Is Self Storage Recession-Proof?

When a recession comes, people downsize homes and offices - then they need room to store the extra stuff that no longer fits.

Self storage businesses provide that space, and even if the recession hurts their profits, there’s still plenty of demand!

Right?

Self storage has become a popular avenue for investors precisely because, among other things, the industry weathered the Great Recession so well.

Where other industries were crippled by the economic downturn, self storage as a whole did relatively well. With economic storm clouds on the horizon, people are starting to wonder if the same will hold true for another recession.

In short, is self storage recession-proof? Or will operators get burned?

The Case for Relaxing: We Did Fine Last Time

If we are headed towards a recession (which some people are certain of, and others are certain won’t happen), it makes sense to look at the last recession the industry faced.

During the Great Recession, the self storage industry did relatively well.

Per ISS: REITs were the only real estate asset that produced positive returns during the Great Recession!

Here are a few reasons to think self storage is uniquely resistant to recessions:

• Adjustable rates. More than other industries, self storage operations can adjust to changing economic conditions. Month-to-month rents can be changed, up or down, as conditions dictate. Other industries could be locked into contracts that prevent this or have customers that refuse to buy at new rates. If your rates are near the market rate, you shouldn’t see too much of a decrease in demand even if you have to raise rates.
  
• Long-lasting value. If you already own a self storage facility, you’ve got a durable source of income that won’t require you to take out more loans. While you do need to spend money to keep your facility running, those expenditures (like a new roof or new pavement) can typically be postponed until economic conditions improve.
• Controllable Expenses. Self storage expenses average about one-third of revenue. This is significantly better than other real estate businesses and lets you weather the storm better than similar industries. 
  
• Auctions and evictions. Unlike other real estate businesses, self storage operators can get their property back from non-paying tenants relatively quickly. Self storage auctions may not be fun or particularly easy, but there is at least a process in place that gets you your property back. Compared to residential evictions, they’re a breeze.
• Low debt. Self storage investors are less likely to be dangerously leveraged. Self storage facilities aren’t as expensive to build and maintain as other major real estate properties - think apartment complexes or commercial real estate. This means most self storage operators can operate on a shoestring budget without going bankrupt, at least for a while.

Per ISS: Self Storage usually operates with expenses equalling 33% of revenue. Gross margins can be as much as 60-65%!

Of course, not all of these benefits will apply to your business. Maybe you’ve just invested in a premium self storage facility in an expensive market and are leveraged up to your eyeballs, with huge expenses and you need demand to continue to grow to keep up.

If that’s your situation, no number of bullet points is going to reassure you.

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The Case for Panicking: The Industry Has Changed

Owning a business is stressful, and owning a business during an economic downturn could be downright terrifying. 

While the self storage industry did do relatively well in the Great Recession, that doesn’t protect tomorrow’s businesses from inflation, degrading demand, and increasing competition.

In fact, the major reason to worry about any upcoming recession is that last bit - increasing competition.

After the Great Recession, self storage was a star. Since then, self storage has maintained growth, even through the pandemic and the Great Resignation.

The durability of self storage has drawn a lot of attention and a lot of investment dollars. That means the competition in busy markets has increased - a lot.

Per REjournals: The Self Storage Industry is expected to register a compound annual growth rate of 5.45% from 2021 to 2026.

The industry is doing great. Smart businessfolks are investing in self storage, and the demand for storage is strong and growing. However, that means if demand slumps for some reason - say, a recession - there are more people clamoring for a piece of the storage pie.

And if your business is on the lower edge of the competition, you could get pushed out. 

We’ll go into why this next potential recession would be different from the prior (it’s fueled by inflation, not a housing bubble, for one thing) in a different article. For now, let’s talk about what you can do to ensure your business isn’t the one that loses out.

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What Should Self Storage Facilities Do in a Recession?

At the end of 2022, we hosted a Year in Review GabFocus session where we asked questions of some leading names in the industry.

Specifically, we asked them what they are preparing to do in the face of a potential recession. 

• First and foremost, don’t panic! This can come out in a lot of different ways. You don’t need to panic sell your business, you don’t need to drop your rates to ensure no one leaves, and you don’t need to make any drastic shifts (probably).
• Don’t drop rates immediately. Even if you’re seeing some customers leave, you may be able to stem the tide with temporary discounts, rather than lowering the bar. If you drop your rates low, it can be harder to bring them back up later.
• Get on top of your leads. Follow up with every lead and ensure your team is writing down the contact information of people who call or message your facility. The game is going to get harder in a recession, and doing the little things will keep you playing.
  
• Find weaknesses in your business. GabFocus is a great resource for this, but the storage industry as a whole is a wonderful community. There are dozens of places to find helpful advice from experienced hands. 
• Make your marketing work. If you're investing in self storage marketing, you need to know whether or not you're getting a return on that investment. If the market is getting tighter, you'll be facing more challenges in bringing in business, so be sure you're marketing the right way!
• Be ready to compete. The big businesses (REITs) are moving into the smaller markets, so even rural facilities are facing stiffer competition than they ever have before. That means you’re facing a giant foe with lots of money - you’ll need to be better prepared, smarter, and more nimble.

We still don’t know if we’ll face a recession at all. And we don’t know if any potential recession will hit self storage hard, soft, or will miss us completely!

But human nature wants to be prepared. So, we’re putting together a series of blog posts that will help you think through what steps to take and which ones to avoid.

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Learn more ways to improve your self storage facility with these:

• 5 Steps to Mastering Self Storage PPC Campaigns
• 2022 Guide to Owning Boat & RV Storage
• The 4 Pillars of Self Storage Accounting

At StoragePug, we build self storage websites that make it easy for new customers to find you and easy for them to rent from you.