How Self Storage Thrives Off The American Dream
in America you don't have to travel far to encounter buildings like these endless rows of generic storage sheds with roll-up metal doors no windows and concrete walls with each space only distinguishable by a number or lock in the suburbs self-storage facilities are typically single story buildings with exterior access where people can drive up directly to the road in trucks and vans to load possessions into their storage unit in the city's self storage facilities are usually multi-story buildings where the storage units are packed vertically on multiple floors with walk-in and elevator access self storage facilities by Design are aesthetically inoffensive and functionally Bare Bones these buildings have one goal to maximize the amount of rentable square footage by converting land into as many separate storage units as possible for some facilities their storefronts are as compact as the storage units themselves with cubicle-sized offices with a single window to interact with customers like a fast food drive-through other facilities have Hotel countertops and a few deaths but no matter the office Arrangement self-storage facilities All Over America are universally manned by skeleton Crews of no more than one or two individuals Beyond small branding differences like logos and the color of the doors self storage facilities are fundamentally the same no matter the state or the company they all offer the same hard product a private storage unit for you to put your stuff in whether it's clothes appliances equipment inventory furniture or even a car or boat what you put into your storage unit is largely your own business whether that's family heirlooms or 80 million dollars in cash so long as it doesn't cause a nuisance and you pay rent every month no one will ask or look too closely self-service storage by and large is an American phenomenon while self-storage facilities exist in Europe and Asia today that business overseas does not come close to the scale and demand that has occurred in the United States over the past two decades Western consumerism is nothing new but when 300 million Americans have so much stuff that they need 50 000 facilities and 2 billion square feet of extra storage and in comparison Europe a continent of 750 million people are doing just fine with 120 million square feet of storage across 5000 facilities it certainly puts American over consumption in perspective in a time where the economy is Contracting institutional and Retail investors are looking for defensive businesses that deal in Essentials self storage companies have become attractive as stable recession-proof lean real estate businesses where cash flows in every month overhead is minimal and customers literally do all the heavy lifting themselves self storage's direct monetization of American over consumption so any bet on the industry is a bet that Americans will keep buying so much stuff that they'll always need to rent extra space to store it in this episode we'll cover the business of Self Storage how the industry success rides on the death of the American dream and how this all relates to skyrocketing home prices wage stagnation and inflation and how one company has remained the uncontested industry leader since the 1990s when it comes to analysis real estate businesses are usually not very interesting they tend to boil down into two factors timing and capital if you had all the wealth back then then you two would have bought out all the prime land in New York City or all the beachfront Lots in Los Angeles and Miami when they were first on sale centuries ago there is a reason why those properties rarely come onto the market as they're typically passed down within families from generation to generation anyone can recognize the value of a Malibu mansion an apartment in SoHo or a commercial building on Newberry Street the attractiveness and appreciation generated by real estate in the hottest neighborhoods are in the most luxurious private beaches is timeless in residential and Commercial Real Estate location is everything and for the best locations unless you got in at the right time there is just never enough Supply but when it comes to Self Storage location is still important but it's not as critical the industry points to Five drivers that transcend location and generate Timeless demand for self-storage these Five drivers known as the 5Ds represent major life events that justified the existence of Self Storage as a business the first is death a self-storage unit provides a neutral ground where people can immediately store the possessions of those that have died the emotional baggage sometimes of figuring out what to do with leftover items in the event of a death can be so heavy that for some people paying tens or hundreds of dollars every month for storage is a small price to pay for the physical separation and mental distancing out of sight and out of mind the self storage companies certainly don't mind as long as nothing stored inside is perishable or will leak your stuff can remain in their Gathering cobwebs and dust until the end of time so long as you pay the rent downsizing is the second D when people move from larger homes to smaller homes whether that's parents who no longer need a big house now that their children are all grown up or individuals who are moving to smaller residences to lower their living costs downsizing is the most common reason of why Americans use self storage because their new spaces simply won't fit as much stuff many Americans opt for Self Storage to keep less critical or seasonal possessions out of their homes like winter clothes or kayaks downsizing also applies to businesses as well as individuals owners who are moving offices rearranging space or dealing with excess inventory can also go to Self Storage as a place to keep items until they're needed with the popularity of Drop Shipping in modern American culture Self Storage also provides valuable space to hold products in while waiting for online orders divorce is the third D the United States has some of the highest annual divorce rates in the world where nearly 50 percent of marriages end in divorce in the event of a separation or a divorce possessions that used to belong to one household now belong to two Self Storage provides immediate space where people can move possessions out of the shared home or the partner that's moving out can store their stuff in until the situation is settled dislocation is the fourth driver of Self Storage which applies to people who lose their homes or have an urgent need to relocate it's not just losing a house through foreclosure natural disasters like hurricanes fires and tornadoes all Drive business as people whose homes or neighborhoods have been destroyed need secure space to store whatever they have left while people tend to think first of relocation as work purposes for private companies the public sector and American Military also play a sizable role in self-storage enlisted service men and service women who must travel out of state or out of country for training or deployment need places off base to store their belongings two percent of all self-storage units in America are leased to military personnel decluttering is the fifth driver of Self Storage even with the trend towards remote work there are still segments of people who are choosing not to move to places with lower costs of living or to downsize because the nine to five is now taking place in a bedroom or in a kitchen these people need more space than ever before to make their home viables for living and working so while these individuals aren't downsizing or relocating they're still leaning on Self Storage to store all the stuff that's taking up space in their existing homes hence decluttering while the 5Ds provide a nice framework for covering all the possible major events that would trigger demand in self-storage the underlying implication is a little too specific the 5Ds almost suggest that all self storage businesses have to do is to feed on tragedy to run ads targeting divorced couples people who are about to croak and displaced families while these negative life events certainly boost business there are broader strokes and bigger Tailwinds that explain why Self Storage has become so essential in American society beyond the obvious low-hanging reason of over consumption since 1965 home prices have risen exponentially faster than income making home ownership unattainable for most Americans individuals and families who must build up their wealth typically opt for urban apartments and condos which are smaller but more affordable than Suburban single-family homes and have closer proximity to employers these days 83 percent of Americans live in urban areas compare that to the 1950s where only 21 percent of Americans lived in urban areas the overwhelming majority of Americans back then resided in suburban homes where space is plentiful with garages and backyards the American dream says to work in cities to rent simple Apartments to accumulate wealth and then upon marriage and childbirth settle down in the suburbs by buying a single-family home complete with a white picket fence lush green lawn and a golden retriever but long before covid in this current recession there were clear signs that the American dream was unrealistic and unfeasible was skyrocketing home prices wage stagnation income that wasn't even keeping up with inflation and the rigid clustering of Industries to specific metropolitan areas like Tech to San Francisco music and entertainment to Los Angeles financed to New York City politics to DC and Consulting to Boston between 2018 and 2019 even when the economy was strong the U.S census reported that fewer than 10 percent of Americans moved to a new place which was the lowest domestic Mobility recorded in the country since the 1940s Americans before covid were clearly reluctant to move or simply could not afford the spacious Suburban single-family home Vision that they had been sold in the American dream many Americans were stuck in their existing Urban Apartments like golden handcuffs they were incentivized to remain close to their employers and industries in the city to maintain income that may have been above average but was never high enough to actually still afford a home moving to the suburbs would have been only benef official for mature established veteran workers for the less experienced or less established working professional living in the suburbs would be professional self-sabotage as the greater distance from work from employers co-workers and offices would be negatively reflected in the loss of earnings and job opportunities if we tie all these threads together the American dream wage stagnation the clustering of Industries and employers to specific metros the rising home prices it makes sense why 83 percent of Americans today have ended up living in urban areas with less space than ever before and it's not necessarily by choice businesses follow where people are and as urban areas have become more densely populated rents go up and as people stay in any area longer they naturally accumulate more furniture and possessions but when urban areas get hit with higher rents people naturally try to fit more roommates into their Apartments to make the rent more tolerable which means less space for possessions another possibility is that as more people recognize that the American dream is just a dream and that they'll never get to the suburbs they stop putting their lifestyle on hold for that white picket fence single family home they go out and they live their life in spite of all the constraints of big city life and they lean on self-storage for space to accommodate those hobbies and belongings this is why urban areas like Los Angeles New York City San Francisco Chicago Seattle and Miami consistently rank as the top markets where self-storage demand is at its highest and rental rates are at their most expensive while this covers why American demand for self storage is so strong beyond the obvious culprit of over consumption we have to also understand the supply side economics space is hard to come by in any City around the world not just America but self storage in America is a uniquely attractive business to developers operators and investors which is why these facilities continue to pop up around the nation all the time from a construction standpoint building a self-storage facility is relatively cheap fast and straightforward self-storage facilities are pole businesses meaning customers come to you and they're willing to travel longer distances for more space location is not as important as proximity land in the prime areas of any City command's top dollar but land in the outskirts of a city is a lot less expensive one rule of thumb in the self-storage industry is to Target lots of land within a three to five mile radius of every major city the land outside and around the city is often cheap and widely available because it has few good uses with the death of retail no one is about to drop hundreds of millions of dollars to build shopping centers especially in underdeveloped areas without anchor tenants building office space would have poor Roi as the quality high-paying employers would want to be as close to the city center as possible where foot traffic is high and employees can easily commute to from a material standpoint self storage facilities can't get any simpler they're plain metal buildings with concrete floors there's no carpet No insulation no windows no hardwood no tiles no appliances no kitchen and barely any Plumbing because of how simple these properties are the average construction cost for Self Storage ranges from 35 to 100 per square foot for a single story building for multi-story Buildings Construction costs can go as high as 50 to 200 per square foot in comparison the average construction cost for an apartment building starts at 200 to 800 per square foot in America and involves bathrooms bedrooms toilets insulation electrical HVAC windows countertops stairs elevators firescapes and so on these costs don't even include the permits lobbying and the various approvals you need at this County city and state level to get such a project moving construction costs for American housing can easily Skyrocket Beyond these projected costs as projects regularly go through administrative delays legal hurdles and local resistance from not in my backyard Advocates while apartments and office spaces are also often custom designed self storage units are generally standardized in material and dimensions simple boxes that are eight feet tall with a single corrugated steel roll-up door and tilt up concrete with fluorescent white lighting at most a self storage facility will offer electronic gates for 24 7 access greater General Security with the inclusion of wired cameras and an option for climate control units from an operational standpoint self-storage facilities are a dream for business owners compared to residential or commercial real estate where expertise is critical and someone must be on call when tenants call in about clogged toilets leaky faucets and lights that won't turn on self-storage facilities have little to worry about Tenants come in to rent a unit they load it up with their stuff then they come back every now and then to add more or to take out tenants bring their own lock and key so owners have no direct responsibility for each unit's security when tenants move out they empty the unit if the tenant doesn't pay their rent the owner can just empty out the unit auction off the items that are remaining inside and then rent the space out to someone else there's nothing for a tenant to damage or for an owner to paint over upon their move out everything is literally concrete self-storage facilities just need one person on staff to handle paperwork and to answer questions from prospective tenants just fill the units with tenants and you can reach a basic level of profitability with very little expertise required one owner could manage this entire operation themselves running a gas station in comparison requires more mental and physical ability than running a self-storage facility sell storage facilities rely on software to automate away the day-to-day paperwork administrative overhead account management inventory tracking and billing complexities it's become the industry Norm for self-storage companies to have websites where customers can go to pay rent every month opt into subscription billing Reserve units and sign or cancel leases all through their phone or computer even though many operators and their employees are not the most computer savvy individuals software and e-commerce have become a critical piece to the self-storage business model on the e-commerce front Shopify is a leader in the space and is the sponsor of this episode Shopify is a Commerce platform that's easy to use and offers anyone regardless of their technical ability and experience to start grow and manage their business Shopify allows anyone to sell online in person and on all major social platforms just like owners who start out with one self-storage facility and grow to more over time Shopify helps business scale from first sale to full scale the barriers to entry for Self Storage are low and attract many ambitious entrepreneurs looking to make their Mark in real estate and Shopify shares those same low barriers to entry for entrepreneurship as a platform Shopify Powers more entrepreneurs than anyone else in the world with millions of businesses in 175 countries on the platform and as a company Shopify believes in a future where Commerce has more voices and they're reducing the barriers to business ownership to make Commerce better for everyone start your business today with a free trial of Shopify go to shopify.com Modern MBA to learn more thank you to Shopify for supporting modern MBA and making this episode possible while cell storage facilities all sell themselves as flexible short-term rentals where you can conveniently store items for as short as a month the reality is that Self Storage is more set and forget than in and out when it comes to usage the average time in which someone rents out a single storage unit in America is 30 to 40 months when people rent out Self Storage even if they say hey we'll get rid of all this stuff one day it tends to stay there for years so cheap land straightforward construction fast Development Little maintenance operable by a single person long stays and a set and forget tenant mentality makes for a very attractive real estate business despite the strong economics of Self Storage the industry today remains highly fragmented and privatized in America just like funeral homes which we covered in season one of the fifty thousand self-storage facilities in the United States over half are run by individual private owner operators because of how inexpensive and straightforward the businesses the barriers to entry in the Self Storage industry are low there are five major public companies that operate in self-storage public storage extra space CubeSmart National Storage Affiliates and Life Storage together these five corporations even with a capital of the public markets only own 19 of all self-storage facilities in the United States because their business models are identical we'll focus on the industry leader Public Storage who's best known for their iconic orange branding is the largest self-storage company in the United States who single-handedly owns nine percent of all self storage space in America the fact that nine percent is considered the Lion's Share certainly puts it in perspective just how fragmented this industry is Public Storage today owns a little less than 2 800 facilities Nationwide and that represents just six percent of all self storage facilities in the country but it's still a multi-billion dollar Corporation if we rewind all the way back to the Great Recession Public Storage has grown its revenue on average six percent every year for the past 13 years going from 1.68 billion dollars in 2008 to 3.4 billion dollars in 2021.
the company has two primary income streams and the first is rental income the rent that tenants pay every month to store something at a public storage unit is the biggest contributor accounting for 94 of the top line for the past decade ancillary income is the company's cross-sell motion all public storage facilities offer a convenient supply of cardboard boxes bubble wraps mattress bags furniture covers and other moving material available for individual purchase insurance sales are the biggest contributor to ancillary income through its orange door program tenants of Public Storage can purchase insurance to protect their belongings that are stored at public storage facilities from flood fire smoke hail lightning vandalism Vermin fungus and even burglary as a monthly premium on top of their rent but despite the company's best efforts over the years its cross-sell motion has played a small role representing only six percent of Revenue over the past 13 years when we look at public storage's net operating income of its self storage facility so removing insurance and merchandise sales just pure rental income we can see the uniquely High margins of this real estate business net operating income is a metric specific to the real estate industry that measures a property's operating profitability it takes the revenue directly generated by that property and deducts all essential operating expenses it doesn't account for tax Capital expenditures depreciation loans or mortgages where traditional companies use ebit real estate businesses use noi when we look at public storage's operating income of its self storage facilities we see some really amazing margins the kind of Juicy double-digit gross margins that SAS tech companies boast about for Public Storage the cost to operate self storage facilities counting payroll property managers repairs maintenance marketing advertising and property taxes combined makes up just a third of all the income they bring in in a traditional service or product business human labor alone typically accounts for a third of Revenue while sales and marketing would make up the other third even through the Great Recession in 2008 total direct operating costs for self storage facilities have never surpassed 33 percent of revenue for public storage this achievement is even more remarkable when we add expansion into the equation Public Storage has expanded 40 from 2008 to 2021 going from 2 000 facilities Nationwide to nearing 3 000 facilities opening on average 62 new locations every year when we contextualize this expansion with overall Revenue over the same time frame the numbers get interesting in 2008 a single public storage facility would generate on average eight hundred and forty thousand dollars in annual income so that's including rental and ancillary fast forward to 2021 a public storage facility these days grosses 1.23 million dollars every year so 38 percent more money than what it earned 13 years ago this seems like an achievement in itself but when we track inflation and see how much a dollar was worth back in 2008 and how much a dollar is worth today we can see that Revenue growth is actually exactly in line with inflation a dollar in 2008 is worth a dollar and 38 cents today so Public Storage overall isn't actually making exceptional returns or charging above Market rent as there's simply too much competition a nine percent market share by square footage and a six percent market share by facility count is simply not enough to command pricing power expansion in a low barrier industry is always risky due to cannibalization and saturation but did the company's credit there's not been any drop in earnings accounting for inflation each Public Storage location grosses the same amount of money today as it did in 2008 which is still an achievement when they've added 40 more facilities over the same time frame while Public Storage can't raise prices it can control costs in 2008 the direct operating expenses to run 2000 facilities came to 500 million dollars on an annual per building basis that means that a single public facility back in 2008 cost 260 thousand dollars to operate in 2021 the cost to run roughly 2 800 facilities combined is 850 million dollars a public storage facility in 2021 costs three hundred and ten thousand dollars a year to operate so that's only 20 more than what it costs in 2008 and well below inflation that same year public storage's direct Opera operating costs dropped to a record low of 27 percent of Revenue so the company has found ways to use less money through automation to run its growing number of facilities fifty percent of customers in 2021 opted for public storage's online e-rental system over an in-person appointment at the facility to reserve their units and to execute a rental agreement this enabled the company to quote unquote fully digitize its processes and shift on-site Staffing to be based on customer demand rather than traditional nine to five shifts the company has also rolled out touch screen kiosks so customers can manage their accounts themselves at the facility and jump directly into a video call with a remote support agent if they have questions Public Storage has essentially found ways to remove the last human from the skeleton group when we break down direct operating expenses we get an even clearer picture of just how lean the Self Storage business truly is the biggest expense is not payroll or repairs or advertising it's property taxes property taxes alone accounted for 45 percent of the company's annual operating expenses in 2021 and costs more than labor repairs and marketing combined perhaps this shouldn't be so surprising given how high property taxes are in States like California Texas Illinois New York and Florida of the 2800 public storage facilities in the United States around 50 percent of their facilities are in one of these five states fifteen percent are in California eleven percent are in Florida 15 percent are in Texas and five percent are in Illinois a single public storage facility paid on average a hundred and seventy thousand dollars in property taxes in 2021. it's not hard to see why American municipalities would welcome development of self-storage facilities as buildings they're inoffensive they don't generate noise pollution or trash and they're built on land that was for the most part languishing to pocket a hundred thousand dollars every year in property tax off an eyesore is a better return for the state than nothing at all to recap a public storage facility today grosses on average 1.2 million dollars a year with three hundred and ten thousand dollars of direct operating expenses of that three hundred and ten thousand dollars roughly a hundred and seventeen thousand goes towards property taxes fifty thousand dollars goes towards the hourly wage of on-site property managers who serve as boots on the ground fifty thousand dollars in a year has done a lot of money in fact this sounds more like the income of two or three part-time hourly workers rather than one full-time employee regardless this demonstrates just how few people are needed to run the day by day of a self-storage facility twenty three thousand dollars is spent every year on repairs and seventeen thousand dollars goes towards advertising so each facility Nets over nine hundred and fifty thousand dollars in net operating income it's worth keeping in mind that these are the earnings for stabilized facilities meaning that these are mature locations that Public Storage has operated for at least three years eighty percent of public storage facilities today fall under the stabilized mature bucket while the remaining twenty percent are either new acquisitions or fresh constructions that are considered too immature to be quote unquote stabilized Public Storage boasts an industry-leading Nationwide occupancy rate of 96 in 2021 and even during the Great Recession was able to find tenants to fill vacant units the self-storage industry uses a metric called revpath or Revenue per available square feet as the total rental Revenue divided by the total rentable square feet in all facilities refpath abstracts away occupancy volatility along with any natural differences in pricing from City to city and state to state renting a storage unit in Los Angeles or New York is always going to be more expensive than renting a unit in Texas revpath serves as a measure for how much actual money you're able to squeeze out of all the self storage space that you own public storage's rev path has remained in line with inflation over the past 13 years growing from thirteen dollars and six cents in 2008 to 18.75 in 2021. public storage's top 5 highest grossing markets are in order Los Angeles San Francisco New York Miami and Seattle all five of these cities boast occupancy rates of over 95 percent Los Angeles is the company's most lucrative market and grosses 417 million dollars every year off of 213 facilities that means a single public storage facility in the City of Angels makes 1.9
million dollars every year people in Los Angeles spend 27.43 per square foot to store their stuff which is nearly ten dollars more than the national average San Francisco is the next highest grossing Market in the land of TAC and Venture Capital Public Storage generates 224 million dollars a year across 130 facilities on a per building basis the earnings are not as high as it is in LA with each facility in San Francisco grossing 1.2 million dollars every year New York is next with an annual revenue of 174 million dollars across 90 facilities with each facility grossing 1.9 million dollars every year on a per
square foot basis New Yorkers pay a little less on average than people in San Francisco and in Los Angeles Miami is fourth on the list with 130 million dollars a year from 83 facilities a public storage in Miami pulls in 1.6 million dollars a year with Floridians shelling out 22.41 per square foot Seattle rounds out the top five list with 127 million dollars from 87 facilities with each Public Storage location pulling 1.5 million dollars a year off 21.53 a square foot but the highest grossing markets are not necessarily the most profitable Los Angeles brings in the fattest returns with noi margins of 83 percent San Francisco is second at 82 percent Seattle's third at and 79 percent Miami is for that 77 percent and New York ranks below the Nationwide average margin at 72 percent with all these highlights and a low barrier to entry Self Storage seems like a slam dunk business but expansion needs to be strategically timed and capital needs to be deployed effectively unlike Tech real estate is not a business where the biggest pockets and highest earn rate wins out every time what's most impressive about Public Storage Beyond its Core Business and execution is the amount of due diligence its management goes through to vet expansion opportunities no one would have questioned if Public Storage chose to maximize its credit lines wield the full power of its balance sheet and outpace its competitors to scale as fast as possible and to blanket the country with orange yet in every earnings call for the past several years the company's leaders show tremendous restraint and reveal a few nuggets as to what they see and hear around the industry by keeping a finger on the pulse of each stakeholder Public Storage knows when to pounce when Capital was cheap and easy to come by between 2014 to 2018 Public Storage watched patiently from the sidelines as developers and owner operators overbuilt self storage facilities around the country which directly resulted in an oversupply in 2019. independent operators who thought Self Storage would be easy money ended up slashing rental rates and increasing operating expenditures to achieve occupancy but they couldn't reach long-term stability with their properties with obvious signs of saturation it became harder for developers to get construction loans from lenders for self-storage projects but even harder to find buyers when covid hit the following year many operators wanted to sell but without good deals in hand they chose to refinance to bring down lending costs now out of covet in 2021 these private owner operators have largely given up trying to stabilize these properties by themselves and are looking for an exit and this is when Public Storage pounced dropping 5 billion dollars over the span of a single year to snatch up 230 facilities around the country for an average cost per square foot of 234 dollars in comparison building from the ground up is a three to five year Endeavor that historically cost a hundred and thirty dollars a square foot historical Acquisitions on the other hand cost 160 dollars a square foot but these were usually deals of underperforming properties it wasn't so much that Public Storage got a bargain deal in 2021 with its five billion M A spree but rather that the company was prepared to act so quickly upon the market change business is about being in the information flow and using that to be two steps ahead of others in the world of Self Storage there are a few that come close to the level of Excellence that Public Storage shows Self Storage is a billion dollar real estate business that rides on not just over consumption but also the death of the American dream so long as home prices outpace income wages remain stagnant and employers continue to Cluster in cities the majority of Americans will continue to be living in urban areas where space is a luxury if the recession does take a turn for the worse companies continue cutting back and remote work takes precedence the incentives that tie Americans to urban areas and force working professionals to remain close to employers May ultimately change for the better but no matter which way this wind blows in the coming years one constant is sure to remain Americans will always have too much stuff