The Pandemic’s Mixed Effects on Self Storage
- Jul 01, 2020
The global health crisis is both a threat and an opportunity for the self storage business. While the impact of the pandemic has been tough on self storage rents across the country, the sector might benefit from an eventual slowdown in new deliveries and accelerating automatization.
In the interview below, Nathan McElmurry, senior vice president & head of self storage acquisitions at InSite Property Group subsidiary SecureSpace Self Storage, talks about the mixed effects of the novel coronavirus outbreak and how the company is tackling the issue.
The self storage business is deemed less vulnerable to economic disruptions. However, it is not completely immune to the effects of the pandemic. What has been your experience so far?
McElmurry: It’s too early to tell what will come of these unprecedented changes we’re seeing in the economy, the health sector and in society. But storage thrives during economic disruptions. You can already see that in the May numbers for many companies, including ours. But no tree grows to the sky, and storage was already overbuilt before COVID-19. Strong, stabilized stores, in good, low-supply markets will do fine. Early-stage deals, especially in areas with lots of competition, will likely struggle to find rent stability and hit occupancy targets.
Hopefully, many of the questionable investments that were in the planning stages won’t be built at all. In other words, I’d say that the pandemic may have just hastened the inevitable. What I’m curious to see, is what specific effect the virus has on tenant retention and bad debt. That will take some time to unfold and would be further clouded if we have a second wave of infections.
How has the coronavirus outbreak impacted the operations of InSite Property Group?
McElmurry: We have adapted to remote work, limited traveling and started navigating the new realities of time management—all the things that everyone is dealing with right now. However, we’re also seeing opportunities to widen our operating platform lead.
For instance, we launched our contactless move-in process for customers a few weeks before the shutdown. During the peak of quarantine, more than 50 percent of our customers selected that option and we grabbed market share, while local competitors and even several of the REITs scrambled to launch solutions. Self storage has always been a product type that did well during volatility, and, despite some small bumps around collections, our stores remain on track.
What can you tell us about investor sentiment during these challenging times? What types of assets are buyers looking for?
McElmurry: Good question. Truth be told, I don’t know. But I’ve observed that a company’s capital source tends to be the primary driver in how they deploy resources. I don’t spend too much time trying to discern what our peers might do because their motivations are particular to their investment goals. Broadly speaking, I think we all see that the most vulnerable properties are the ones in transition, and at this particular stage, I would expect many folks to be looking for these particular properties.
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What strategy do you use when choosing a market to invest in?
McElmurry: Storage is still a very local business and likely will remain so. People store in dense, urban locations and smaller markets as well. But they do so differently, depending on their needs. We’re able to use technology in a unique way to predict demand in any area. We always strive to allocate our resources judiciously. We set minimums for metrics like population, rent per square foot, total revenues etc. Also, where we can cluster properties, we will.
How has the pandemic influenced your approach to investing in self storage?
McElmurry: If anything, it has made us more disciplined. We thought we’d see a faster trend toward price stabilization and attrition of competition. That has not yet materialized in any sort of comprehensive manner. So, for the time being, we remain selective and patient. We are seeing deals come back around—some for a second or third time—and moving forward this time. Still, we feel that a larger opportunity has yet to unfold.
What permanent changes do you expect to see in the self storage sector in a post-pandemic world?
McElmurry: Every time there is major disruption there are dire predictions about a “new normal.” We saw it after 9/11, during the global financial crisis, when the debt markets were disrupted a few years back, and now with the coronavirus. By and large, though, I expect behaviors to revert to the norm, as they’ve done historically, with some minor adjustments, which result from any change in the landscape.
I would expect to see a hastening of the trend of automating some facilities. There may also be an uptick in opportunity for smaller markets that have strong growth trajectories and offer a high quality of life. Lastly, I think the industry will take notice of how various regions of the country respond from a policy and regulation perspective—in the near and long term—and adjust accordingly.