Many markets across the U.S. are experiencing negative population growth. But is that an important issue when it comes to making smart investment decisions regarding storage properties? In this Self-Storage University podcast we’re going to explore what’s causing negative population growth and what the implications are for your investments.
Episode 79: The Impact Of Negative Population Growth Transcript
Across America, population rates are declining. We are becoming a country that is slowly shrinking, similar to the phenomenon in Japan. This is Frank Rolfe with the Self-Storage University Podcast. The question is, what is the impact of all this negative or flat population growth? When you look at a map of America, what do you see? You see the southwestern regions of America that are showing strong increases in population in most cases, but the whole rest of the map is either flat or going down. Now when you look at that, it would suggest that we are shrinking because that is exactly what's going on. We have the lowest birth rates we have ever had as a nation. Some credit that to millennials who seem to be pushing farther off into the distance, the idea of having kids. Others point to the fact that families that have kids traditionally today are only having maybe one. So as a result, we don't really have enough population creation to offset the number of people who die each year. Regardless of what the root cause is, all you have to do is go to a website like bestplaces.net and plug in almost any zip code in America and you'll find that it's either declining slightly or flat.
And if it's going up, it's at a very, very slow pace. So if our population in America is going to become stagnant at roughly 300 million people, then what will that do to your self-storage investment dollars? Is the fact that the population isn't growing anymore going to be the death knell of storage? Well, let's explore that for a moment. Storage was created with a very simple premise and that was to store our goods. It started in China thousands of years ago where people would pay to be able to place their most beloved belongings in pots which went into caves. The modern self-storage industry in America started up basically back in and around the 1960s and '70s. But it was on the same concept that we wanted a secure place to store things. And that need hasn't really changed much. And if you look at how most people rent their self-storage unit, they don't rent one for each member of the household. They rent one for the household. Most American families' households have a self-storage unit. I know that I have four for our family. It takes me four large self-storage units to handle all the many material things that we have acquired over the years to keep our Christmas trees at the ready.
I've even got two different cars parked in self-storage units. But it's done by a household, not by individual. You're not going to find a family in America where you've got the one spouse has a unit, the other spouse has a unit, and the teenage kid has a unit, and the eight-year-old kid has a unit. That's just not how it works. So if we're saying that basically, self-storage units tie to households, then the size of the household really isn't that essential. You would have the same self-storage demand, the same self-storage rental of units, whether the household had one person, two people, five people, or seven people. It really wouldn't matter. So the fact that we have become a stagnant nation really is not going to impact self-storage demand. However, what it is going to imperil are areas where we have rampant and extremely high levels of new self-storage creation. America went nuts in the last few years building self-storage units. Literally, billions of square feet of storage were added to a stagnant America.
It wasn't because the population was growing and we needed it. It's because people found that there was big money in building self-storage units in the form of getting fees and things for doing it, regardless of the success of what they built. And many people built those self-storage facilities right into the very apparent fact that people were leaving those cities. There's been an exodus in America, people leaving entire states like California or major cities like Chicago and New York City, and they're unlikely to ever return. So the bottom line is, for the average self-storage facility in a solid suburb or exurbs of America, it doesn't matter what the population demand is doing. You'll still have the household demand to keep those units full. But it means that the ever-weakening part of urban self-storage is only going to exacerbate and get worse. So how do you insulate yourself from these population trends of the fact that we are a stagnant nation? Well, stay clear of overbuilding. Stay clear of areas that you have very, very strong levels of vacancy, because those self-storage units will compete with each other.
One person will offer, "Hey, rent my space and get one month free." The next person will top that and say, "Rent here and get two months free." And the next person, "Rent here and get three months free." Until eventually, it's going to be all free. Because that's what happens when you have very, very overbuilt markets. So don't be concerned about seeing negative population. Instead, be concerned about what the overall occupancy of the storage is in the market that you are looking at. That's the more important criteria. Now if you were selling pizzas or fast food, then it would be a big deal to you that the population in a certain market was declining. You have fewer mouths to feed. People would no longer buy the large pizza. They'd buy the medium or perhaps the small because that's all they need to feed the household. But we're not in that business. Again, households rent the unit as a collective group, and the size of the household doesn't really matter. The problem is when you don't have enough households, then you're going to have a problem. Another issue with negative population that you need to watch out for is when you have situations that no one wants to live in that area and they're all fleeing, such as what is happening in Chicago.
A good way to spot that if you go to bestplaces.net is to go to the housing stats and look at housing vacancy. When people are fleeing, what's going to happen is you're going to have very, very high levels of housing vacancy, because houses are like self-storage units. They're based on households. Doesn't matter if you've got one person living under the roof or five. All that matters is that you have a household to fill that housing unit. And in areas that have high levels of housing vacancy, you can imply that they are also going to have situations where people are all leaving. There's not enough people moving in or even remaining to keep those housing units full. The average vacant housing rate in America is roughly 12%. In some areas that people are fleeing, you'll see it go as high as 30% or greater. Just look at such markets as Gary, Indiana, and look at where that's going as far as their housing vacancy, and that's because people are leaving in droves. The bottom line is that negative or flat population growth should not be of concern to you as a self-storage investor.
There's many, many markets that are experiencing slight negative population, but they're solid and they're good. Instead, watch out for areas, mostly urban markets, and with people who have massively overbuilt, so that no one will ever be able to fill those units because there simply are not enough households, or areas that people are fleeing in such quantity that you have very, very high housing vacancy rates because those are the weak spots of the puzzle. This is Frank Rolfe, the Self-Storage University Podcast. Hope you enjoyed this. Talk to you again soon.