Economics students are well versed in the rational choice theory, or the premise that individuals will make choices based on calculations that maximize their advantage and minimize their losses. The real economy, however, is riddled with examples where this is wholly untrue and perhaps there is no better example than the self-storage market. More than one in 10 Americans lease storage space, according to market research, and these customers are paying approximately $166 per month, an amount that over time is often far more than the value of whatever they are storing. Take the CEO of $56 billion property investor Harrison Street, Christopher Merrill, who estimates he has paid for his stored items “six times over” in the last six years. Public Storage CEO Joseph Russell Jr. confirmed this reality stating, “statistically, once a customer stays with us for a year, they end up staying for five years.” There are of course self-storage facilities around the world, but nowhere have they been more profitable to own than in the United States thanks largely to Americans’ propensity to accumulate more stuff than they can squeeze into their homes.
From the storage owners’ perspective, the challenge is getting customers in the door, often with discounted starter rates, move-in specials, and algorithmic one-upmanship but, once committed, human nature generally takes care of the rest. It doesn’t much matter what someone pays when they move in as most stays outlast introductory rates. The business benefits from so-called price inelasticity where unwavering demand persists despite an increase in prices. Self-storage operator Extra Space issues about 130,000 rent-increase notices each month holding back some as a control group to ensure the increases aren’t prompting move outs. It turns out that, by and large, moving to a cheaper facility or simply disposing of stored items is just not what people end up doing and the industry knows it.
Self-storage facilities in the United States have benefitted for the last 25 years but is the party coming to a close? During the pandemic, profits soared as bedrooms became offices, basements transformed into home gyms, and the displaced items needed a place to go. More recently, however, return rates to the office have increased and home sales are declining; two factors that could impact the demand and value of self-storage facilities going forward. The CEO of CubeSmart Christopher Marr suggested the period between the summer of 2020 and 2022 may, in hindsight, be “the best 24 months in the history of this business.” Shares of CubeSmart, Public Storage, and Extra Space Storage are mostly down in 2023 while the broader market is up double digits, but M&A activity is thriving suggesting a consolidation within the industry. Specifically, Extra Space acquired rival Life Storage for $11.6 billion creating the largest storage operator in the country with 3,500 locations and 270 million sq. ft. Public Storage will buy 127 facilities from Blackstone for $2.2 billion and corporate takeover KKR determined the business is still viable and has spent more than $400 million on self-storage buildings.
In 2022, institutional investors such as university endowments, insurers, and pensions plowed $2.5 billion into a fund raised by privately held storage specialist Prime Group Holdings. And Prime’s CEO Robert Moser (still only 46 years old) got to work scooping up nearly 100 properties with the fund. And Moser’s story is a dream big rags to riches American fairy tale: he started his business out of his college fraternity room while at Union College (a Michael Dell of sorts) and wrote his thesis on income-producing properties. He spent weekends visiting and photographing properties after sorting through volumes of documents looking for acquisition targets. With so much conviction about his future in real estate, he didn’t bother looking for a job when he graduated and his mother—the story goes—borrowed against the family home to stake him. It certainly didn’t hurt that Moser showed up first semester already a licensed real estate agent and no doubt skilled in the due diligence required for success.
The self-storage industry isn’t going anywhere but the mom-and-pop players will have a tough time competing with the institutional ones. And the recent decline in share prices is perhaps a healthy cooling off from a record run (rather than any existential demise of the self-storage industry) and an opportunity for further consolidation. Until Americans adopt a “tidying up” strategy of decluttering their life of items that no longer spark joy or somehow manage to avoid death, divorce, and disaster (and good luck with that), expect this asset class to be around for generations to come.
Dezember, Ryan. “Is There a Limit to Americans’ Self-Storage Addiction? Billions of Dollars Say Nope.” The Wall Street Journal, 8 Aug. 2023, www.wsj.com/articles/self-storage-addiction-investors-80e0a14b?mod=hp_lead_pos7. Morris, David Paul. “A Dixon, Calif., Facility Owned by Life Storage, Which Was Bought Last Month by Extra Space Storage in an $11.6 Billion Deal.” Is There a Limit to Americans’ Self-Storage Addiction? Billions of Dollars Say Nope, Bloomberg News, 6 Aug. 2023, https://www.wsj.com/articles/self-storage-addiction-investors-80e0a14b?mod=hp_lead_pos7.