Where will Self Storage be in 10 Years | FUTURE PROJECTIONSOct 10, 2023
Today, we embark on an exploration of future projections within the self-storage industry. Our focus transcends the present, delving into what lies ahead in this sector.
The significance of this endeavor resonates not only with experienced investors but also with those aspiring to enter this dynamic field. However, it's important to acknowledge that a decade represents a substantial timeframe, during which significant changes and developments can occur.
Forecasting and anticipating the trajectory of the industry over a ten-year period may appear akin to attempting to grasp water with bare hands—an endeavor seemingly impossible. The landscape can undergo dramatic shifts, and variables can transform beyond the scope of our predictions. Nevertheless, within this realm of uncertainty, strategic decision-making thrives.
Prepare to venture into unknown territory with valuable guidance for the uncertain future. The future is like a blank canvas, and we're here to help you select the best options. Let's get started.
Growing Pains of Self-Storage
First, let's delve into the evolution of the self-storage industry. Picture it as a maturing sector, though its journey to this point was not without its challenges.
If we rewind to the early 2000s, self-storage was not a particularly prominent investment. It was not a novelty, yet it had not aged into a well-established asset class either. Instead, it could be likened to a teenager in the realm of investments. The story of self-storage traces back to the 1970s, and it gained momentum during the 1990s. However, when we entered the scene in the early 2000s, it was still in the process of finding its footing amidst a landscape populated by more mature assets.
Few Anticipated This Transformation
Fast-forward, and the self-storage industry has undergone a significant transformation. Back then, we did not possess clairvoyance; rather, we made astute decisions based on sound judgment. We recognized the potential of self-storage by assessing its fundamentals, devoid of any reliance on mystical foresight. Our approach was pragmatic; we did not attempt to predict the future but instead understood our industry and how it aligned with this asset.
Now, self-storage has become akin to the popular kid receiving widespread acclaim. Previously skeptical banks are now extending loan offers, demonstrating their newfound enthusiasm for the sector. Third-party management has emerged as a prominent facet of the industry. Remarkably, capital is flowing in from all directions, igniting a fervor of interest in self-storage. It has evolved into a competitive race to secure a share of the market.
The past decade resembled a marathon in self-storage construction. One could liken it to a superhero experiencing rapid growth. Never before has there been such a surge in construction activity – a development frenzy that surpasses any previous era in self-storage history. The consequences of this fervent development are profound, as they are fundamentally reshaping the trajectory of the industry.
Interpreting Future Trends Through Analysis
However, what does the future hold? Regrettably, we don't possess psychic abilities or rely on fictional crystal balls. Instead, we arm ourselves with practical tools: insights, analysis, and well-established context. Our objective is to decipher the maturing self-storage landscape and discern the clues it offers.
So, where is this all headed? How do we determine whether the future of self-storage shines brightly? Brace yourself for a deep dive into analysis. We are about to dissect the layers, examine the inner workings that drive the self-storage industry, and unveil its long-term strategy.
When it comes to evaluating an investment, I take a methodical approach, starting with the basics. Let me break it down for you.
Fundamental Drivers and Eroders
First up, I look for the drivers of value – how it's built up, what is it that actually creates value within those assets, and the eroders where it drips away. Value drivers are the core elements that enhance the appeal of an asset, while eroders are factors that can diminish its value over time.
I am excluding from consideration the temporary price increases resulting from market speculation or the compression of capitalization rates due to an influx of substantial capital into the asset class. Likewise, I am not referring to the current market phase, characterized by an excess of available capital and a scarcity of investment options, which is driving up the prices of the same assets purely due to heightened demand.
I’m talking about the fundamentals of value that actually create within that asset type. Take, for instance, a business using it –who is using it? Why are they using it? Are they going to keep using it? Will there be more demand for this kind of asset in the next 10 years?
Comprehending the Underlying Principles and Essentials
We must also consider the factors that gradually diminish value and assess whether they are expanding or diminishing. While it's true that we cannot foresee every occurrence, unexpected events, often referred to as "black swan" events, can disrupt various aspects of society, investments, and even government operations. These events can entirely reshape the landscape in unforeseen ways. Since we cannot anticipate these unknowns, we concentrate on the foundational aspects. We examine the asset's current state and strive to identify the following fundamentals:
- Identify drivers and eroders
- How are they being played
- Who are your consumers
- How do they see your assets
When considering markets and their impact on the self-storage industry, I prefer a straightforward approach. While there will undoubtedly be fluctuations and varying conditions, with favorable and unfavorable periods, it's crucial to recognize that the long-term outlook, say by 2030 or 2040, is heavily influenced by local dynamics. The local economy plays a pivotal role, primarily shaped by the factors propelling it forward and those impeding its progress.
Despite discussing the broader perspective, it's essential to remember that nothing surpasses the significance of local dynamics right in your own vicinity.
Drivers of Valuation
Several key factors significantly drive the value of self-storage properties. While each location has its unique characteristics, let's provide a broad overview.
Speaking of regulations, they have become a transformative element. Establishing a self-storage facility is no longer unrestricted, as more rules and regulations have emerged, constraining the range of activities permitted within these spaces. For instance, one can no longer simply establish a workshop adjacent to their residence. This regulatory shift has prompted individuals to downsize, opt for smaller homes governed by Homeowners Associations (HOAs), and adapt to increased regulations. All of these developments have a direct impact on the demand for self-storage.
In summary, limited space and evolving regulations are the primary drivers behind the value of self-storage properties.
Movement and Change
Change holds considerable significance, and often, we fail to recognize the extent of these shifts. Before the 1970s, it was customary for individuals to remain in the same city throughout their lives. However, this is no longer the prevailing trend in contemporary America. We have evolved into a highly mobile nation, pursuing opportunities and utilizing technology to do so efficiently and cost-effectively.
Consider this: our mobility has significantly expanded. In today's fluid markets, individuals can readily sell possessions, change residences, and amass resources to seize fresh opportunities. Thanks to technology, opportunities have become more accessible than ever before. Additionally, we have discovered means to relocate at a lower cost than in previous eras. Markets have grown more adaptable, simplifying the process of selling items, relocating homes, and assembling the necessary resources for capitalizing on new prospects.
Another factor to consider is the concept of a decentralized workforce. Gone are the days when everyone needed to be physically present in the same location. The COVID-19 pandemic hastened this transformation, enabling individuals to work remotely from their homes and giving rise to internet-based businesses that span various geographic locations.
Additionally, there is the challenge of the "last mile" in e-commerce. As online shopping surges, there is a growing need for storage space to house products and services, particularly to facilitate efficient shipping. All of these elements contribute to the growth of the self-storage industry and its value to end users, namely tenants and customers.
It's worth noting that regulations are unlikely to become less stringent, and individuals are not expected to suddenly have an abundance of disposable income for additional space. In fact, how we utilize space is evolving. Consider how people are transforming corners of their homes into home offices or strategically utilizing their space to adapt to changing needs. The workforce is also becoming more dispersed, and this trend is expected to endure.
In conclusion, these shifts in mobility, work dynamics, and space utilization are propelling the self-storage sector, and there are no signs of them abating in the near future.
Another influential factor at play is the purchasing power of the general public and our capacity to maximize the value of our expenditures.
In the 20th century, with the advent of globalization, the outsourcing of production of goods and services became widespread, resulting in more affordability. This shift meant that a dollar could purchase a more significant quantity of goods. Simultaneously, access to financing became considerably more attainable. In the past, securing financing for various purposes was challenging, but today, even financing for items as small as a microwave is readily available. This accessibility to financing led to a substantial increase in purchasing power during the 1990s, and this trend continues to thrive.
What's more, this trend shows no signs of deceleration. The proliferation of innovation, driven by the internet and industry giants like Amazon, is sustaining this trend. Thus, the ability to derive greater value from our money and the ease of obtaining financing are pivotal factors in this dynamic, and they are poised to endure in the long run.
Eroders of Valuation
At its essence, the primary factor undermining valuation is oversupply. This situation occurs when there is an excessive abundance of a particular resource, in this context, an oversaturation of storage space, an overabundance of storage units, and a surplus of storage facilities, all vying to lease their units.
The problem arises when there is simply insufficient demand or potential buyers within a specific region to match the surplus of available supply. Oversupply poses a formidable challenge, and in fact, it ranks as one of the most significant threats to the long-term viability of storage facilities.
Emerging Business Models as Competitors
Another factor to consider is the emergence of competing business models. New entrants are entering the self-storage arena with the goal of fundamentally reshaping how self-storage operates. This transformation extends from how tenants access storage to how they locate storage facilities. Innovation is burgeoning throughout the self-storage sector, with many innovations encroaching on the profit margins of traditional self-storage operators.
We have been addressing this substantial challenge for years, investing millions of dollars in technology to protect our established business model. While these competing business models will persist, no single model appears poised to dominate the storage market significantly. However, there is a noticeable increase in on-demand storage and similar approaches. These models may capture a portion of the demand, and their impact on the industry's future, especially in the long term, remains uncertain.
Given that storage needs are often location-specific in most areas, we do not anticipate a major upheaval in the next decade. The percentage of individuals utilizing self-storage continues to rise, making drastic changes less imminent.
Regulation: A Substantial Factor
Regulation constitutes another pivotal factor. It encompasses the regulations governing tenants, land usage, and the broader regulatory framework dictating the role of self-storage in our economy. Overly stringent regulations can significantly constrict profit margins and engender intense competition.
Additionally, the rising construction costs pose a significant challenge. When the expenses associated with constructing and establishing self-storage facilities become prohibitively high, it can deter market entry. This is a noteworthy concern that can affect sales and hinder industry growth.
Furthermore, there are unknown variables, and elements that remain unpredictable in the coming decade. These encompass the continuous influx of innovation and unforeseen changes that are bound to disrupt the status quo.
In addition, the broader context of the self-storage industry in the United States is susceptible to stagnation. As the nation accumulates more debt and the economy matures, it is likely that growth will decelerate. Such a slowdown can have a cascading effect on people's mobility, spending patterns, and overall behaviors. These shifts can impact the industry by potentially leading to either excessive development or an oversupply of storage facilities during a period of stagnation. In this scenario, a saturation point could be reached, where an inert economy, combined with competition from new business models, results in diminishing returns for self-storage. This scenario is plausible and aligns with patterns observed in various industries.
Putting it Together
In summary, let's cast a glimpse into the potential self-storage landscape of 2030. Firstly, it's evident that self-storage remains a robust and thriving industry. Those who entered the market early and have established a strong presence are likely to continue experiencing profitability. However, maintaining a competitive edge will necessitate the adoption of technology and automation. This vision includes the prospect of automated self-storage facilities and innovative strategies for attracting and retaining customers, some of which may not even be foreseeable at this moment.
As we peer into the future, we anticipate a more mature self-storage industry. Profit margins are likely to become more constrained, and the sector may encounter a degree of stagnation. We will see a multitude of well-established self-storage facilities, many of which may require refurbishment and modernization. However, the profit margins for such undertakings could be narrower compared to the earlier stages of the industry's development.
In essence, self-storage is here to stay, representing a lasting presence. Nevertheless, as with any industry, entering early often proves advantageous. It is important to bear in mind that the self-storage sector is progressing toward maturity, mirroring trends observed in various other industries.