11 Jul 2024
During the recent ISS Las Vegas World Expo, we had the opportunity to engage with industry experts, gaining insights into the current self-storage landscape. with Scott Meyers, who shared insights on the sector’s growth and challenges post-COVID-19. He highlighted the surge in interest from multifamily investors and private equity, emphasizing the need for proper education and due diligence in the business. Scott noted three major pitfalls for newcomers: a lack of realistic mindset, inadequate understanding of current underwriting models, and underestimating the ongoing management effort. He stressed the importance of solid financial analysis, continual monitoring, and disciplined operations to succeed in self-storage. Despite the industry’s potential, thorough preparation and commitment are essential for success.
James: Okay, guys, we finally got some time with Scott Meyers. We were waiting in line all day to talk with him. He runs a successful podcast, but Scott, you also help so many people just get into self-storage. What have you seen since COVID-19? So much positive attention has been put on the self-storage industry for people to either look at as an investment or a possible retirement avenue. What are your thoughts?
Scott: Yeah. Wow. Well, we've been at this a while, and so we've seen a few different cycles. And so obviously, we got a lot of traction during COVID and all eyeballs around self-storage. And so we saw a lot of multifamily folks come into the space, a lot of private equity coming into the space. But for the solopreneurs that were either maybe in multifamily or in single family or just looking to start a business, they saw this as, well, we've been known as the recession either proof or recession resistant industry to come into. So a lot of traction with that. I think as we educate, we syndicate, we also develop, we buy existing facilities, and so we cover the gamut. So when a lot of folks come to us, they want to get in, they want to get in right away. Everybody's impatient, and they don't feel like they have to go through and really educate themselves on the business. And so what we've seen is a lot of maybe over-exuberant investors that don't really understand what it takes to get into the business. Simple predictable business model, but you got to learn, you need to know what you need to know. And so I think what we've seen, not to put a negative spin on it, is a whole lot of folks that tried to get into it that didn't really do it well, and maybe some folks that did get into it and now wishing they would have done their homework a little bit sooner. All that said, we educate people and teach them how to get into the business, and many of those folks are doing extremely well. But I think there's an awful lot of folks that maybe misunderstand sub-storage and some of the threats in the industry right now, as well as some of the threats in investing in real estate, especially ground-up developments right now. We're positive on it, and we understand that a pound of due diligence goes such a long ways, and just educating yourself and doing the due diligence, you still, the model, the financial analysis models, all the procedures and things that we put in place for due diligence, nothing changes during these times, it's just our cost of capital went up. And so we just need to account for that and make sure that we're still sticking to our guns and making good, solid decisions based upon the principles that we've had in place for years.
James: Right. You made an awesome point there, Scott, about the cost of capital going up. So what are the three sort of pitfalls you see newcomers to this space fall into and get blindsided by? And now that there's less room for error with capital being so expensive, what are the top three things you can advise newcomers to on a due diligence front?
Scott: Yeah, I think, quite honestly, mindset is one of them. I've heard many folks that they're excited to get in, and they begin to educate themselves, and they begin to looking at properties, and they get disappointed. They're thinking, oh, well, I can't find any deals. Where's the low-hanging fruit? Well, the low-hanging fruit's been gone for a few years now. And so then they try to manufacture and put a square peg in a round hole, and they think, well, maybe if I can get a little bit better in the operations here, or maybe our lease-up is going to be a little bit better than we think, or better than the feasibility study, or better than our consultants say, then this will work. And they begin jiggering the numbers to try to make it work. Or they decide that, wow, this isn't all that great, but I've got a goal to get into my first facility this year, or three this year. And they say, well, I'll just make it up on the next one. And I think that is the worst decision I think anybody could make. And so I think it's the mindset of saying, first of all, teaching people and showing them and helping them recognize that a bad deal's a bad deal, and you're not going to make it up on the next one. You've got to get a solid one to begin with, or there may not be a second or third deal. So I think that's the first. The second is not really learning an underwriting model. And knowing that that has changed, as you know, so much during these past three years. We used to have a 5% property management that we would throw into our underwriting, and we would project a 3% increase in rates when we get in and a 2% increase in operating expenses. That has gone out the window. With inflation that has affected everything and rising energy costs and operating costs, I think people have basically underestimated their expenses because they're looking at an old business model, and they're not really looking at it for realistic what it is. Getting into a facility in which they know that they're going to have to clean it up if it's a value-add, and they don't account for that drop-off of income as they clean up their accounts receivable and their capital expenditures, and they're going to get behind their projections in the first three months if they don't account for that. So I think it's that solid underwriting that they really need to be able to look at and then also have somebody look over their shoulder. So I think those are the first two. And then the third is I think they just don't know what they don't know, and they still think that it's a little easier business model, and they don't understand that what it takes to run it, the attention that it takes, it's not a set-it-and-forget-it business model, and you have to not only know the numbers like we just talked about, but then you have to be pounding those numbers on a monthly basis. You have to train the manager or the management company, you have to train your asset managers to keep an eye on things, set really good and really solid benchmarks and KPIs to get in place, and then you as the owner, the solopreneur, you have to continue to monitor that and make sure that you hit that, because once you get behind, it's so difficult to catch up back up again. So all of that just means doing your homework, understanding it, understanding your financials, the financials are the business, not staying disciplined and not saying, I'll make it up on the next one, or just think, well, it'll get better next month, or we'll double it next month. That doesn't happen. You've got to mind the store, and you've got to keep on the numbers and keep on the people that are responsible for making those numbers.
James: Scott, thank you so much for all this information. I think this is a must-hear for anybody looking to get into this space, and people need to hear this as well. It's an awesome industry, but it's one you've got to do your homework on, and the work produces the results.
Scott: Absolutely.
James: Scott, thank you so much, and I hope you had a great show.
Scott: I certainly did. Thanks so much, James.
