Near the end of 2008, the U.S. Secretary of the Treasury was on his knees begging Congress for Trouble Asset Relief Program money, essentially telling congressional leaders the sky was falling and only the better part of a trillion dollars would cure the problem. Never mind that the money wasn’t spent on what was promised.
In the ensuing months, banks went bust (or should have), loans were impossible to get, home mortgages were being foreclosed left and right, stocks dropped like a rock, and asset values were cut in half or more. Consumers quit spending. CEOs let go of employees by the droves (but not their own bonuses) and, thus, more mortgages went unpaid. In short, everybody was seriously scared and had a right to be.
In the commercial real estate markets, liquidity (i.e., loan availability)completely dried up, causing buyers to disappear and sellers to freeze in place. Goldman Sachs was suggested that cap rates would go up (values down) by 300 to 500 basis points. It looked pretty bleak for commercial real estate, and for several months, transactions were almost nonexistent.
Office buildings cast out their mortgage-broker tenants. Shopping centers lost tenants and renegotiated leases with those that remained. Hotels were hit hard as business and tourist travel came to a near halt. Real estate investment trusts (REITs) discovered they were out of money, and some were forced into bankruptcy. In short, 2009 was a long, slow, scary year.
Why Self-Storage Is Different
A wise man once said, “There must be a pony in here somewhere.” Sure enough, there is a pony, and it’s self-storage. While the industry hasn’t been entirely immune from the effects of the recession, the colossal devastation that has visited other types of real estate has been less damaging for storage properties. This isn’t because of luck; it’s because of natural, positive differences in the way self-storage works as a business.
In the self-storage industry, many follow the REITs quite closely. The U.S. Securities and Exchange Commission requires REITs to publish their audited results on a quarterly basis. Since the self-storage REITs have a broad distribution and large number of stores, this information provides us with a reliable gauge of what the entire market is doing.
When comparing the quarterly results of the REITs for the last year, same-store revenue shows a decline of about 2.7 percent to 3 percent. By order of magnitude, these results are better than those experienced in other real estate categories. While it’s somewhat painful, it certainly isn’t devastating to self-storage operators.
To look at an even more positive aspect of these numbers, let’s run through some math. Let’s say the average self-storage tenant stays a year. If occupancies declined only 10 percent in 2009, then 90 percent of current tenants were new at some point during the year.