Inflation vs Self Storage v1.1

Inflation vs. Self-storage Ok, you’ve probably noticed inflation is hot, really hot. It’s over 7% and it doesn’t really look like it’s ending anytime soon. Today I’m going to be talking about inflation and its correlating effects on self-storage. We’re really going to dive into what’s happening with my portfolio, what we’re seeing in the marketplace, and we’re going to talk about potential outcomes that may arise from such high inflation in this industry and asset class. We got to this place because of course lockdowns, government intervention, and the mass flooding of our economy with capital. Normally during a recession we have a contraction, and this contraction results in households tightening up. That’s all normal. In this contraction, the government stepped in. There was a lot of money being dumped into the economy. Trillions of dollars. On top of that, interest rates were at all time lows. We made a whole video walking through how we got to this place. The link is in the description. So what does that mean to self-storage? What does that mean to your tenants? What does that mean to your acquisitions and different markets? Self-storage as an asset class has been exploding. As you can see from this chart, the sales price of self-storage on a square foot basis exploded. We were looking at self-storage demand being right around 9.5% of the total population that use self-storage. We’re now at 10.5% of the population using self-storage. Will that continue? We don’t know. We don’t underwrite that it’ll continue because we think that’s crazy. We want to be conservative and we want to look at normal increases and we want to look at the market in the past and see how it’s acted. We don’t want to suspect that the last three years are going to continue to the next three years because the last three years in self-storage have blown away anyone’s prior expectations or ideas on how self-storage would perform. Money is chasing this asset and it’s chasing this asset because it’s done so well over the last 15 years. A lot of real estate assets were absolutely demolished in 2020 and 2008 and self-storage survived both of them. Plus, there seems to be growing demand. Now, because investors have taken notice, there’s been a lot more demand and capital inflow to this asset class. And we have seen an incredible compression of cap rates, especially since 2010. We are seeing things trade at today, this year, in prices that are unbelievable. Prices have gotten crazy, to say the least. And one of the large driving factors of this is that inflation took a toll on replacement cost. So people wanted to acquire and the price at which they could acquire grew. We saw steel prices explode, the price of labor and land. That meant to develop and put new inventory on the market, you were paying a pretty penny. We’re seeing facilities trade at $300 a square foot that we were buying for $60 and $80 a square foot just a few years prior. This all came to be a perfect storm around self-storage and the demand from investors, which seems to be insatiable at this point. When we look at our assets and what’s happening on the ground, we’re seeing a couple things at the same time, like a lot of people are. First, our costs are rising, especially if you have managers, we’re seeing a substantial rise in employment cost. But one of the great things about self-storage is all the other costs associated with it are fairly fixed. On the revenue side, we’ve seen a very, very big change. Now we’ve been raising rates and we’ve seen our revenue growth for years going on right now. But when we’re looking at last year alone and where we’re at, we were facing roughly a 20 to 40% increase on our street rates. And we have about an 8 to 16% increase on existing tenants. And I can tell you right now for the spring, that’s going up even more. We have very limited space. There’s a lot of demand right now, more demand than we’ve ever seen. Since the beginning of the pandemic, we’ve seen our vacancy rates shrink, markets have gotten tighter, demand has gone up, even with all the new supply that’s come on over the last few years. That means we’re raising revenues, we have less vacancy and the majority of our costs are fixed. That’s a good spot to be in. Our profit margin or the money we’re making is expanding and people took notice. So overall inflation so far has been very kind to the self-storage industry. Low interest rates and high inflation has definitely benefited the self-storage industry. Now I say so far because normally inflation is followed up by rising interest rates and we haven’t seen that effect yet on self-storage and we’re really not sure how that’ll play out. With all of this demand from buyers, we’re still seeing rates rise and rise fast and people are expecting them to continue. I know we are at least for the next six months. The question is, are we finding deals? Yeah, we are. We’re still finding a lot of deals. Most of them are off market. We’re finding deals going direct to owners that are not in line with the current market where even if we’re paying more, there’s just so much meat on the bone. It doesn’t matter. We have large margins and most importantly, we aren’t expecting the market to go up to make us and that’s the big difference of our investing style. We’re not investing in an asset predicting that rates will continue to rise and that’s how we’re going to get our return. Our return is based on what we can get out of that asset pretty much day one. If the market keeps lifting rates, that’s great. That’s the cherry on the top. But at this point in the cycle, I wouldn’t be planning on the same thing happening that’s happened over the last three years. Okay, so self-storage is benefiting from inflation in a really big way to existing operators. Our revenues are rising. Yes, our expenses are rising, but a huge portion of self-storage expenses are fixed. So we are getting really good margins because our costs were locked in on the other side of the coin. Deals are outrageously expensive. Investor demand is sky high and we have to do 10 times as much work to find one deal. What you got to really look out for is interest rates and how that’s going to affect our customers. Luckily in self-storage, there’s lots of opportunities. You just got to work harder to find them. So the question is, is self-storage too hot? Is it in a bubble? Well, we made a video about that. It’s called The End of Self-Storage. Check it out. Thanks everybody for watching the video. 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