Bubbles And Baths

Show Notes

The world economy has endured countless bubbles and resulting financial baths. They follow the same trajectory every time and you can see them build with investor behavior and attitudes. Is there a bubble and bust coming in the self-storage industry? We’re going to explore this topic with examples from past financial panics and zero in on where the storage industry stands in relation to these historical moments.

What is The Self Storage University Podcast?

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.

The world economy has been filled over the centuries with bubbles to lead to economic baths. This is Frank Rolfe, the Self Storage University Podcast, we're going to talk about bubbles, busts, things need to watch out for and if the self storage industry in fact it right is right now part of a bubble, or how it relates to that greater bubble note is the American economy. Now the six biggest bubbles in world history, the first one was the Dutch tulip bubble of the year 1636. Now, if you're unfamiliar with this bubble, it was the craziest thing, people started thinking that the most valuable commodity in the world at the time, were tulip bulbs. People kept trying to grow ever nicer, prettier tulips. And for some bizarre reason people thought that if you bought the tulip bulb that produced the prettiest tulip, you could somehow find a way to commercially market by grafting this tulip and creating more tulip bulbs. So we were all competing as a society for tulip bulbs. I know it sounds ridiculous, but it's true. And eventually, these two of balls rose in value to unbelievable levels for literally nothing. And then one day the perception changed. People said, Wait a minute, these are just tulip bulbs, they're worthless, you can't eat them, you can't do anything with them. They're not really worth any money. And everything just completely plunged. So that was the first bubble in world history. The second was the South Sea Pearl bubble. Now that him in about 1720. And you had somebody called the South Sea Company. And everyone thought that South American trading Well, that was going to be where all of the world's riches were going to come out of the the South Seas, they had pearls, it had gold, it had everything. And so people all were clamoring, they kept buying up this crazy stock in this company, which really didn't produce much anything until it reached such an incredible level of valuation. And then suddenly, everyone realized, wait a minute, this company doesn't make any money. There's not any great riches in the South Seas, nothing that corresponds to this value. And again, their investment was just completely wiped out. And then you had the American stock market collapse of 1929. everyone's aware of that one least they shouldn't be aware of that. That was the year the stock market bubble burst, we'd had all kinds of American industrialization and values went up hugely, the stock market. And then in October of 1929, it all came to a roaring and stocks plunge. And it was the beginning of what we know as the Great Depression. The next big bubble happened over in Japan. And that was the Japanese stock market bubble back in the 1980s, when the market in Japan tripled in value between 1985 and 1989. But for no good reason. It isn't like people's incomes at those companies tripled during that period, it was all again, just complete perception. And it was bad thinking it was people following each other thinking they were under the new hot thing. And then of course it completely collapse which takes us into the.com bubble. That was another American invention in the 1990s. In the years 2000 to 2002. The NASDAQ dropped 80% During the.com crash Imagine that 80% Of all the value on the NASDAQ exchange lost in just a two year period that's far worse than the 1929 stock market collapse. And it was basically all driven by technology. And companies in the technology field, particularly resulting from the Internet didn't make any money getting these high valuations based on nothing. Other nonsense people were bringing out all kinds of new.com names didn't even have a business model or funding. And yet they were getting private equity groups to put in massive amounts of money. And they could go public without any earnings, in fact, losing money every day, and still get these wildly high valuations. And then finally in 2007, the US housing bubble we all remember that wonder we should if you around if you are an adult back in 2007 2008. That was the last huge bubble collapse in world history. And that one was based mostly around the single family housing market. Now, what did all of those things have in common what what they all had in common? Were two things in my opinion. Number one, it was all about perception. Because the big thing he did had that they all shared was none of those things ever made any money. You know, it's one thing to go into the entertainment industry. And let's say be an actor, pretty much anyone can be an actor or actress in my opinion. It doesn't require any massive talent. So I'm not convinced in any way that every single person listening this could not go to Hollywood and be As an actor, at least, if not in a major role in a more minor one. But yet none of us could probably just walk on a football field and become a quarterback for a NFL team, because that requires some great degree greater degree of skill. And that's a problem with some businesses, some businesses actually require you to make money to be a value. And others are just about talky talk, just coming up with clever ideas, dressing nicely, having good people skills, and then suddenly, overnight, you're all kinds of valuable, but for absolutely no good reason, because you don't make any money. And so that's what you have to have to set up the bubble, is you have to have a focus and perception that these things that really have no value, are enormously value. It just recently, you've seen that even it wasn't close to what people have said, Mark Cuban said that, basically, in the new economy, all the matters is what people think things are worth. So he's basically throwing out the viewpoint that nothing matters anymore as far as just perception. And the bottom line of this is, that's what that's one thing that self storage, doesn't share with all these other bubbles you see right now in America is the value of a self storage facility is simply based on net income revenue, less expenses, and then apply to CAP rate to that. So if you have a self storage facility that loses money, it's worth nothing. If you have a self storage facility that makes money, how much money does it make, and then you apply a CAP rate to that and that gives you the value. But Thank heavens, the self storage industry is not based simply on perception is not about to let balls are the values we feel a tulip bulb may have is not based on some clever.com name that doesn't actually have any real business plan or any any no house or anything going on at all. No. Self Storage is based on the basic premise that income property is just about that income. But that's not to say there are not bubbles within the storage industry. The biggest one you're seeing right now play out is the fact that most of the Self Storage in America are focused in urban markets. Focus in the big city right at the heart of it all right where no one wants to live anymore. Where there's lots of crime, lots of poverty, people don't feel safe. And they're in searching out now. greater prosperity, greater quality of living by getting the heck out of town and moving out into the suburbs and excerpts. And all that storage that was built, you can't move it, you can't pick it up with a helicopter and fly it out to the suburbs. So all of that storage is trapped in town. And no one knows what's going to become if at all, there was a huge overbuilding surge over the last few years, they built a massive amount of new storage in just the wrong spot right back in those urban markets. And so to me, that's going to be probably a big bubble issue is going to be what you do with all that urban storage. And there's no doubt the industry will have a black eye before all is said and done. Because there's no way they're gonna be able to maintain decent rents and decent occupancy in areas where people are fleeing and living as fast as hard as they can look at all those U haul maps and where people are moving to moving away from they're all moving away from big cities and moving into suburban and exurban areas. The other bubble you're going to have is an evaluation. And what happens to those people who bought at insanely low cap rates. Right before Jerome Powell started jacking up the interest rates. There were many people out there, obviously, even REITs, they were buying self storage facilities at Caffrey slower than anyone ever had in American history. Under the assumption that interest rates would remain near zero. Well, now they didn't. Palace raised the rates of nearly four points in January. And so there are a lot of people out there who bought self storage facilities with really no upside, no way to really push the rents or increase the occupancy. They looked at them more like a bond. But the problem is they guessed wrong, and they got the value of the bond wrong. And they assumed that interest rates would always remain historically low. And now suddenly, they're on the wrong side of that. You see the trick. The key to not buying into a bubble, is just stay focused on income. But also be watching the trends and not trying to follow the Lemmings and not try and follow the perceptions. That's where you always get in trouble yet to think independently. Need to read more, read lots of news, all the news you can get, you can get so much news on the Internet for free. It's unbelievable. And think for yourself. Don't listen to what other people say. At the end of the day, we all bet with our lives and our livelihoods, and what we think to be the right thing to do.

So make good decisions. Be aware that there are bubbles, there are perception issues that things should be actually tied to net income. Don't be believing people who say that things are only now based on what we think things are worth that isn't the correct way to be. You want to be aware of bubbles. You want to be someone who instead of getting In a situation where your bubble gets burst they used to have a strong foundation in real earnings this is Frank Rolfe the Self Storage University Podcast hope you enjoyed this talk to you again soon.