The Lowdown on Recession
and Self Storage
Look familiar? These headlines of impending doom seem to be present in your local newspaper on a daily basis. The topic of recession is on the minds of almost everyone in the business world. I’ve personally received call upon call asking "What happens to the self storage industry during a recession?" At the last few trade shows the question is the same. What is recession? And how will it affect the self storage industry? We’ve decided to interrupt our regularly scheduled article this month to concentrate on this very important topic. I’ve put the question (and several other relevant questions) to several leading experts in the self storage industry: Buzz Victor, president of Mini-Storage Companies; Charles Ray Wilson, president of Charles Ray Wilson & Associates; Maurice Pagoda, President of The Pogoda Companies; Joe Niemczyk, of Executive Self Storage ; and Peter Hitler, commercial broker with Investment Real Estate, Argus Self Storage Sales Network affiliate and self storage owner/operator.
What is a recession? A recession is typically defined as an overall slowing of economic activity.. The National Bureau of Economic Research, a non-profit organization which assigns dates to the beginning and end of downturns, defines a recession as "a period of declining output and employment." One common and often cited definition of the beginning of a recession is two consecutive quarters of decline in real GDP.. Recessions can be of various durations. Since 1945, the average recession has lasted 11 months. We are not implying that our industry is being affected by a recession, we are also not speculating that a recession is happening or going to happen or that it will affect the self storage industry at all; we are merely surveying the experts.
Maurice Pagoda: 1990-1992 were the worst years for the self storage industry. Occupancies reached all time lows in 1990-1991 because of all the new facilities that opened up in the late 1980's combined with the severe recession. Financing for purchasing new sites or refinancing existing sites was virtually impossible to get because of the Savings and Loan crisis. Many owners found themselves stuck with high mortgages, low occupancy rates and unable to make their payments. Many, many sites went back to banks or were taken over by the RTC in 1990 -1992. As these sites were dumped on the market, values for self storage facilities plummeted.
Peter Hitler: I have been an owner of storage since 1985. We have continually added units since that time and have stayed nearly full. I have noticed no change in my customer base i.e. commercial vs. consumer. We have been lucky in that we do not have a lot of competition. There are a lot of mom and pop owners in the industry that do this as a side line and do not raise rates very often
Ray Wilson: During the past national recession self-storage performed very well. As you know, the saving and loans loaned money to non self-storage developers who help to put more supply on the market and was warranted by demand. Still by the 3rd Quarter 1993 overall occupancies were over 90% and we were off and running again.
Joe Niemczyk: The worst experience with recession I have been through was during the 1980’s particularly in the Denver Market. Occupancies plunged during those years far more dramatically than many of us thought.
Buzz Victor: I have been through several recessions, both of national scale and "rolling" recession variety where certain parts of the country were doing find while others were not.
Buzz Victor: Both happen. As tenants move out through natural attrition, and they are not replaced, owners tend to lower rates and offer specials. On the one hand this is foolish. These actions do not increase to pool of renters. But, the first owner to do so believes he will get more than his fair share of the business. Soon, the next guy matches. Ultimately, everybody’s rates and occupancy are down where really only the occupancy has to be down.
Joe Niemczyk: It is my belief that softness in occupancies would occur first. Without sounding too derogatory, we have a tendency in this business to not plan ahead so we tend to respond with a knee jerk reaction after it is too late. Once the occupancy drops begin the price wars are sure to follow.
Maurice Pagoda: Occupancy will fall first and then, most likely, rental rates as sites compete for customers
Ray Wilson: Self-storage is somewhat counter cyclical. The demand for space occurs when a major event hit a person’s life, such as losing a job, divorce, death, moving, etc. Those things happen during a recession, thus it should be good for the self-storage industry. Therefore, I don't believe rental rates or occupancy would be impacted by a recession alone but overbuilding can cause both.
Peter Hitler: . I feel this industry is fairly safe from recession. The biggest problem is over building. This will negatively effect rates and occupancy. In the Milwaukee market, everyone seems to be a full capacity.
Ray Wilson: Perhaps not recession proof, but closer than any other type of real estate that I can think of.
Buzz Victor: I would rather be in the mini-storage business in good time, but if I am going to be in a real estate related business during bad time, I want it to be mini-storage. The need for storage changes, but it does not go away.
Joe Niemczyk: I do not believe that any business is "recession proof". However, self-storage seems to be a bit more resilient to it than many others. When recession hits, people respond first by downsizing. They will rent a smaller apartment, buy smaller homes, sell their expensive toys and eventually give up their storage.
Joe Niemczyk: I believe the first steps that an owner should take is look at where they can trim their own expenses first just like the potential consumer will be doing. During times of recession just like times of intense competition, one of the most important factors will be your customer service ability. When times are great and everyone is full, customer service is usually at its lowest point. However, the store with the best customer service during a recession has a tremendous leg up since customers will now have a much greater ability to shop around. The next a common mistake is to cut advertising, this is the last thing you should do. Your advertising will most likely need adjustment however since your market will tighten as occupancies drop. Advertising is you only link to your customer, without it you will effectively unplug your telephone.
Maurice Pagoda: A SS owner that is running his business in a professional, class "A" manner should do little to change his business practices in a recession. Customers will still flock to a well run business, even with higher rates. Keeping your properties in tip top shape is always sound business both in good times and bad. I would never suggest dropping rates if possible.
Ray Wilson: This question assumes that self-storage will be impacted. I don't believe owners have anything to worry about! It is over building they should worry about, not a recession.
Buzz Victor: I think the only real answer is to keep the manager motivated, to be sure customer service and sales techniques are the very best they can be. Also, to keep up with what the other owners are doing and react as required.
5. Do you see a change in the type of people that are actually renting the stroage units during a recession?
Ray Wilson: I don't have any statistics on the type of person who rents during a recession. I believe, however, more people would rent because of changes in their lifestyle, a job loss for instance. People might also share an apartment and thus rent a self-storage unit to store furniture.
Joe Niemczyk: I do not believe that there is a substantial change in the type of people who use self storage during a recession, with the possible exception of small businesses, which are cutting back on space but want to maintain records, equipment and inventories. The bigger change will be in the types of items stored. There will be fewer boats, jet skis, snowmobiles etc., as people tighten their own personal budgets. There will also be a change in the type of space they will rent since they will be willing to become better packers and give up the convenience of space.
Our impressive group of experts seem to say that recessions are going to affect self storage, but perhaps less dramatically than other types of real estate. But, it is also clear that our experts believe that the real issue to worry about is overbuilding. It is overbuilding and unbridled competition that creates problems in our industry.