Drew Dolan, Principal and Fund Manager
One of the most common questions we get is “Why is now the right time for a self storage development fund?” The “now” is always emphasized, a reference to the headwinds of a pandemic, recession, election year and the enormous disruption we are all witnessing in our daily lives. True, it might be easier to wait out the storm, but the advantages we gain for acting in this moment far outweigh the short-term challenges. It is not dissimilar to the great financial crisis and resulting recession. Action in the face of disruption was handsomely rewarded.Premier development opportunitiesPre-Covid, the highest and best use for a tract of land now under contract for self storage would have been retail, restaurant and/or office. Those uses are longer viable in the current economy, but the land seller’s obligations to their investors and lender remain. We are finding excellent self storage sites we could have only dreamed of developing prior to the pandemic.
Americans are buying an unprecedented amount of stuffAccording to Craig Johnson, President of Consumer Growth Partners, “There’s an extra $1.2 trillion in people’s pockets versus a year ago. It’s like dry powder to spend for Christmas.” And spend we will. Everything from outdoor heaters, bikes, air fryers and home office furniture. This stuff will create incremental immediate and future need for storage.Potential for construction cost to decrease
Like 2009-2011, there is lull in the construction industry. The American Institute of Architecture expects commercial construction spending to decline by 11.6% in 2020 and another 8.4% in 2021. While there are too many factors at play (like labor availability and commodity prices) to estimate overall construction pricing, the expectation is a reduction in construction pricing with demand softening.Perhaps the most compelling reason to ignore the noise and focus on our long-term goals is:Past performance has shown that self storage outperforms in a post-recession recoveryOne of the greatest attributes of the sector is its ability to mark rents to market. Our customers are on month-to-month leases and while a customer’s only obligation to their landlord is only one month’s rent, our obligation to hold prices is also only one month. Customers are staying in self storage longer, allowing us more opportunities for rental rate increases. According to the 2020 Self Storage Demand Study, 54% current self storage customers plan on renting in excess of one year and 24% of customers anticipate they will rent in excess of three years. These longer staying customers allow us plenty of opportunity for rental rate increases. As demand outpaces
supply in a growing economy, self storage has a unique ability to achieve high NOI growth, creating additional upside for our investors.
Photo by Brett Jordan on Unsplash