I don’t have a crystal ball to look into the future and see what is coming for the self storage industry.
But I don’t think I need one either.
We are moving into the “hyper supply” phase of the economic cycle in many markets. If you are not sure what that means, click HERE for an episode on economic cycles.
In simple terms that means in many individual U.S. markets, or even submarkets, there is more supply than demand.
This is usually spurred by new construction.
With prices being as high as they are, it is no wonder there is so much new construction.
There are still submarkets where there is an undersupply of self storage.
I hunt for those markets. You should too.
When I see a facility for sale or run across an undersupplied submarket, I still get excited.
But at this stage of the game (i.e., this period of the economic cycle) I am very cautious.
Especially building new construction from the ground up.
Why?
One word…lag.
Lag is the technical term economist use for the fact that construction takes so long.
In some of the markets where we have properties, I am seeing the oversupply come in slow motion.
In one submarket in my hometown, there are three new multi-story, 100% climate controlled self storage facilities coming online within six months of each other. This will add hundreds of thousands of square feet of storage.
Then last week, I read that another one has been approved for that same submarket.
Crazy. What is that developer thinking?
All I can do is sit back and watch as that submarket moves into oversupply facility by facility.
Lag.
Like slow motion.
And what comes after the “hyper supply” phase in the economic cycle?
Recession.
That is why we are very hesitant right now to do a lot of new construction.
If I find an undersupplied submarket, I won’t hesitate to move if I can.
But I am very hesitant to build new construction. I would much rather buy existing and expand or even do a conversion.
Why?
Because I can get product into service faster in the case of conversion. I can expand and not flood the market with a large quantity of new square feet. Plus I am already breaking even from the existing cash flow on an expansion.
My concern is what happens in the next phase of the economic cycle with new construction.
When it comes to new construction, our breakeven point tends to be around 50% occupancy on the low end and 62% on the high end.
The problem in a recession is not that the facility won’t lease up. Eventually, it will. The problem is that the lease-up slows down considerably.
What we don’t want to see happen is to find ourselves with a number of facilities in our portfolio that are in the lease-up phase with under 50% occupancy when a recession hits.
Holding periods of months with no cash flowing could really hurt us.
Imagine having three projects, all not breaking even yet, and the lease-up is cut by a third… a half?
Not fun to think about.
That is my word of caution for you at this moment in time.
I am not saying do not start a new construction project. I am just saying we are being very cautious.
I am hedging now.
For example, we have one relationship with a company that is in another business. They are looking at certain markets to do business in. They have asked us to find a suitable site in these markets for self storage and then they will partner with us.
We could build a multi-story self storage facility and have all or a portion of the first floor dedicated to retail space for their business. They would assume some of the risk for the self storage. In that scenario, we have $30,000 – $40,000 in rent coming in before we rent our first unit.
In the last recession, I did a conversion that was a multi-use project and it made a big difference. We had $42,000 in income before we rented unit number one.
I am definitely not an economic expert or even a self storage expert for that matter. I do have the luxury of some years of experience. That is what happens when you continue to breathe and stay in one industry for a while.
You see cycles and you learn stuff.
Be careful as you contemplate new construction.
This is a fantastic business. The best one there is for smaller investors like us. But let’s be aware of the market conditions submarket by submarket, and the economy as a whole.
If we do that, it does not matter where the economic cycle is, we will create True Wealth in this fantastic business of self storage.
