The Economics of Everyday Things - 45. Storage Units

Episode Date: April 22, 2024

Americans love to buy new stuff and hate to get rid of old stuff, which is why storing it all has become a $45 billion business. Zachary Crockett cleans out the garage. SOURCES:Zachary Dickens, executive vice president and chief investment officer of Extra Space Storage.Anne Mari DeCoster, self-storage consultant.Kara Kolodziej, self-storage unit tenant. RESOURCES:"A Fifth Of Americans Rent Self Storage, With Millennials Overtaking Gen Xers In Generational Storage Wars," by Francis Chantree (Storage Cafe, 2024)."Lessors of Mini Warehouses and Self-Storage Units Show Significant Financial Gains During COVID-19 Pandemic," by Ben Chandler and Robin Enlow (United States Census Bureau, 2024)."The Fate of Oversupplied Self-Storage Markets and How to Pull Back From the Brink," by Frank DeSalvo and David Perlleshi (Inside Self Storage, 2023)."A Pandemic Space Race: Self-Storage Roars Back," by Ellen Rosen (The New York Times, 2021)."Need to Store That? Booming Self-Storage Industry Says No Problem," by Liam Pleven (The Wall Street Journal, 2015). EXTRAS:Storage Wars, TV series (2010-present).Auction Hunters, TV series (2010-2015).

When Kara Kology went through a breakup six years ago, she had to move out and get a place of her own. The new place was smaller, so small that she didn't have room for all of her stuff. And she didn't want to get rid of it. So she decided to rent a storage unit. Mainly, things I stored were books, kitchenware. I have a lot of clothes and gear, you could say. So winter clothes or summer clothes or snowboards. As people in my family started moving out of their homes, I started inheriting a lot of knickknacks, heirlooms, which I just didn't have room for. Koloj isn't alone in her quest for more space.

It's estimated that one in five Americans rents a storage unit. High housing costs, urbanization, and rampant consumerism have made self storage into an estimated $45 billion industry in the U.S. alone. And real estate investors are clamoring for a piece of the action. Self-storage has become sexy because people have recognized what a strong fundamental business it is.

Americans love their stuff and they don't want to get rid of it. For the Freakonomics Radio Network, this is the economics of everyday things. I'm Zachary Crockett. Today, storage units. The modern self-storage industry traces its roots back to the 1960s. The earliest facilities were more about investing in land than building a viable business. It began with folks who have good vision and they imagined where population was going. That's Anne-Marie DeCoster. She's a consultant

who's been in the self-storage industry for 22 years. They tended to buy land outside of city centers, anticipating that the population would move there. And in the meantime, they put a self storage facility on it so that they could generate cash. For these early entrepreneurs, storage units were what's called a covered land play. You buy some cheap land not too far from a growing population center and wait until there's enough people nearby to build a hotel or a shopping mall. In the meantime, you need to cover taxes. So you set up a business

that's cheap to operate and brings in a little cash, like a storage facility. But a funny thing happened. Investors realized that self-storage is among the highest and best uses. So instead of selling those, they kept them. Today, there are around 52,000 storage facilities in the United States, more than 20 million individual units. About two-thirds of those facilities are owned by small to mid-size operators. The rest of the market is controlled by a handful of large national corporations like Public Storage, U-Haul, CubeSmart, and Extra Space Storage. My name is Zach Dickens, and I am the Chief Investment Officer with Extra Space Storage.

Dickens has been with Extra Space Storage for more than two decades. During his time there, he's watched the company grow into one of the largest self-storage operators in the world. We're around 283 million leaseable square feet today and 2.6 million units that we operate, so that's quite a number. Those units vary in size. On the lower end, some are just 25 square feet. Those are generally good for someone like a college student.

They hold a twin mattress, a dresser, and maybe a few boxes. On the bigger end, you've got units that are around the size of a two-car garage, and it goes up from there. The monthly rental on a unit varies based on size, location, and how fancy it is. Some are climate controlled, others get hot in the summer and cold in the winter. The average unit price today is somewhere around $180 a month per unit.

And that's probably on a unit that's a little bit bigger than a 10 by 10 unit or a hundred square feet out there today. For the facility owner, most of that rent is profit. Operators have to pay for things like property tax, insurance, and utilities. And many facilities have a manager on site during business hours. But as far as real estate goes, storage is a pretty low maintenance business. If you looked at residential, when somebody vacates a property or an apartment, you have to go through a process of doing a lot of tenant improvements.

Whereas on the storage side of it, you simply roll up the door, they take their belongings and we sweep out the unit and it's ready to rent for the next person. It's also a business in constant demand. Around nine out of every 10 units tend to be occupied at any given time. And tenants are easy to replace when they vacate. If you are in a retail space and you have an anchor tenant go out of business,

like a Bed Bath & Beyond, or some of those that have had issues, it changes your economics dramatically. Whereas if you lose one or two storage customers, it's a small loss to the property and we can quickly replenish that with another customer. Most self-storage units are offered on month-to-month leases. Dickens says that most people think they'll only have to use a unit for a couple months,

but they'll actually end up staying much longer. use a unit for a couple months, but they'll actually end up staying much longer. They typically stick around somewhere between 14 to 16 months on average, depending on the storage facility. A move into a storage unit often revolves around some kind of major life event. It could be a college student graduating, a military officer being deployed, or a family moving to a new home. People need storage when they're in transition. When life events happen like having babies or maybe their parents are growing elderly

and they need to move in with you. When divorce happens, often there's a period of uncertainty and transition. When people move, they need storage. They're going to sell their home. They have to get the clutter out, so they need storage. They're going to sell their home. They have to get the clutter out, so they rent storage. But another large chunk of the customer base is people who simply don't have room to store all of their stuff. We find a lot of use between people that are renting because they don't have a lot of space within their apartments. And, you know, we're like an extension of their apartments where they can store their holiday belongings, their decorations and all that.

This is especially true of millennials who now make up the largest share of storage renters in America. Baby boomers, they tend to store memories. They store grandma's living room furniture or China, they don't visit that stored property very often. But millennials and Gen Z, they tend to use self-storage as an extension of their home. They leave in the morning, they get their kayak, they go kayaking, they come back late in the day and they put it back in the storage unit because they don't have any place else to store it. They can't store it on the balcony of their apartment. unit because they don't have any place else to store it. They can't store it on the balcony of their apartment. With the rising cost of housing, many renters are downsizing.

Across the nation, the size of new apartments and urban centers is also decreasing, partly because developers are building more studios. At the same time, Americans are buying more stuff than ever before. It's the American love affair with their stuff that creates the demand for self storage. We are a wealthy country with a lot of things and we want to keep them and we want to store them.

So, what exactly are all of these things that people are storing in their units? And what happens when they stop paying rent? That's coming up. During his time at Extra Space Storage, Zach Dickens has seen people use storage units for all kinds of things. You see a lot of furniture, right? You see a lot of couches, that sort of thing. We have musicians that have to store their equipment in a temperature regulated environment. People with vehicles that want to preserve those vehicles. People with heirlooms that don't want to store them at home.

Small businesses that want to store excess product. Pharmaceutical reps use us because they're not allowed to store their medicines on their own property at home. And so they'll use us as a secure alternative there. Tenants are almost always required to get insurance on their unit, and they're generally prohibited from using it to store more than $5,000 worth of stuff. What you put in there though, is entirely your business. That is until you stop paying for it. In that case, your stuff goes to the highest bidder.

In that case, your stuff goes to the highest bidder. In most states, when a customer is late on rent, storage operators are required to send out multiple notices over the course of 30 or 60 days. When the notices go unanswered, the unit's contents are seized and auctioned off. Reality TV shows like Storage Wars and Auction Hunters often make it seem like storage units full of hidden treasures are abandoned on a regular basis. Anne Marie de Koster, the storage industry consultant, says the truth is a little less glamorous. It is very, very rare that a foreclosure sale at auction generates enough money even to cover

the rent due. They generate small sums of money because for the most part, people store memories. You know, your children's schoolwork and your grandmother's dresser and clothing, furniture, household goods, and those are not things that sell high in a public auction where the consumer is determining the value of it. That's not to say there isn't the occasional crazy find. In 1989, a contractor in Long Island paid $100 for a unit and found a futuristic car used in the James Bond film, The Spy Who Loved Me.

He later sold it at auction for just under a million dollars. The winning bidder was Elon Musk. DeCoster has a few tales of her own. We had a whole unit of coffins that needed to be auctioned off because the business had gone out of business. So the owner operator contacted mortuaries, and then five or ten of them bid. That doesn't mean the storage facility operator got a windfall.

Any proceeds from an auction that are in excess of the rent owed are returned to the renter. And many times the renter can't be found. They moved, they died, they are in jail. Typically, if money's not claimed, it reverts to the state or the county. Other items don't have any monetary value, but still require legwork from the storage operator, like an urn full of cremains of a loved one who maybe died 40 or 50 years ago, and they were very well cared for for 10 years, 20 years, 30 years. And then there's this dilemma, you know, what do you do with them? And many, many operators will call one church and cemetery after another to find a place where they can bring the cremains.

The relative secrecy of storage units sometimes leads to more morbid fines. A unit in Colorado contained a pile of police evidence, including a bloody rope and an axe. The bodies of a woman and her two sons who had been missing for 12 years were found in a Seattle unit. There have been units that contained meth labs, boxes full of stolen passports, and illegal firearms.

But stories like this are pretty rare. Industry experts say that only around 1 to 3% of storage units are auctioned off in any given year. And every state has laws that require plenty of notice before an operator can sell someone's stuff. No one goes into self-storage to sell renters' belongings. They go into self-storage to rent space. And when a renter is not paying rent,

what they really want is to be able to rent to someone who will. And there's usually a new tenant waiting in the wings. Because storage is a business that bucks economic trends. Because storage is a business that bucks economic trends. When things are good and people are buying more things, self-storage does very well. But when things are not as good and people are hurting, storage does well under those circumstances too, because that's when people have to combine households or they have to move into smaller living quarters.

So one of the great dynamics of the industry for an investor or an owner operator is that regardless of the business cycle, self storage tends to do well. In recent years, storage units have followed the path of nursing homes, mobile home parks and car washes. Institutional investors have been consolidating the industry in a bid to gain market share. In 2023, operators built 49 million square feet of new storage space, nearly 16% more than they built the year before. In some high growth cities, storage units have been popping up so fast that legislators have enacted moratoriums temporarily banning new construction. The industry has been fighting back.

I think it's short-sighted to try to prevent self-storage development. It's a great way to use space that's not otherwise used. You know, the triangular-shaped piece of land that has a funeral home on one side and a 55 plus community on the other side and retail business on the third side and then has a street front. That's a great opportunity for self-storage because they don't have to be a specific size or shape. Storage units may be a symptom of overconsumption, high housing costs and shrinking apartments. But for tenants like Kara Koloji, they're a home away from home. A place to put all of the things we don't really use, but can't seem to part with.

You're not getting a house, you know, and even if you are, you're sharing living space with another person. At least 50% of my friends have storage space. If you want to keep stuff, you're going to have to put it in storage, whether it be for two years, five years, or longer, which isn't a bad way to be, because you can really get down to the core of what is super important to you in the long term. the core of what is super important to you in the long term. For the economics of everyday things, I'm Zachary Trockett.

This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston. We had help from Daniel Moritz-Rapson. Well, I bet that operator is pleased to find that those coffins are empty. Yes, very much so. You don't want to find one that isn't, that's for sure. The Freakonomics Radio Network, the hidden side of everything.