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Welcome to the Self-Storage University Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate self-storage facilities. And your host is a partner in one of the largest real estate portfolios in the U.S. with nearly $1 billion of holdings, Frank Rolfe.
What a mess the self storage industry has become in America. It is the second worst performing sector of commercial real estate. Since 2021, the average self storage facility is down 22% in value. The only thing worse is the office department. Office buildings have fallen by 35% over that same period of time. So what the hell happened? How did self storage post such a poor performance? This is Frank Rolfe with the Self Storage University podcast. We're gonna explore how storage got in such a mess, and what you need to be doing if you wanna stay away from the carnage.
So going back, if you go back to the hands of time, self storage was a product that was very, very simple to understand. People would pull up to the old single-story storage facility, they would roll up the door, take their goods out of their pickup truck or car, place them in the unit, roll down the door, and drive off. Everyone was happy. The customers loved it. It was so easy. The owners loved it. It was so easy. And then it all went down the drain, because a lot of your storage providers lost track of what the customers wanted and instead decided they wanted to build things that were in line with their hopes and dreams. And what they wanted to do was to take that piece of land, and they wanted to put multi-story storage on it because that could give them more revenue for that plot of land than they could have with just single-story. No consideration to what customers want, of course, but simply what they wanted. And from that sprung all of these multi-story storage facilities that we see. And then they added on climate control, because by making them climate control, they could charge even more rent. So we went from a nation where people would just pull up with their pickup truck or car, roll up the door, and put their things inside, to something where you had to go there and park and get a cart and take your thing and take it up multi-stories in an elevator to a climate-controlled locker that cost an arm and a leg.
Now, for a while, it all worked out because people needed storage. And across America, a lot of cities were growing, and they needed more storage. And so even though customers were a little unhappy with the result, there were enough of them to keep things fairly well occupied. And then what happened was, industry massively overbuilt. Not just a little bit, but in a crazy, crazy way. They built so many millions of square feet of additional storage space that they swamped the market. And like any industry based on supply and demand, when the supply grows faster than the demand does, you have a decline in occupancy and rents, and that's what happened. So suddenly, the storage facilities that people were running at a certain occupancy level, they started to see people leave and not come back in, and it fell. And as it fell, to keep up with the Joneses of all the competitors, they would have to drop the rents to somehow make it all balance.
At the same time, you had Jerome Powell over at the Fed, and he went on a crazy odyssey of raising rates. He raised them for 11 straight rate increases, the most in American history, the fastest in 40 years. And self storage facilities, which had been purchased or built based on the assumption of a low cap rate, were then horrified to find, at the end of Powell's raisings, that the cap rate and the interest rate on the debt had gone up proportionally in such a manner that their investment was now upside down. It's a tale of carnage. Storage right now is doing worse than shopping centers, and we all know how bad those are doing. So what's the solution then if you're a self storage investor? What part of the industry is still profitable? What can you learn from the woes of those who have gone out and bought and built large self storage portfolios that are now underwater? Well, the first thing is, go back to the old ways of what the facilities looked like. You will find in many markets the stuff that's sold out is the old original product. One-story, roll-up door, pull up to your space. This whole nonsense of multi-story and climate control, I think, was an industry invention not based on any fundamentals of consumer testing or behavior, and therefore, it's not prone to succeed for the long-term. Number two, get out of urban markets. Right now in America, you have your urban core surrounded by the suburban markets, followed by the exurban markets, and even a new thing called the super commuter market. These are situations where people are willing to drive an hour from their job in the urban core to live, and those are the new hot markets, the exurban markets, those suburban markets, of course, and even the super commuter markets.
Don't go and beat the bush where everyone else has already beaten it to death. If you wanna go buy or build a self storage facility in most American markets, get out of the normal market. Push farther out. If you push farther out, not only will you find you can buy things much cheaper, but you'll also find you'll be in the path of progress. Because as America is expanding, that's where it's expanding right now. People are finding they can't afford single-family home prices in America, which are now around $400,000. So in search of cheaper housing, they're pushing farther and farther out. And as they push farther out, and that's where the demand is, and that's where the households are going, you'll have a lot more demand for the products that you do.
Also, it's always very important in the self storage arena to remember that the customer is, in fact, always right. And if you provide the service that they want, a place to store their goods that's easy for them to access at a price point that is affordable, then you should have no problem maintaining occupancy. And don't forget that when you push farther out, out of the mainstream, you have much lower competition. And additionally, you have a much lower amount of space being put on the market. Overbuilding proved to be a chronic problem in urban areas because, in many of them, they're so blighted that people are more than happy to have you build anything on that vacant piece of land.
When you get more into the suburban and the exurban terrain, a lot of those city fathers like to have limitations on the amount of storage. It's not particularly beautiful. Single-family home subdivisions are much nicer and provide a lot more money for those suburban and exurban markets. So they tend to control the supply to a much higher level. And just as Warren Buffett likes a moat to protect investments, that gives you, as the storage owner, greater protection. Don't be disheartened by the poor performance of the self storage industry on behalf of the larger owners. You can watch and see how this has developed over time. And you don't have to share in what they've done. And you can learn from there examples of exactly what not to do, and, as a result, be a better investor yourself.
This is Frank Rolfe with the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.