It’s nearly impossible to separate real estate’s fortunes from the health of the overall economy.
Yet one sliver of the property game has a most curious — even at times, inverted — relationship with the business climate.
Welcome to the odd world of self storage, those somewhat odd facilities where one can rent space to stash everything from keepsakes to household goods to business supplies to plain old junk.
This is not a small business. The industry claims it services 1-in-10 Americans. According to Self Storage Almanac, there are 49,000 storage facilities across the nation — 1,100 in Los Angeles and Orange counties — worth roughly a quarter of a trillion bucks.
How’s that? When the economy’s a mess, lives get turned upside down. Thus, people frequently need space to keep some — or many — of their belongings. Failed small businesses — another outcome of a financial downturn — additionally create demand for storage for tools, machinery and/or inventory. Where better to stockpile the goods but at a local storage locker?
This recent economic cycle has been particularly brutal in many ways. Yet it’s proven to be an opportunity for self storage as a flood of foreclosures has forced scores of families from homes. That’s boosted demand for storage as these households are often forced to relocate to smaller quarters that can’t hold all their possessions.
Bad news can be good news in the real estate genre.
“Self storage has weathered the storm,” says Michael Schwartz, CEO of Strategic Storage Trust Inc., a self-storage investment firm from Ladera Ranch. He feels he almost has to apologize because, “we’re moving so fast.”
He’s not alone. When Selfstorage.com recently surveyed 200 self-storage owners on business conditions, 42 percent replied that their rental traffic rose in 2010 vs. the previous year and 38 percent said revenue rose as well.
On Wall Street, where shares of four big owners of storage facilities trade, self-storage investment trust stocks were up 18 percent in the first five months of the year – the hottest real estate investment trust niche, according to NAREIT indexes. Note: U.S. stocks in general, as measured by the SP 500-stock index, were up 8 percent.
And the industry’s even a hit on TV. Not one, but two cable shows – “Storage Wars” and “Auction Hunters” — follow the antics of the bidders drawn to public auctions of goods stored in self-storage units with delinquent renters.
Schwartz’s SSTI — a real estate investment trust with stakes that do not trade on stock exchanges — was started in 2008 and has raised $230 million from investors. It recently started the SmartStop brand of storage facilities and, according to its financial filings, if it completes a series of acquisitions it will own 77 self storage facilities located in 17 states with 50,590 units and 6.2 million square feet of space. One of those planned deals includes a facility in its hometown, what will be its second Orange County property and its eighth in California.
“I want more assets in California,” says Schwartz, noting the state’s population density and its typical – though not current — economic heft.
This isn’t a play on extended lean times, Schwartz insists. Self storage flourishes in good times, too.
For one, a certain slice of the population is always in transition — between jobs, cities or marriages or the like. And that movement gives rise to the need to store things. In towns where cost of living is high, storage space in the home can be a rarity — also creating demand for extra storage. The self-employed and home businesses — growing forces in the American economy — also generate customers for Schwartz’s industry.
Plus, natural disasters — and we’ve seen a rash of floods, tornadoes recently — have victims who require storage, too.
Schwartz’s own business is seeing a recent upswing in rentals, which he interprets as a sign the economy is improving. Rental rates are up a bit. Empty units are down. And delinquencies are modest.
“People are willing to make more decisions,” he says. “People are moving because the economy is healing.”
In California, the pace of rentals at SSTI’s facilities is “very healthy,” Schwartz says, with the northern part of the state outpacing the south. He’s actually seeing even stronger rental gains at his facilities in Gulf States and the northeastern U.S.
“What I like is diversification,” Schwartz says.
SSTI is still in growth mode. New storage units and improving economics helped SSTI triple its revenue last year as it trimmed its funds from operations to minus-$441,000 from minus-$3.25 million in 2009. Accounting procedures for start-up expenses – not actual losses — are largely behind those deficits.
But even with a slew of acquisitions in the pipeline, and despite all of California’s challenges, Schwartz wants to make a bigger bet here.
“From my prospective, there’s cautious optimism about California,” he says. “It’s a large economic engine. But we have our fiscal problems.”
He says his California facilities have seen numerous clients leave the state, frequently to places such as North Carolina and Arizona. Jobs are scarce here; and living costs are high. “We got to make it somewhat easier to stay in California,” he laments.
Schwartz is keenly aware of one of the big risks of self-storage investing — a common real estate tale: too much construction and resulting oversupply. Some observers already worry that self storage has grown too fast nationwide. By one industry measure, there’s 7 square feet of storage space for each American — roughly double the supply of 15 years ago.
As a real estate investor, Schwartz loves what drives California developers crazy — the difficulty of building anything in this state. That limits the ability of new players to flood the state’s self-storage market with new product unlike, say, a developer-friendly Texas — where construction is easier to pull off.
That scarcity has a downside to investors: Prices for California storage yards run higher than elsewhere. But it’s a premium Schwartz is willing to pay.
In its ongoing acquisition push, SSTI plans to pay $17 million for 980 units in Ladera Ranch (and $4 million will be spent on a neighboring vacant lot.) In other proposed deals, SSTI will pay just $61 million for 8,800 other units in seven states, including California.
“In some places, you may have 20 competitors. Here, maybe three or four,” Schwartz says.