The Covid-19 pandemic has not been kind to urban self-storage investing. In fact, it’s a downright disaster. Here’s what the New York Times had to say:
What once seemed like one of the few recession-proof parts of commercial real estate looks as vulnerable as many other businesses.
And then backs that up with the facts:
Monthly rent for new customers before one-time discounts for a 10-by-10 unit without air-conditioning and heat, for example, declined 4.3 percent nationwide on an annualized basis, according to the research site Yardi Matrix. For the same unit with climate control, rent fell 6.7 percent.
You can read the entire article here.. So what happened and are their any bright spots?
Urban markets are going down the drain
Virtually all of the decline is in large urban markets that are facing what is now called “The Great Reshuffling” by Zillow – basically those in the big cities moving away to escape Covid and urban unrest. The numbers are staggering. It is estimated that nearly 10% of the population of some major cities has already left or is in the process of leaving. That type of demand decline is unprecedented and, when coupled with the massive over-building of storage in recent years, can only lead to economic ruin. Will it ever come back? The megatrends in the U.S. would suggest not. As workers have learned to work from home thanks to telecommuting – coupled with the desire to be away from crowds – it is unlikely that Americans will have any real interest in moving back into cramped, unsafe, urban centers.
All the growth is in suburban and exurban markets
As Americans move away from these urban centers, they are instead focusing on suburbs and exurbs (the line of towns just outside of suburbs). These offer everything they desire: privacy, space, security and the ability to have a much higher quality of life. And they are, of course, bringing all their stuff with them. As a result, self-storage owners in suburbs and exurbs are reaping the benefit of the urban storage facilities’ misfortune. It’s simple economics at play: supply and demand.
These markets are dominated by smaller players
Virtually all large storage facility owners focus strictly on large urban markets, and have long ignored suburbs and exurbs. That’s proving to be a really stupid strategy that was built on laziness and not economic focus on investor’s best interests. Urban markets allowed large operators what they called “operating efficiencies” at the sacrifice of portfolio balance. Instead of putting all their eggs into multi-story urban properties they should have been hedging that with suburban offerings, as well. Meanwhile, smaller operators – who were priced out of urban markets due to excessively low cap rates – now look like geniuses as Americans are pouring into these areas and pushing demand like never before.
And the larger operators are stuck trying to prop up their failing urban properties
Now that the larger operators have been caught unprepared, it’s too late for them to compensate because they are stuck with trying to salvage their urban holdings. This focus will also prevent them from being able to borrow aggressively to buy suburban properties because the lenders will be too concerned about their urban loans. Of course, this will not go on forever. And when the larger players are finally able to focus on suburban and even exurban markets, they will be faced with paying higher prices to the smaller players, many of which will see this as a selling opportunity.
Conclusion
The Chinese word for “crisis” has two characters which translates to “danger” and “opportunity”. The Covid-19 crisis is just that: a real danger for urban storage owners and a real opportunity for suburban and exurban owners. For many investors, understanding this shift and investing accordingly is extremely important if you want to profit from self-storage investing.