Is Self-Storage the most Recession Resistant Asset?

There are many things that affect the real estate industry and how well it performs. Covid 19 is new to the world, but it has created the same effects that we see during any recession. Within the real estate industry there are the 4Ds. Downsizing, Divorce, Dislocation, and Death and the reality is that all of these are good for Self-Storage. When people go through any of these, they need a place to put their treasured belongings and Self-Storage serves as a way to get them through these horrible events. Because of this, Self-Storage is the most recession resistant asset class and Covid 19 is going to benefit this industry.

Not only has Self-Storage proven to be the most Recession Resistant it is also the best performing asset class during boom times. During boom times, cash-flowing Self-Storage facilities, Parking Lots, and Triple Net Leased Industrial receive cash on cash returns from 15 to 75% depending on the investment. If you are not already in Self-Storage, then this is an area of the real estate industry that you should seriously consider.

Self-Storage REITs were the only real estate asset type that was positive in 2008. Obviously, there is no way to guarantee that this will happen with Covid 19, but there is also no reason not to believe that it will not happen again. For example, college students suddenly found themselves with closed colleges. They had to go home. This was terrible for multifamily real estate investors, but this was fantastic for Self-Storage. The students had to have somewhere to put their belongings with very short notice. This created an increase in Self-Storage Facility occupancy rates.

According to NAREIT, REITs that specialize in Self-Storage only fell 11.11 percent from the beginning of 2020 through April while the Dow Jones Industrial Average fell 16.96 percent during the same time. Hotel REITs fell a shocking 53.69 percent during that period. This is another example that shows the stability of Self-Storage.

As this pandemic continues, we are going to see households that must consolidate. There are already 26 million people on unemployment and that number continues to grow each week. Many of those people are going to find themselves in a situation where they are going to have to move in with family or friends in order to be able to afford rent. As this happens, they will need a place to store their belongings. This will affect the occupancy rates of Self-Storage facilities positively.

While many landlords will find that their occupancy rates will go down, that of existing Self-Storage will go up. Another unexpected boon to current Self-Storage facilities is the fact that many projects that were in the pipeline will be slowed down. Projects that are at the planning stages are on hold because city planners are not meeting. Projects that are under construction are being slowed down due to illness or the shutdown of current construction which will delay the completion of current projects. This means that existing buildings will see the advantages of the COVID 19 fallout first.

There is no way to predict how Covid 19 will affect the Self-Storage industry but there are some things that I think we will see. For example, online registrations vs meeting new tenants in person will probably be a new way of moving forward to decrease the potential of exposure. Many companies are already offering move in bundles that are left in the storage unit for the new renter. These can range from a welcome package to boxes and bubble wrap depending on what your unit has to offer. I think that we will see more owners putting systems in place that will allow us to convert our rental processes to an online platform.

One of the keys to surviving the Covid 19 pandemic is going to be marketing and how you place your business in front of potential customers. There are a lot of small businesses that are going to be affected by this. These owners are going to need a place to store their entire business until they can get back on their feet again. Creating a marketing plan and a package that is designed specifically to these small business owners will increase your occupancy rates. Think about what they specifically need and how you can meet that need. What services do you offer that will help them the most? Do you pick up? Do you have boxes and bubble wrap and other moving supplies that you can package as a small business package? Can you offer discounts for full year packages on larger units? Make yourself stand out from all the other Self-Storage Facilities in your market. Put together packages that include moving supplies and a year of storage all in one. Make yourself relevant to today’s market.

For those of you who are interested in purchasing Self-Storage Facilities, there are always going to be people who are afraid during a recession, or who are negatively affected by one of the 4Ds and so they are going to sell their facility. As you are looking at properties, there are several things that you want to look at when you evaluate that property. Cap rate is always a nice figure, but it does not tell you the entire picture. Whenever you purchase a property, many of the renters are going to move out because they are friends or family members of the current owner. I had this happen to me one time. Now I always assume that I am going to lose some renters. Why does the facility have the cap rate that they have? Is it due to management – good or bad; is it due to marketing or oversaturation or pricing? What changes can you make to improve this property? Do they have extra land that can be developed to improve the cap rate?

You want to look at the surrounding area. How many other facilities are within 3 miles of yours? Are they closer to your target market then you are? If they are, then why would a potential renter go past those facilities to rent at yours? What is the current supply index in that area? Has the area reached equilibrium? If it is oversaturated, then you may not want to invest there. However, if there is room to grow, then this might be a great opportunity. According to current Self-Storage industry statistics, the national equilibrium is 5.4ft per person that number may be higher or lower in your market.

Another thing to look at if you are trying to get into the Self-Storage industry is vacant land or conversions. This is an avenue that is down the road right now do the fact that city governments are currently closed, but they will not stay closed forever. You may be able to find a large piece of land that a seller is more willing to sell because of the recession. You may be able to find a large warehouse or retail space that a commercial owner no longer wants because they cannot keep tenants in it due to Covid 19. Can that space be converted to Self-Storage? Either of these would allow you the possibility of creating new units if your market is undersaturated.

Whether you are just now considering the Self-Storage market, or you are a seasoned investor, this is an important time to make sure that you have your online systems in place. You need to be able to communicate with current tenants and potential tenants remotely so that you can prevent the spread of Covid 19. This is not something that is going to go away anytime soon. Make sure that you make the necessary changes to stay relevant in this market.

Covid 19 is going to be part of our future. The markets are going to go through a recession, but the Self-Storage industry will not be affected as much as other industries as proven by the stock market statistics so far. Make sure that you are implementing changes that will allow you to be more online. Make sure that you are looking for new opportunities that will come on the market because of mismanagement during this new pandemic. As always, happy investing.

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