IT IS THE BEST TIME TO BUY SELF STORAGE

Self storage has sometimes been called recession proof. I am not sure about that. But I do know that it is recession resistant. By this I mean that in good economies people store for positive reasons. That is, people store because they have more things to store like snow mobiles, 4 wheelers, boats and classic cars etc. During downturns people store for less positive reasons like scaling down from a house to an apartment and they hold on to things in hopes that the economy rebounds. Or families consolidate so some things that are important to them have to be put in storage.

As far as self storage becoming recession proof, I do not see any indication that that is the case. A benchmark that I found useful is that if warehouse space reaches a vacancy rate of greater than 10% and the unemployment rate exceeds 10%, this vacant space will put pressure on self storage, like it did in the 1991 recession and vacancies in self storage will increase beyond normal levels. This is due to the fact that landlords of warehouse space will start leasing out space to smaller and smaller storage uses at very low rents.

Since I do not see the New England economy getting to that vacancy level in most areas, the financing climate has made self storage a compelling investment right here and right now. By this I mean that, for an investor with good credit scores, banks are very willing to lend to self storage operators for all of the reasons I noted above. One can borrow with very favorable terms with an interest rate of 6% or less. In addition, the Small Business Administration has expanded its borrowing activities to self storage. This is a new and very positive development for the self storage industry.

The most important reasons for investing in self storage is because this recession resistant investment class will perform better in an inflationary period and an investor will be able to pay back the loan with dollars that will be worth less in buying power as the value of hard assets rise exponentially in inflationary times. Also, if one can lock in these low interest rates now, one can avoid borrowing at higher inflationary rates if they do not wait until inflation comes before making an investment in real estate. This borrowing opportunity adds to the positive cash flow of self storage. Lastly, the equity that is being built up tax deferred due to the pay down of the mortgage over time adds to the total return for this fine investment class.

The other reason why self storage is a good buy now is that many investors are fearful of another downturn in the economy. So the competition for buying investments now is very low. And, if you will make an offer on self storage, you will find out the lowest price the seller is willing to take. Some believe that self storage is a distressed asset class, but this is not the case, because occupancies are very good in most markets in New England. So, even if you are the only offeror, you cannot buy self storage in New England at a deep discount like you can in areas like Florida and Nevada. In the words of the astute investor Warren Buffet, “Buy when everyone is scared and sell when everyone is giddy”. If you accept the wisdom of Mr. Buffet then now is the time to buy.

I have been a real estate broker through 5 recessions. I started with the oil embargo of 1973 when you could only buy $2 worth of gas at a time. In closing I will ask you the same question I ask all of my clients. Which one of those 5 recessions did not turn out better after it was over? The answer is none or I would not be writing this article to you about investing in real estate. The comeback is, yes Joe, but this recession is different. After short laugh, I remind that person that in 1991 there were no banks in New England to lend to anyone. The market was controlled by the FDIC. Today we have wonderful banking opportunities for creditworthy borrowers. This recession is only different in that it is not nearly as bad as the others. However, inflation is coming soon. Those investors who buy hard assets with good cash flows will increase their wealth significantly in the coming years.

Written by Joe Mendola, NAI Norwood Group, joe@nainorwoodgroup.com