Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
The self-storage industry’s status as a “recession-resistant business” is being put to the test right now. But despite a sour economy, facility investors and operators will likely benefit in the coming months.
There are many things that affect real estate performance. The coronavirus lock down 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. As a result, it’s become the most recession-resistant asset class.
Historical positive returns during recessions
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 multi-family 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.
Furthermore, 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, self-storage 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.
Reduced new construction
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. 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.
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 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.
Our government’s shut down of our economy will guarantee a recession…but the self-storage industry won’t be as negatively impacted as other asset classes.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com