The self-storage industry’s status as a “recession-resistant business” is being put to the test during the coronavirus pandemic. But despite a sour economy, facility investors and operators will likely benefit in the coming months. See how and why.
There are many things that affect real estate performance. The coronavirus may be relatively new to the world, but it’s created the same effects we see in the markets during any recession: downsizing, divorce, dislocation and death. All of these are good for self-storage. Our industry helps people through these events. As a result, it’s become the most recession-resistant asset class.
As scary and sad as the situation around COVID-19 has become, it’s likely going to benefit our business as the economy continues to sour. Let’s delve into how and why.
Positive Returns
Self-storage real estate investment trusts (REITs) were the only real estate asset type that produced positive returns during the Great Recession of 2008. Obviously, there’s no way to guarantee this will happen during the current pandemic, but there’s also no reason not to believe it will. For example, in March, college students suddenly found themselves ousted from their schools. This was terrible for multifamily real estate investors but fantastic for self-storage. The students needed somewhere to stash their belongings with very short notice, which created an increase in facility occupancy.
According to the National Association of Real Estate Investment Trusts, REITs that specialize in self-storage fell only 11.11% from the beginning of the year through April, while the Dow Jones Industrial Average fell 16.96%. Hotel REITs fell a shocking 53.69% during that period.
As this crisis continues, we’re going to see households consolidate. There are already 26 million people on unemployment and that number continues to grow. Many of those struggling are going to find themselves moving in with family or friends, just to afford rent; and they’ll need a place to store their belongings. While many non-storage landlords will see their occupancy rates go down, ours will climb.
In addition, many small businesses will be impacted. Some may have to move or shut down. These owners will need a place to store equipment and inventory while they get back on their feet.
Another unexpected boon to existing self-storage facilities is many projects that were in the pipeline will stall, and those in the planning stages are now on hold because many city officials aren’t meeting or approving proposals. Projects under construction are being slowed, which will delay completion. This means currently operating sites will see the advantages of the COVID-19 fallout first.
A Good Time to Buy
There are always going to be self-storage owners who get nervous during a recession and want to sell their facilities. If you’re interested in acquiring, there are several things to consider. The capitalization (cap) rate is always a nice figure to know, but it doesn’t give you the entire picture. Why does the property have that cap rate? 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 asset? Does it have extra land that can be developed?
Examine the surrounding area. How many other facilities are within three miles of the acquisition candidate? Are they closer to the target market? If so, why would a potential renter go past those facilities to rent at this one? What’s the current supply index in the area? Has the market reached equilibrium? If it’s oversupplied, you may not want to invest there.
Another thing to look at is vacant land for development or vacant buildings for conversion. These may have to wait for a while, as city governments are currently closed; but they won’t stay that way forever. A seller may be very willing to part with a large piece of land because of the recession. You might also find a large warehouse or retail space the owner no longer wants because he can’t keep his tenants. Either of these opportunities would allow you to break into the business or expand.
A New Way to Operate
There’s no way to predict how the pandemic will affect the self-storage industry overall, but there are some things we should see moving forward. Online rentals vs. meeting new tenants in person will probably be the way of doing business. Many companies are already using a contact-free approach. We’ll see more of them putting online systems in place.
You also need to communicate with current and potential tenants remotely. This isn’t something that’s going to go away anytime soon. Make the necessary changes to stay relevant in this market.
One of the keys to surviving COVID-19 is going to be marketing and how you place your business in front of potential customers. For example, think back to those small business owners I mentioned earlier. Targeting this audience and meeting its specific needs will increase self-storage occupancy. How can you help this group? Do you offer item pickup, or packing and moving supplies? Can you provide a discount on a full-year rentals of larger units? Make your facility stand out from all others in your area.
Time to Prepare
COVID-19 is part of our future. The markets are going to experience a recession, but the self-storage industry won’t be as negatively impacted as other asset classes. Make the appropriate changes now that’ll allow you to continue to do business, and be intentional in your approach to investing. Downturns are no fun, and many businesses will struggle; but now’s the time to be hyper-aware of the opportunities that’ll come on the market due to challenges and fear some owner may not be willing or have the ability to weather.
