By now, you’ve probably seen all the stories, know all the stats and have seen the TV reports stating what the self storage industry has known for years – the sector was recession proof and more popular than ever. Most of the larger companies, especially the REIT’s, had strong financials in the years leading up to the Great Recession and then powered through with better than average returns. Now, as we come out the other side of the downturn, the industry is going mainstream and people are starting to take notice.
A recent report published by Moody’s Investor Service, a provider of credit ratings, research and risk analysis, states the self storage sector will continue to exhibit strong growth through at least the rest of 2013. The report cites strong consumer demand, rising rental rates and limited supply of new storage facilities as reason for optimism.
There are several other factors leading to Moody’s positive outlook on the storage industry. One analyst believes the ability to provide short term leases is a major advantage. With these leases, storage operators can respond quickly and easily to market changes. The analyst, Alice Chung, also believes a diverse customer base minimizes the risks of exposure to a single tenant or too few number of tenants. Alice states, “The(se) underlying dynamics will likely be strong for the next three to five years.” Alice also says, “The storage sector is benefiting from a low break-even rate which boosts profitability.”
Another factor is the storage industry is attracting more business customers which provide additional occupancy, stability and longer average rental terms than personal storage customers. Business storage is beneficial for those companies looking for a place to put extra files, documents, old inventory or extra equipment. More business are turning to self storage units to store these items instead of cluttering their offices or simply selling old inventory or equipment.
A third aspect is the storage sector is benefiting from a large number of 18-34 year olds renting storage. The theory is that this age group is now renting space rather than purchasing their own homes, thus leading them without adequate space in their new residences to put all of their belongings. Typically, most storage renters are older, storing items from their past which they will pass down or items which simply don’t fit in their smaller residences. The trend of younger people using storage is relatively new. Some of these people may have had homes or larger apartments before but are deciding to downsize due to the economic conditions. With downsizing comes less space and thus they need a place to store all of their belongings now.
Lastly, the self storage REIT’s continue to be in a much better position than small, independent operators. This is due to an increase in outsourcing of third-party management functions to the REIT’s from smaller operators and continued industry consolidation. Expect the REIT’s to continue to benefit from industry consolidation, although at a more measured pace.
During the REIT Week presentation in June, Extra Space Storage CEO, Spencer Kirk, told the audience how the Internet has become the “Great Divider” in the storage industry. He said, “As little as five years ago, the Yellow Pages and drive ups were the primary ways to reach customers. Today, over 60% of Extra Space customers use the Internet and mobile devices during the decision process.” He also said that the larger, more sophisticated operators have a huge advantage over the smaller mom and pop, independent facilities. The advantage comes in the form of having the resources, time and knowledge of how to reach the customers. Extra Space spends an average of $34,000 per day on interactive marketing. This is nearly $12.4 million per year spent on simply branding, call centers, SEO and PPC for their website.
Public Storage CEO, Ronald Hayner, agrees with Kirk on the trend of technology and the internet. He said, “Now, the Internet and mobile phones have replaced the phone book. In 2012 we spent over $15 million with Google.” You can see the huge advantage the REIT’s and larger companies have over the smaller operators who don’t have the resources to compete for the online customer. This is one reason the smaller operators are being managed and ultimately, at times, purchased by the REIT’s.
The report can be found here for $550.
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