Scott Zucker, Partner, Weissmann Zucker Euster Morochnik, P.C.
Over the last year, through a massive public health crisis and a distressed economy, the self-storage industry has once again shown its resolute strength within the real estate sector. Notwithstanding the pandemic and the resulting business closures and unemployment, many would say the self-storage industry not only survived, but thrived, supporting the often-heard phrase that the self-storage business may not be “recession proof,” but it is certainly “recession resistant.”
If job losses and the impact to discretionary business and personal spending was not enough of a concern to the industry, self-storage owners especially faced a number of external issues that could have significantly disrupted their operations. Initially, self-storage operators had to address both the federal and state emergency orders that challenged whether self-storage facilities were “essential” real estate businesses that retained the right to stay open. Then, once those questions were resolved, those same operators were forced to manage their way through a litany of state and municipal orders that impacted their rights to raise rents, charge late fees, deny access to delinquent tenants and, ultimately, to foreclose their lien rights against tenants in default for their failure to pay rent.
But, through it all and, even with many of these state emergency pricing restrictions still in effect, self-storage operators continue to demonstrate strong earnings and continued growth. Certainly, market dependent, self-storage has seen an increase in new development, a surge in acquisitions, and an ongoing stability in cap rates. It is interesting to focus on just two factors that support the success of the self-storage industry during the impact of the pandemic.
The first is the recognized shift from office use and direct retail to remote working and the online marketplace. Self-storage is a common solution for temporary transitions, whether it is personal use (making space in a house or apartment to convert to a daily office) or for business use (storage for inventory). The universal evolution as to how space is now being used has had a direct consequence on the need for self-storage. Space is suddenly a commodity that has an increased value in our day-to-day world.
The second is the transition from face-to-face transactions to contactless operations. The seamless ability of the industry to switch from live interactions to remote management provided a way to reduce expenses and lower overhead. Although this has been a function in process for years, the pandemic accelerated its long-awaited implementation. As these technological options for the industry (including locking systems, security, and other automation) continue to grow, the industry will undoubtedly see further long-term revenue benefits and resulting increase in net operating income.
Ultimately, the strength and tenacity of the self-storage industry is a result of the people that run these businesses and the tenants who occupy their rented spaces. Surprisingly, even with the uptick in significant unemployment and reduced spending in the economy, there was a relatively small increase in tenant delinquencies and operator lien sales. Essentially, even though operators may have been frustrated by the governmental interference in allowing these operators to manage their tenant delinquencies, the actual financial impact of these imposed restrictions was low. Instead, to the credit of both the operators and their tenants, although there may have been delinquencies that occurred due to COVID impacts (job losses or personal or family medical issues), the operators and their tenants seemed, for the most part, to be able to resolve those conflicts amicably, with most operators deferring payments for the benefit and protection of their affected tenants.
At the end of the day, self-storage is a real estate investment. Such investments are typically local in nature and need to be considered based on the analysis of the area where the project is bought or built and within the community that it operates. Notwithstanding nay-sayers who remark that the industry may be over-built or is subject to a correction, as demonstrated over the past year and with all of the travails it has suffered, self-storage has once again shown its unique strength and resiliency and why it continues to be an attractive investment.