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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.
The US home mortgage interest rate is going to levels not seen before in 40 years. This is Frank Rolfe from the Self-Storage University Podcast. We're gonna be talking about the impact of higher single-family home mortgage rates and payments on the self-storage industry. Now, we're not in the single-family home business, yet in some ways, the fortunes of self-storage are tied to that single-family sector. So I brought this up in the two areas, positive impacts and negative. Let's start with the positive impact of higher mortgage payments and rates. The first is you can't sell your house, so you can't really move, this is gonna be something you'll see that is going to affect most Americans. They bought a home at a really low mortgage rate, and by virtual low mortgage rate, their home was worth X, but now that home mortgage rates have gone up, the price of that home is now less. Why? Because people can't afford to buy it, 'cause the payments are higher. So as result, people will be stuck. The house they bought for $500,000, now only it was worth $450,000, and so they won't sell or they can't sell.
So what's then going to happen if Americans are all stuck in their homes, which they certainly are. Well, if they wanna have more space, they're gonna have to make do with what they have, and one way to get more space in that house, to have more usable square footage is to put more stuff in storage. It's always been a fact that a storage unit is kind of an extension of a single-family home. It provides the storage that in the old days, back in the 1950s and '60s would have been found probably in closets in the garage. But today, to make those spaces usable, people put it in storage, and it only makes sense because the price they pay for a month for the storage unit based on the square foot of their house is a fraction. So that's one item you'll see. Is more demand for storage because people simply can't move and they'll have to create new extensions of their home, new living spaces, through things like self-storage.
The next item is, it's going to push people into the suburbs and exurbs. And I've been riding on this for years now. I'm a huge believer and I've seen it first-hand myself since I live in an exurb of St. Louis. What's going to happen is that people are going to go and fly out of those urban markets to areas that are not only more affordable, but safer and have better skills, and you're seeing that happen all across America. If you look at the statistics from U-Haul, for example, of where people are renting U-Hauls or moving to. Well, they're not moving to urban markets, that's for sure. They're moving out. Now, at the same time as they're moving away from those urban centers, they are buying up and utilizing and renting more self-storage units in those areas. So the higher single-family mortgage rates, what you're gonna see as part of that feature is going to be that people are invariably going to be doing a 180 for where they were before and moving farther out of that urban core. And if you own self-storage facilities out in those suburbs and exurbs, you will definitely benefit from that.
Next, people are gonna stay in apartments longer because they cannot afford their own single-family home to move into, and as a result, they are gonna need storage for longer periods of time and be more stable because they're not going to segue from those apartments into single-family. They're not going to be buying that larger home where they can pull the stuff out of self-storage and put it in the garage or into a closet because they cannot afford those higher monthly mortgage payments. So in many ways, you're going to see a continuation of the fact that people just are gonna need storage for longer periods of time.
Finally, since people really can't sell their home, that means they really also cannot move, and so they're gonna be very, very sticky customers. America, for the longest time, had a huge transformation of movement, people buying one home and selling it and moving to a different neighborhood or moving across town or moving across to a different city, but you will no longer see the movement such, everyone will be trapped in their home with that low mortgage rate, which they can't ever match again, nor can they get the price of the home that what they paid back again. So you'll see a lot more stability.
Now, what are the negative aspects to higher single-family mortgage rates? Well, the first one is the variable rate mortgages, when they reset, which many people have variable rates and not fixed rate 30-year mortgages, that is gonna make those people more cash-starved, and they're gonna look at every possible way to cut their budget, one of which would be to cut their self-storage unit. So you have to be extremely careful and watchful because you will start to see some customers simply blow out. They'd like to keep the storage facility, but they can't because they don't have the money to do it anymore. So that's one negative attribute.
Another negative attribute is going to be, if you own self-storage in an urban market, well, you're in real trouble because people are moving away from you, they're not moving towards you. So as this continual wave of folks leave city centers and go out to into suburbs and exurbs, those people who are unlucky enough to own storage in those urban centers, well, they're gonna have nothing but bad news for the longest time. Now, there's been billions of feet recently built in those urban cores, and I have no idea what in the world is going to happen. If you look at all of these other failing sectors of real estate, they're all occurring in the urban centers, office buildings at half occupancy nation-wide. Retail, also at half occupancy in many markets. It was thought at one time the adaptive use for all that empty space was self-storage. We can imagine how that will go over. Let's add even more millions and billions of empty self-storage square feet towards already existing, that people are leaving from. So even though it was a positive, on the one side, if you own a self-storage in a suburban or exurban area, the higher mortgage rates are also going to cause even greater negative pressure on those urban cores as people looking for lesser expensive housing decided to move farther and farther out, because while moving further out, they can buy a home on a mortgage they finally can afford.
Also, it's going to make true for many years ahead, that self-storage is going to be a positive or negative, just based on where you are. Again, urban areas are gonna be tough. You're already seeing decline in rents, decline in occupancy, many more concessions required to get customers. If you drive around in many urban areas today, you'll see big banners, "Rent Here." "Sign a six-month lease to get two months free." and the next guy will say, "Sign a six-month lease and get three months free." And probably some other guy who says, "Sign a six-month lease and get six months free." So you're gonna see the industry kind of break, there's gonna be kind of a two tranches to it, the urban owners who will be in a world of misery, and then the suburban and exurban owners, which have never seen better times. And I would say that is probably the big take away from the higher single-family home mortgage rates, is simply you're gonna see the storage industry kind of break into two components, that's gonna be feast and famine at the same time, feast for those who own in the suburban and exurban markets, and famine for those who are unlucky enough to own big storage facilities in the urban core.
Now, do I ever see this actually changing again? No, I really don't. I think what's gonna happen is even if single-family mortgage rates go down again, which I'm not projecting they really ever will, but even if they did, I think so many people have now realized how superior the quality of life is. As they push out of those urban areas, they're probably not going to be coming back. So as a result, we have long advocated, if you're going to buy a storage facility, you need to do it outside of those urban centers, that is where all of the magic is going to be from this point going forward.
Bottom line to it all is that higher mortgage rates aren't necessarily bad for the self-storage business, but it all depends on where you are, where your storage facility currently is and where is it when you're looking to buy. This is Frank Rolfe, the Self-Storage University Podcast. Hope you enjoyed this. Talk to you again soon.