chicago; they're leaving in droves. There's negative population growth. And 10 years ago, 12 years ago, areas that were gentrifying inside the city of Chicago, that phenomenon has largely stopped, and people are now starting to move out. When hedge fund managers get mugged on the Magnificent Mile downtown, that's a problem. And it's not getting any better. Those are anecdotal stories I hear, but both of my sons lived in downtown Chicago, working for big companies, and between COVID, the riots that were going on down there, and just the overall crime aspect, people are just looking for easier places to do business. And it's really too bad, because it is a great city.
Slocomb Reed: You're painting a difficult picture for the real estate business, but a beautiful picture for the attorney business, which unfortunately I'm not in, so I don't know that Chicago makes sense for me either. I'll stick to Cincinnati. Thank you. Cris, are you ready for the Best Ever lightning round?
Cris Burnam: You bet.
Slocomb Reed: Great. What is the best ever book you've recently read?
Cris Burnam: It's called "Quartered safe out here", and it's a story about a British soldier in Burma during World War Two, but it's a true story, and it is written from a soldier's point of view, which tells you just how awful things really were. And it's refreshing to actually see what might have been the real stuff.
Slocomb Reed: Cris, what is your best ever way to give back?
Cris Burnam: Something I'm most proud about is our company's affiliation with Big Brothers and Big Sisters. We've raised hundreds of thousands of dollars for them over the years, and we just think it's a great way to reinvest in every community that we do business in.
Slocomb Reed: Cris, thus far in your self storage investing career, what is the biggest mistake you've made and the best ever lesson that resulted from it?
Cris Burnam: Almost every time I've hesitated to take a tough decision, it's come back to bite me in the butt. And it's one of those things that you learn kind of a gut feeling. Usually it might be regarding an employee or something like that, and things just aren't working out... And sometimes it's better to just tear off the band-aid and face your problems, because they don't go away. Just confronting things head-on has been one of the toughest lessons that I've had to learn.
Slocomb Reed: On that note, Cris, what is your best ever advice?
Cris Burnam: Ah, let's see... Get a great employment agreement...? No, just joking. Best ever advice - I think if you work hard, and have some passion, things will turn out.
Slocomb Reed: Last question... Where can our listeners get in touch with you?
Cris Burnam: Sure. Storage-mart.com, or Cris.burnam [at] storage-mart.com. I'd love to hear from you all.
Slocomb Reed: Thank you. Those who links are in our show notes. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation about keeping self storage investing recession-proof, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through today's episode. Thank you and have a best ever day.
Cris Burnam: Thanks.
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