Is SSI a Risky Investment v4 FINAL

Is self-storage a risky investment? In general, any investment, any business, anything really is just as risky as the people that are doing it and running it. Now, why this is such an interesting question is I think there’s a lot of misnomers around it. And I think what I’m going to have to say here is probably a little different than what people expect. What’s up, everybody? Welcome to Self-Storage Income. Please like and subscribe because that is the currency of YouTube and how we appease the YouTube gods. And before I get too deep into this, as we know, I am probably the largest self-storage cheerleader in the world with the largest self-storage podcast, Self-Storage Income, which hundreds of thousands of people listen to. I have bought more facilities this year than we have in any year prior. I am building 650,000 net rentable square feet at this current time. So I am a huge believer in the asset class. I’m a huge believer in the future. I have been in this space since early 2000s. So I went through the Great Recession. Now, the asset class, as we know it, has changed. Self-storage is the newest asset class on the block in commercial real estate, right? Prior to 2008, it was not mainstream. When we were first starting to buy storage facilities, we were insurance salesmen. And we were told by one of our co-workers, so you’re going from professional insurance people to slumlords. That was the perception of self-storage at the time. And it still is in a lot of places. But the way that consumers use self-storage, the product they’re putting out, it’s all changed. And this change is what’s important. Because how we view the asset and how we view whether this asset will do good or not, its overall return associated with its risk is predicated on its past and how it’s survived a lot of things. So first of all, let’s go back to the Great Recession. In 2008, self-storage gained a reputation. And we hear a lot of echoes from the Great Recession in the philosophy and the overall thinking of self-storage now. The first thing that I noticed is the vast majority of people that talk about it did not own or even knew what self-storage was during the Great Recession. That’s because after the Great Recession, self-storage really took hold in investors’ minds. And over the last five years, we’ve had a swarm of new capital diving into this investment class. It has been the greatest period of returns, asset appreciation, and increase in overall price per square foot and revenue with this asset class that we’ve ever seen. This, in return, has created a massive theme with all of these investors that are new into the asset class that have been lifted up by the market. And we see a lot of them that really don’t understand how this asset performs in any other kind of conditions or why it did what it did during the Great Recession. And they say, even if there’s another 2008, we saw how self-storage performed during that time. They say it’s recession-proof or recession-resistant. And this is where I start to have some issues. The reason being is the performance of self-storage during the Great Recession and how we view it today was predicated largely on two things, occupancy during that time and overall defaults. So how many of the self-storage facilities went under, defaulted, and what happened with occupancies during the time, of which it blew out any other asset class. It had the lowest defaults, had the highest occupancy, and everybody looked at it and said, geez, this is incredible. The reason why I believe in no way, shape, or form that self-storage will do what it did in 2008, today, or beyond is because of the change in the asset class. So let’s go back prior to 2008. Nobody really wanted anything to do with it, right? Well, that means banks also didn’t want anything to do. It was very hard to get financing on self-storage. Now, although it was the lowest defaulting, out of all major commercial real estate, it also had the lowest debt to revenue and value. The debt to income was lower, and the LTV was really low in storage because it was forced. Banks didn’t want to refinance and let people take out more money. Banks didn’t want to loan. We had to put a lot more money down. We had to keep a lot in the accounts. And this was fundamentally due to the perception that self-storage is extremely risky. And that was due to the fact that leases were month to month. They weren’t long-term. So banks didn’t think that they could project out the revenue like you could in apartments or other retail, right, or housing. In storage facilities, our occupancy changes all the time. It’s always moving. And this was dangerous to them. So in turn, the assets had to have a lot of equity in them. They had to perform well in order to banks even get involved. Immediately when we compare the two assets, performance is skewed. There wasn’t as many defaults. But when I look at performance, I care more about what happened to the income. And this is where I think people get very, very confused. During the recession, we bought lots of assets that went under, self-storage facilities. And the ones that didn’t, that were still around, they may have had 80% occupancy, 85%, 90% occupancy, but revenues were cut in half. But they had low debt. They had favorable debt, right? They could survive that. And they could keep occupancies high because they could give away. And as people were moving around and changing, they said, I’ll give you one month, I’ll give you two months free. And people would come in. You can’t do that in apartment buildings, right? You can’t say, oh, I’m just going to give you one month free or not. And you just have people sitting around. First of all, your debt’s high. You got to pay your bills. And then two, during that time, you had lots of syndicators and lots of different structures, refi processes on the bank loans and the notes that covered those assets that wouldn’t ever allow you to. So we had lots of people that were running storage through the Great Recession that weren’t even paying, but the asset could still function like that. Now, the second part that people don’t realize, since 2008, we have now seen the largest development cycle in self-storage ever. It has blown everything prior out of the water. Every single year, development is two, three, four times higher than the next highest average year prior. Retail and other asset classes like homes prior to 2008, they went through a 10-year development cycle. Banks didn’t like to lend to people to develop self-storage. So self-storage didn’t really go through a development boom. Today, it is. So what that means is in 2008, when customers needed to use self-storage, there wasn’t as many options as there are today. So you could still get somebody in, still fill them up, and then eventually charge rate. Today, that is very different. You’ve probably noticed there’s a self-storage on every single landscape. So in the event of a credit contraction or a major recession, not a COVID recession where the government just pays for everything, right? I think it’ll look very different. First of all, there’s supply everywhere in self-storage right now in every single market. Debt structures are different. We have short-term financing. We have funds. A lot of money got involved, and it created a development boom. We also had simultaneously, due to super low interest rates and people now being able to get into their homes, move around, combined with the internet and COVID actually coming in and decentralizing workforce through office space, demand spike. So all of these things are happening with self-storage. It was the perfect storm. It was amazing. I would never underwrite or expect the last five years to happen that way. It won’t. Yet a lot of people are buying assets as if it will. They think that this huge upstick is going to continue forever. That’s not how it works. After 2008, institutional money came in. Third-party managers came in. We got favorable loans, and we could develop more, which created a massive boom. If 2008 happened again today, it would be completely different. We have supply on the market, which a lot of markets are oversupplied. We are artificially lift up through COVID. We have totally different banking structures and new inventory through development coming on everywhere. Yet the cost of materials to put the product out of the ground is three times what it was just five years ago. So they can’t sustain a massive cushion. Okay, now that I’ve gone through all of this, you’ve seen the development trends. You’ve seen everything else. You say, holy cow, AJ, what is this mean self-storage is over? Does this mean self-storage? No, absolutely not. I’m buying, I’m building, I am bullish on self- storage. The economic forces around self-storage are better than I think any other asset class. With that said, though, the performance from the past will not dictate the performance in the future. We have more danger in self-storage than it’s ever had ever in this assets life cycle. Hands down. I also think it provides a better opportunity for any individual to get into this asset than any other commercial asset. There’s still tons of mom and pops to buy. There’s tons of ignored markets. When looking at self-storage and the risk in self-storage, oversupply and not being able to survive an actual credit crunch. We have turnover, we move. If the housing market freeze, you have a seasonal outflow that you won’t get an inflow to the next year. That goes two years in a row. You are now 15, 20 percent down in occupancy. Plus, you have a compression of all other lines of revenue that they just evaporate away. So your overall revenue goes down dramatically. Can you cushion that? How will you offset it? The best way to prepare yourself and to make sure none of that happens is go into markets where demand is super high and there’s not new inventory on the market. Because then if there is a crunch, customers have nowhere to go so they still have to use you. You’re going to lose the ones that just leave the market for good, but anyone that needs a storage will have to utilize you so you can remain high occupancies. So is self-storage a risky investment? That’s what you came here to know. The first thing that you got to say is yes and also no. That really depends on you. That depends on your strategy, where you go, how you manage the facility, and your ability to perform. I like to tell people about my MOS. Warren Buffett has his margin of safety. I have my margin of stupidity. My margin of stupidity means that I will be in a market and even if I don’t perform great and even if things go wrong, the asset will still be okay. Meaning the market is so good and so strong, even if I screw up, even if I’m stupid, I’ll still be successful. Make sure you have a margin of stupidity in. If you have a contraction in that market as far as growth, a contraction in that market as far as housing moves, people are not selling, people aren’t moving, so the housing market shuts down, how will occupancy be affected? Are there so many new facilities that are in fill up that everyone gets drug down and the entire market is destroyed whether you’re good or not? Because that’s what happens, right? If you can avoid that, self-storage will make you wealthier than any other asset class out there. Before you leave, if you want to learn more about self-storage, pick up the best-selling self-storage book. That’s me. It’s the Playbook to Self-Storage. You can pick it up on Amazon, link below. I go over case studies, actual deals done, how to market, how to run, how to find deals, and Annalynes Markets. Check it out.

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