Scott Lewis
CEO, Spartan Investment Group LLC
Our company started out doing residential flips and condo conversions. We quickly realized that was not for us, so we knew a change was needed. Using a structured decision-making process I learned in the Army, we decided to focus on commercial assets with the following three evaluation criteria, which we call the “3Es.” The 3Es are: easy to operate, easy to maintain and easy rent recapture.
As we assessed a number of different commercial asset classes – multifamily, medical office, self-storage, industrial, office, mobile home parks, etc. – one came out ahead of all the rest based on those three criteria: self-storage. Let’s take a look at why based on the 3Es.
Easy to operate. With the right business plan and management team, operating a self-storage facility can be a pretty easy. In fact, we own a facility we manage remotely from 2,000 miles away and there is no on-site manager. For this facility, prospective customers can go the website, choose what size unit they want, sign their rental agreement, get a code to the gate and start storing their belongings. Some operators have installed kiosk’s that also sell locks or have remote connections to a human being at a central call center.
One of the primary ways to drive value in any commercial real estate asset is through rent increases. In almost every other asset class, the ability to raise rents on current tenants is annually, and most are governed by the lease agreement. Not in self-storage. We can raise the rents as frequently as we want, which, depending on market factors, can be up to twice per year. With the average rental rate for a 10×10 unit being around $120, a 10% price increase is only $12 per month, hardly worth moving for, but incredibly valuable from an asset valuation perspective. In fact, according to a NY Post article from May, one in 10 people would rather go to prison than move. We have some tenants who have been with us for over 20 years – on auto pay.
Easy to maintain. Self-storage properties are designed and built with simplicity in mind. Most are light-gauge steel construction throughout with the most complex feature being the roll-up door and the occasional elevator. Because of this, the amount of effort required to maintain a facility is very low. With some basic preventive maintenance, facilities can go years without needing any capital improvements.
When we have someone move out, most of the time, with a quick sweep, the storage unit can be rented immediately. The only regular maintenance we do is change light bulbs, replace the piece of rope used to open the unit and grease the doors. We almost never have to touch the inside of the unit and certainly never have to do a tenant build-out. In the worst-case scenario, a unit comes off line for about a day because we have to clean out a completely full unit. Even then, we usually call our auction customers and they’ll come and clear out the units. In addition, when a customer is being asked to leave for lack of payment, it is very hard for him to damage a unit.
Easy rent recapture. We believe if we provide a clean, safe, easy-to-access place to store your belongings, we should be paid for that. And if we aren’t, we want an option to recapture what’s owed to us in an expeditious manner. In self-storage, evictions are governed by lien laws, which are far more in the favor of the owners. In addition to only having month-to-month leases, we’re able to lock customers out of their units until they pay. If they don’t pay, we’re able to auction off the belongings to recapture what is owed to us. Now you may be familiar with the TV show “Storage Wars.” It almost never happens that way. Auctions rarely recoup the total owed and we would always prefer to work things out, but it gives us an option. If we do have to go to auction, the total time to clear out a unit and get it rented is about two months, which is faster than any other asset class.
In addition to these reasons, one fact stood out for self-storage among the rest of the commercial asset classes. When we looked at the history of performance of multiple asset classes over the last 20 years, it was very clear that self-storage is pretty recession resistant. Self-storage does well in both up and down markets. When times are good, folks are buying lots of stuff so they need space and businesses need additional space for inventory. When times are bad, folks are losing homes and businesses are downsizing, so they need a place to store their stuff. Self-storage also is a life event business, both positive and negative. Divorces, as unfortunate as they are, drive demand as inevitably there is transition period in splitting up the household. Also, self-storage had the lowest foreclosure rate of any asset class during the Great Recession as indicated by the chart.
A fun fact about storage is that if you want an asset to be easy to operate, easy to maintain and easy to recapture rent, self-storage is the best option. And whether you’re an active owner or a passive investor, you can sleep a little easier at night knowing storage weathered the recession storm. In most of its history, self-storage wasn’t seen as a top asset class, but that has certainly changed, and we’re super excited about it.
