Self storage occupancy suddenly falls to lowest since 2014. Senior housing has been dropping for 2 years. As more building continues, no signs of changes in sight for either.
(Disclaimer: I'm not a financial advisor, accountant or attorney. Consult your own financial and/or legal advisors before making any investment or legal decisions.)
"What could possibly go wrong?"
The pitch-deck for that shiny new self-storage facility looks so convincing. Many self storage facilities held up really well to the stresses of the last recession. So it claims that makes their investment "recession proof" going forward and it'll do well no matter how the economy does. Or at least, that's the way the narrative goes.
To those who buy this story, the latest reports from REIS (a real estate data company) may be quite a shock. 2017 occupancy rates across 50 metropolitan areas have deteriorated and decreased back down to the levels of 2014.
"The worrisome trend is that this is the first year that occupancies have actually deteriorated year over calendar year – despite seasonality within quarters we tend to end with stronger occupancies year-over-year. At 11.6% vacancies, we are back to levels last seen in year-end 2014."
And this was during the middle of an expansion with no recessionary stress in sight. So if a boat can't hold water when the sun is shining, what happens when the storm comes?
Some (including me) have pointed out for a while that many of the underlying trends that helped self storage do well in the last recession, have changed.
For example, 10 years ago, self storage was an obscure niche. Today, everyone and their brother is building new facilities. This new competition, can cause occupancy to drop and drive down prices.
And, thanks to millennials, many US consumers now favor the accumulation of experiences over physical goods (versus 10 years ago). What will happen to all these new facilities if people no longer have as much stuff they want to keep as before?
In my opinion, while some self-storage can still be a good investment, these are not the "no-brainer" investments that they're being pitched as. And I feel that prudent investors need to look very closely at the local statistics. Many times there's no way to know for sure if some else is going to have the same idea, and put up a competitor nearby soon. If so, investors need to understand the risk they're actually taking before sending that wire payment.
"But na-na? You don't you want to stay in my Senior Housing facility?"
Senior Housing finds itself in the same situation. Pitch-decks talk only about how the number of seniors is soaring, which they claim makes their facility a slam-dunk. But a recent study, found that many times the promises of obvious demographic tailwinds don't pan out.
And sure enough, statistics are showing that this asset class is also experiencing stress. Occupancies have been falling (and vacancies rising) since 2015. And again, this is while the sun is shining, the sky is blue, and the clouds for the next recession are not yet threatening.
And again, there is a lot of building going on. Additionally, as Reis notes:
"What do we make of rising vacancies in Senior Housing? First, that we always tend to teeter on oversupply for this sector, given how challenging it is to estimate actual demand from the senior population – most of whom tend to hold on to their multifamily or single-family homes as long as they can."
Again, maybe not quite the ultra-low-risk investment, it's being sold as.