“The self-storage industry is at a crossroad as it travels down the path to maturity.” Ray Wilson, Self Storage Data Service Inc.
The above quote from Ray Wilson could well be describing America, for there’s no doubt we, as a country, are at a crossroads—from the wars overseas to the financial one everyday Americans are fighting at home. At the time of this writing in December, a new president had been chosen, but had yet to take office. Automakers were failing, as were lending institutions. Foreclosure and unemployment rates were at an all-time high, while the availability of credit was nearly impossible to find.
Although the economy was feeling the affects of the recession since the beginning of 2008, it wasn’t until Dec. 1 that it was officially declared a recession. Now, some economists are predicting we’re in the worst recession since 1981-82.
For self-storage owners, developers, builders and investors, there’s no doubt that 2008 was a bumpy year. For many, it was a year of losses and slowdown; others fared better. “The self-storage industry is enduring arguably one of the toughest economic environments it has ever experienced,” says Minh Tran, managing director, Holliday Fenoglio Fowler LP in Houston. “Consumer confidence is at an all-time low; unemployment rates are continually on the rise; and many have lost a considerable amount of money in the stock market.”
Now, with a new president in charge and promising a revived economy, everyone is hoping 2009 will be the turnaround year.
Basic Supply and Demand
While the self-storage industry has always been touted as recession-proof or, at the very least, recession-resistant, it was put to the test in 2008. Across the country, self-storage builders and developers saw projects disappear as banks tightened lending and raw materials drove up the cost of construction. Likewise, investors and self-storage owners scrambled to find suitable loans. Some facilities reaped the benefits as foreclosures forced people from their homes. Others saw rent increases and new rentals drop at alarming rates. And many facilities grappled with tenant delinquencies or those who simply walked away because they could no longer pay for their units.
“The belief that self-storage was recession-resistant was based upon its performance in earlier recessions when the industry was still building to a huge pent-up demand,” Wilson explains. “The demand was so great that changes in the economy did not affect the self-storage owner’s ability to increase rent and still maintain physical occupancy.”
Now the balance between supply and demand has tipped the scales in the other direction, Wilson says. “The current level of supply of space has satisfied the pent-up demand and now changes in the economy do impact performance.” However, he does maintain that the self-storage industry is not as sensitive to downturns in the economy as other real estate sectors, such as hotels or retail. “There is that segment of storage demand that comes from ‘need’ resulting from disruptions in people’s lives, which helps balance performance during these turbulent times.”
How a facility faired in ’08 depended largely on the market in which it resided. Markets with heavy foreclosures enjoyed increased occupancies, while other markets had more empty units. “Although we have seen reductions in overall occupancy, a drop off in telephone-call volume and walk-in rental traffic, and increase in the traditional levels of delinquencies, our occupancies on a relative basis are still OK,” notes Jim Chiswell, industry consultant and owner of Chiswell and Associates LLC in Palmyra, Va.
Some facilities experimented with concessions; others conducted exit interviews to pinpoint why they were losing tenants. “People are making very conscious budgetary decisions,” Chiswell says. “For the most part, the purchase of our product is a discretionary expense.”