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.
For the last several years, all we hear about is fake news, and yet we're finding most of that news was in fact fake. The ability of AI to generate pictures is astounding. You should try it. But it's also terrifying. I could AI myself riding a bull in a rodeo, when I've never set forth on a bull in my entire life. The bottom line to the way the world is changing and progressing is, you can't trust anything unless you've actually seen it with your own eyes.
This is Frank Rolfe with the Self Storage University Podcast. We're gonna be talking about the necessity as a storage buyer in today's world to never trust anyone but yourself. Now, obviously, that's a pretty harsh statement because we all want to assume there are people who do look out for our best interests. But the problem is there's more people who aren't. So if you just assume that everyone is on your side, is being perfectly honest with you, you're going to get yourself in lots of trouble. Because the truth is, most of the time, that's not the case. People are trying to morph your thought, manipulate your thinking, because they have something in it for them. They're trying to sell you something, they're trying to convince you to do a certain thing, and they're willing to do anything to make that happen, including telling you things which are in fact, incorrect.
So let's start off with the first self storage thing that you hear frequently, which is just how great the industry is doing. And it's not. And we all know it's not. And we know it's not, because we see the vacancy around us. We see the sign saying units available. We can see at the facility the fact there's no locks on a whole bunch of the doors. So don't tell us things are going great. They're not going great. How ungreat are they doing? On those urban storage facilities, the ones in the big cities, I would have to gather that they're in quite a crisis. They're not meeting any, I imagine, of their occupancy targets. Their rents are not where they're supposed to be. But most importantly is what's happened with interest rates and cap rates, because the value of storage facilities is completely contingent upon that all encompassing item, that single digit known as a cap rate. And what's happened is interest rates since Q1 of 2022 have shot up like a rock from nearly zero percent with the Fed to about five and a half.
Correspondingly, the interest rates on loans for self storage facilities have gone up, although not quite that much as much as the Fed's fudge rate. They've gone up a lot. And the cap rates on many of your urban core storage deals have doubled, and that means the values have halved. It's probably a good bet, if people were truthfully honest at a lot of the larger investors in storage facilities, that the value of their assets has crushed down to maybe half of what they paid based on when they bought them. So don't say the industry is doing well. That's not the hallmark of an industry doing well. Now, the suburban storage facilities, the ones that are owned by individuals, those are doing far better. Those people did not pay exceedingly low cap rates. They use fairly conservative underwriting, and they're fine. But that's not the bulk of the storage industry. The bulk of the storage industry are the folks out there with the giant well known names and well known brands. And although I have no access to their books, I have no knowledge of what they're doing, I do know what I see. And what I see shows quite a bit of pain, both in valuations because of rising cap rates, but also just what I see myself personally as far as vacancy.
Another thing you'll hear all the time is that this market is hot or that market is hot, when in fact it's not hot. Take a look at Austin, Texas, for example, which was hailed out as the hottest market on earth for the longest time. It's not even the hottest market in Texas anymore. Fort Worth is now deemed to be a hotter market than Austin. What happened? Massive overbuilding, among other issues. And then just people kind of got tired of Austin. It kind of lost its glamour to some degree. People started to leave, and the demand for storage kind of started to decrease. Why do people tell you markets are hot? Well, they tell you markets are hot typically because they want you to overpay or pay more to own a storage facility in those markets. But you can't trust them because, again, they're trying to sell you something. If someone told me, oh my gosh, Oklahoma City is the hottest storage market in America, I'm gonna think, well, I guess it probably means this guy's trying to sell me something in Oklahoma City, because I don't believe that it is. And again, this all comes back on your belief in yourself and forming your own opinions and having the ability to ignore people if what they tell you does not align with what you think.
Then you have the issue when someone's trying to sell you a storage facility and they're trying to convince you that this low, low cap rate is perfectly acceptable and a smart financial maneuver for you when you know it's not. Why would they tell you that? 'Cause they want to sell it to you. They want to convince you that, oh yeah, you can pay this price, you'll do just fine with it, when they know better, and deep down you probably know better, but nevertheless, they will try and manipulate you just as hard as they humanly can.
So how do you get out of that trap? How can we actually see things and believe only those things that align with what we in our own brain think? Well, the first thing you have to do is to pack your brain with information. That's how AI originates, is they have to pack it with a gazillion one off decision making, lesson learned items for it to be able to write letters, write reports, make decisions, things like that. So we have to pack it with all the different factoids that allow you to make smart conclusions. That means learning everything you can about how self storage works. That's a good one, but that's not the whole thing. You then need to pour over constantly all kinds of market data, read lots of articles, read lots of books. It doesn't have to be just based on storage. It can be on any other kind of asset type. They all pretty much run the same parallel. For example, the cap rates that went up on storage went up on everything else. Office, retail, you name it.
Also read a lot of things out there, and there's quite a few that come out on a regular basis. Most people don't read them 'cause they're boring. Read like analysis, economic analysis by big banks, like Chase Bank puts their stuff out there normally, and other people do on, what the direction of the economy is. Because, at the end of the day, obviously, everything in America is tied somewhat to the economy. What are the projections on the economy? Where is that going? Where are interest rates going? People have been pegging the interest rate movement improperly now for years. No one saw Jerome Powell raising the rates like he did, nor has anyone seen pretty much anything. Remember, right now, we are in unchartered territory. You can go back to 1776 books on America. We've never had this much debt. We're in there at $35 trillion plus. No one knows how this movie ends. People may fake it. They may claim that they know. They really don't.
Look what happened in the election. The polls said that Kamala was gonna do fantastic. Oh my gosh, she was gonna win, or it was gonna be the closest race ever, like an NFL game decided by a field goal with two seconds to go. How'd that election actually go? Well, I don't know if you qualify anything today as a landslide, but it was pretty close, if it wasn't. So the pollsters had it completely wrong. And that's what's happening right now, is people make all kinds of projections and comments. They write articles, they give speeches, they declare things with 100% certainty, when in fact they don't have a clue. And that's what necessitates you being the sole decision maker. To be a good caretaker of your investment money requires you to stay current, to stay timely. You have to do the work. You have to do the homework. Warren Buffett, when he started Berkshire Hathaway, what he was known for is he would sit upstairs in a room and he would read everybody's public annual report of every public company, all of them. He would read 8, 10, 12 hours a day, every day. Did he like to read that much? I don't know. I don't really know Warren Buffett. But I do know, to me, it seems awfully darn boring.
But nevertheless, he did it because he needed that financial information to make smart decisions. Consequently, a guy that read all the time ended up with the highest annual rate of return in stock market history. Was it strictly because of his knowledge? Well, it certainly helped. So as we start this new year off, I think it's very important that all of us realize that we can't really trust anything anymore. I think we all learned that over the last several years from the news. But on top of that, we have to take the necessary effort to forge good decisions. You need to educate yourself and constantly re-educate yourself. You need to not let a day go by without reading and learning and listening. That's the only way you can make good decisions, when you have clarity of the action to take based on your best thoughts. This is Frank Rolfe, the Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.