I Left Finance for Self Storage - Here’s Why I’m All In

I Got Damn Lucky by Falling into Self Storage

Most reading this probably don’t know, but my first entrance into storage was in 2016. At that time I was a buy-side analyst at a hedge fund (my job was to advise my portfolio manager on what to buy and what to short). I left the hedge fund in early 2016 and started a consulting business that combined research capabilities, with technology and data expertise.

The business thesis was simple: Let's find stocks or industries that were either overvalued or undervalued and collect the data to prove it. We would sell that research and data to the top hedge funds in the world who we knew and had worked with for years.

What was the first industry I looked at when we started this business? Self Storage.

At the time, self storage was at the tail end of a monster bull run.

The bull run was driven by two things:

1. Demand for storage had been increasing every year, and still is (see chart below)

2. Developers had essentially stopped building new facilities from 2010 - 2015 (2nd chart)

Well, when demand goes up year after year, and supply stops growing, the price you can charge a tenant goes up by A LOT, and from 2010-2016 it did just that. See Extra Space’s revenue growth during that period below.

This was the backdrop in 2016 and early in that year I spent many hours doing research by talking with self storage developers across the country.

The conclusion from those conversations?

Industry fundamentals had become so strong and bank financing was so readily available that there was a MASSIVE increase in new self storage that was under construction.

So our thesis in storage in 2016 was as follows:

There was a massive increase in new supply that was coming to market and no one was expecting it. When supply goes up by a lot in a short period of time (first chart) the price people have to pay for storage goes down (second chart).

While we were right on the thesis (chart below) and our clients made money, the storage REITs did much better than I expected them to and the stocks rebounded quickly (second chart).

To be clear, 2016 was the LARGEST supply wave to ever hit the self storage industry.

Here’s why the stocks didn’t go down more, more importantly why they rebounded like they did, and why I’ve subsequently dedicated my career to self storage.

The business model and underlying dynamic of how storage operators make money isn’t as simple as looking at the spot rental rates.

The dynamic at play is ECRI (Existing Customer Rent Increases).

Six to nine months after a tenant moves into their unit, they normally see their rent increase, another six to nine months goes by and it happens again.

Why does this matter?

61% of the customers stay longer than a year, after two years 46% still remain.

So you have a large group of people that move in and never move out. Those people continue to see their rents go up over time, which counteracts the impact of any rental rate drops that new tenants bring.

Lets discuss the current period:

Storage rental rates are down 25% from their peaks in 2021, average occupancy is down 2% and still, Public Storage is telling its investors that it will still see ~5% revenue GROWTH in 2023.

What should you take away from all this?

That THIS is why I pivoted to storage; it has an incredibly resilient revenue model.  

Once tenants come in, they stay for a long period of time, and you can continue to increase their rents, which buffers the model against any short term volatility in the market.

There are more variables involved than the headline rental rates and it’s the business model’s underlying dynamics that have made self storage the best performing class since 1993.

We have entered a period similar to 2010 where the number of new facilities being built will be much lower than the years prior.

Demand is still going up every year.

As for rental rates, while they are down 20% from 2021 highs, they are up 40% from pre-covid levels, and at the highs of the last cycle (2016).

Consolidation of the top operators (think the Life Storage and Extra Space merger that closed a few weeks ago) will only consolidate pricing power and enable to industry to raise rates faster over time.

For these reasons, if you can find a great location to build today, you should.

That's our current business plan at DXD, and I’m excited to see just how many we can make come to life. If you are interested in learning more about the deals we are pursuing, please let me know or click here; we would be happy to discuss our pipeline with you.