The AAA Storage Podcast

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Brandon Giella: Hello and
welcome back to another episode

of the AAA Storage Podcast.

So today we are going to
talk again with Paul Bennett.

Thank you so much for joining.

We are going to talk today about future
trends, opportunities, and basically what

to pay attention to in the self storage
and real estate investing industry.

So my first question to you, Paul,
is What are some trending topics for

self storage or maybe just real estate
investing in general that you think are

listeners who are mostly investors that
they should pay attention to as well.

Paul Bennett: First, thanks for having me.

Always enjoy getting together.

The biggest trends and trending topics
and particularly in self storage, we

certainly look at all the real estate
markets because they're, related

to each other at some level, but
we tend to focus on the two asset

classes that we build in, which is
self-storage and office industrial flex.

Specifically to self-storage one of
the trends that I think has been a

pretty constant point of focus and
conversation over the last several

years is the professionalization
and institutionalization of

the self-storage marketplace.

Although, the, majority of
the facilities in the U.

S.

today are owned by private individuals.

Some refer to them as mom and pops,
that's a little bit demeaning to me.

But, individuals who own maybe one or two
facilities, usually in their local market.

However, there has been, a massive
move, in the industry, that includes

the large private equity groups, and,
publicly traded REITs, of which there

are five, are becoming a more and
more dominant, force in the industry.

Their portfolios are widespread
enough now, that their strategy

related to pricing and occupancy.

Really drives the market,
particularly in major markets,

they tend to focus on maintaining
occupancy at the expense of rates.

So if you remember, I did a podcast
with, the Passive Pockets group, a

month or so ago and the question was
asked about the decline in self storage

property valuations over a six quarter
period where the data showed they had

declined from 172 a foot to 139 a foot.

The question was, are you catching a
falling knife by invested in self storage?

That data is driven by the fact, that
rates have come down somewhat over

the last year and a half, two years.

It's come down because of the
influence of the REITs and large

private equity groups, who are
really using demand driven pricing.

They'll price a unit below, where the
market is just to get the occupancy.

The reality is, occupancy was
at insane levels during COVID.

If you think back to that time
period, people were turning bedrooms

into offices and had to have
somewhere to put the furniture.

They were at home with nothing to do,
so they were cleaning out their garage

and their attic, and the utilization
of self storage went through the roof.

National average occupancy
was about 98%, during COVID.

As we came out of COVID, it sort of
Went back to a more normalized level.

And today, national occupancy on
average is about 91%, which is sort of

consistently where we expect to see it.

But the trend I was talking about is the
influence that the institutionalization

of the industry, and the influence
that the REITs and large private

equity groups are having related to
occupancy and pricing in the markets.

I think another trend that's been
significant is home sales activity

Home sales and people moving drive
about 25 percent of the demand in the

self storage market and the increase
in interest rates Has slowed The pace

of home buying which has resulted in
fewer people moving which has impacted

demand on the self storage side

so we link one to another to
another is the impact interest

rates are having on people's ability
to acquire or build facilities.

Higher debt cost, results in
sort of having to rethink the

valuation and the cash flows that
an existing property, produces.

And it also, makes you go back with a
sharper pencil in terms of the development

process and what really makes sense.

I think that the two good pieces of news
that are also being talked about related

to everything I've already said, is first,
all the data shows a steady increasing

demand for self storage over time.

If you look at the demographics
generationally, you've got the boomer

generation that I'm a part of that,
is hitting a point in life where we're

downsizing, the kids are gone, we're
moving to a smaller house, we're not very

good at letting go of our things, we think
one day the kids actually will want them.

Brandon Giella: They don't want it,

Paul Bennett: I know, but we haven't
that that reality hasn't struck us yet.

So we rent a self storage facility
and stick everything in it.

and then you've got the Gen X and
millennial generations that are just

hitting household formation age.

And that's the point in time at
which people start to use storage.

They're having babies, they're
moving, all those kinds of things.

So, the demand data, is very solid.

And we're very confident
that we'll be a consistent.

growing demand for self storage.

The other piece of news that may not
be such a great piece of news or a

trend for other people, but it is
for us, is that the little bit of

depression in rates combined with
higher interest rates have really

slowed a lot of development activity.

The entire thesis of our current fund,
not the entire, but the principal

thesis, strategy of our current
fund, is that the drop in development

activity, which all the data shows has
already occurred and will continue to

occur for about another two years will
lead to fewer new deliveries in the

market in the next four to six years.

As the demand curve continues to climb
and new supply declines, what you get is

a supply and demand imbalance that drives
faster lease ups and higher valuations.

Particularly for the current
fund for our our growth fund.

We really tried to strike the
timing to be in a position to

sell into that seller's market.

In the next.

Four to six years.

there are some headwinds in the industry,
I always like to remind people that

self storage has outperformed every
other asset class in real estate

in more difficult economic times.

even it is cyclical to agree, and
we're in a cycle that has been a

little bit more challenging than some.

with the demand for new properties from
the institutional investors that are

in the market, with solid demand data,
and the fact that as a developer, We're

seeing less competitors developing new
projects in the markets that we're in,

which means down the road, we think
our facilities will do very well.

So that's sort of a mixed bag of things,
of trends within the industry, that

certainly everybody in the industry
is looking at and talking about.

Brandon Giella: Hmm.

I like that.

You mentioned the kind of
macro like demographic picture.

Like you said, boomers and
millennials, because both of those

cohorts are the largest, demographic
cohorts, I think, in the country.

Boomers, like you said, downsizing.

And then you have millennials like me
starting new homes and things like that.

I'm curious what do you think is
driving the professionalization

of the self-storage industry?

What's behind that?

Paul Bennett: Self-storage is a unique
asset class, and it for the longest

time was really the domain of the
individual investor, I live in North

Carolina, maybe a little more rural
than some of our listeners in terms

of the area that I live in, but I
frequently see a lot of self storage.

A house sitting along the side of
a two lane highway and next to it

is a 60 unit self storage facility.

when I look at it and I ride by
it, I know exactly what happened.

The guy that lived in that house had a
couple acres of extra land beside him,

and self storage is not tremendously
difficult or expensive to build.

They usually have gravel
parking lots, maybe they have

a chain link fence around them.

But he just simply put up self storage
and manages it because it's next door to

him, doesn't hire anybody to manage it,
and it becomes mailbox money for him.

It's a great way to use a little
bit of excess land, that you know

that you have next to your house.

The industry kind of went from
that to, individuals who look

for opportunities in markets, to
Build self storage and operate it.

As time went on, the institutional guys
figured out that the returns and the

stability, the risk adjusted returns
in self-storage equaled or exceeded

almost any other part of real estate.

I mean, I'll give you an example, Brandon.

It still blows my mind.

There's a group called Prime Holdings.

That is a private equity group.

They've done other segments in the
real estate industry over time.

Their investors are predominantly
institutional investors.

, they set out to raise a
$600 million fund to acquire

self-storage properties in 2022.

The demand from the
investor side was so great.

They finally closed that fund at $1.2

billion

Brandon Giella: Gosh.

Paul Bennett: in equity commitments,
and that was in 22, early 23.

Today that fund is about 40% deployed.

Which means they still haven't
found a home for 60 of $1.2

billion dollars because remember that's
equity Leveraged at any level that's

north of two and a half billion dollars
worth of self-storage real estate that

they're either going to develop or acquire

Brandon Giella: Wow.

Paul Bennett: That didn't exist
ten years ago, it just wasn't

Such an animal in the marketplace.

You've got five publicly,
everybody's heard of public storage.

I raised money for public storage in the
early 1980s when they were, a brand that

was known but nothing like they are today.

Today they're the largest publicly traded
real estate investment trust that's solely

focused on self storage in the country.

Brandon Giella: Wow.

Paul Bennett: And I didn't look to see
what their market cap is today, but I

can guarantee you it's in the billions.

And those players over time
have evolved in the marketplace.

You've got other private equity
groups or names that people wouldn't

necessarily know that have investments.

With operating companies in the hundreds
of millions of dollars in self storage,

and it's simply because, it's an asset
class that provides good returns and

is resilient and resistant to downturns
in the economy, and that risk adjusted

return profile fits very nicely in the
portfolio of these large investors.

Brandon Giella: So, basically,
the market is maturing in a sense.

Paul Bennett: It's a different way to say.

The funny thing is, there's
still over half the facilities.

Half the facilities in the U.

S.

Are still owned by mom and pop operators.

It's certainly not fully
institutionalized at this point.

But we see that as an opportunity.

We've sold property to virtually all
of the major institutional players.

We know them all and
that's our preferred exit.

Storage king, which is backed by Anthony
Gordon, which is a private equity group.

They've got about 600 million
invested in storage king.

I think we've sold them seven properties
those are the buyers that we tend to

target when we take a property to market.

And we think it's good for the industry.

And the demand for new property and
the demand for well located quality

properties continues to increase.

It hadn't slowed down a bit,

Brandon Giella: So, I know some of
our listeners are probably thinking

like, well, how do you, how do
you know all this information?

What kind of influencers do you follow?

But another way of saying that it's like,
what data are you paying attention to?

Are there like newsletters or
economists or, you know, real estate?

Investors that you look at
and look to read their stuff.

I guess I want to paint a picture for
our listeners that like I know you guys

are reading this stuff all the time and
paying a lot of attention to what is

happening in the world Like you said,
these are the kind of trends that the

real estate world is talking about
Well, who is that talking about that?

And how do you know and
how can I go read them?

Can I learn what you guys know that
kind of thing is what i'm after

Paul Bennett: Yeah, well, from a
professional standpoint, obviously

the answer to that question
might be really different for an

investor who's not in the industry.

Brandon Giella: Yeah,

Paul Bennett: but from
from our standpoint.

A couple of obvious ones.

The National Self Storage Association
provides a broad range of data,

and information about what's
happening in the industry and

transactions that are occurring.

There's another group
called Inside Self Storage.

ISS they have a magazine and an
online publication that really

is focused on the industry.

They also have a Exposition
or a trade show in Las Vegas.

I think it's in April every year
that we routinely go to probably

attended by about 3000 5000 people
That are interested in the industry.

There are a lot of professionals
like us that are there.

But there are also a lot of
investors who are there to gather

information and sort of learn
different aspects of the industry.

So that's a pretty valuable sort
of event that occurs every year.

They have a publication, like I
said, on a routine and regular basis.

We pay a lot of attention to the
metadata that drives the economy.

Self-storage is insulated from
a lot of things, but it's not

insulated from everything.

I said a few minutes ago that 25 percent
of demand in our market is driven by

moving, which is certainly impacted
by interest rates and other factors.

So we track that data on
a pretty consistent basis.

Beyond that, on a macro basis, there's
not I mean, that's the data, the kind

of data that drives the big trends.

Obviously, as an active investor on behalf
of the people that have chosen to invest

with us, we really rivet on market data.

one of the things that has changed,
sort of relative to everything we talked

about in the first section of this
conversation, there was a time when you

could take a dart and throw it at a map.

and build a facility wherever it landed,
and you're going to be just fine.

As the industry has matured, the
market selection process has had

to become a lot more sophisticated.

We look at a tremendous amount of data
on an individual site, in order to sort

of understand what the opportunity is.

It's one of the things that, has
changed in the industry and that

is the availability that data
technology is driven a lot of things.

And we can drill down on an address in
any market in the country and tell you

within 1, 3 and 5 miles of that location.

How many facilities exist?

What total square footage
of storage exists?

What is the square foot
of storage per capita?

In that one, three, or five mile radius,
and we have, we have metrics that tell

us where the demand sweet spot is.

It typically cuts off at about
ten square feet per capita.

If a market has more than ten square
feet per capita of storage available,

it's probably either overbuilt
or starting to get overbuilt.

Yeah, that doesn't necessarily
apply to high growth markets.

There are markets in Texas and Florida
and other parts of the country that

are growing, you know, very rapidly
and they can absorb above that

10 square foot per capital level.

But we tend to, that sort of is
our, typically is our cutoff.

We can look at demographic data.

I can tell you how many households,
how many people, what's the

average household income.

That demographic.

All data is sort of on the on the demand
side tells us a lot about a market.

And then we can look at traffic counts
as influential as technology has become.

And on the marketing side of our
industry, everybody's focused on SEO.

And their Google presence and
where they fall in the Google

search and all that kind of stuff.

More than 50% Of the tenants in
any self storage facility still

come from the fact that they drive
by it one or more times a week.

Brandon Giella: Interesting.

Paul Bennett: so, anyway, I kind of
wandered off into ten different, you know,

Brandon Giella: No, no,

Paul Bennett: You asked me about
influencers, and, that just kind

of gives you a sense of, what's
out there in the marketplace.

From an investor standpoint, as I thought
about this question, I don't know of a

good source of everything I just talked
about is really insider information

that people in the industry look at.

It's not bad information for investors to
look at, but I would think most investors

probably don't get that granular.

one of the reasons we started this
podcast was to provide a vehicle that

could help make people more aware of.

Data and information and dynamics
and trends and opportunities

in the self storage and office
industrial flex markets.

And so I can't really give you a great,
hey go to this guy, read his newsletter.

They're just not out there.

Brandon Giella: Subscribe to
the AAA storage newsletter.

Paul Bennett: Yeah, that's right.

Brandon Giella: That's
right, that's right.

Paul Bennett: No, but, but, you
know, there is data out there

and, it can be very helpful.

One of the things we've said in
some of the earlier episodes is

our commitment to really educate
investors and being very transparent.

All of the data on every property in our
fund that I just talked about a minute

ago is available in our secure data room.

I don't really expect investors to
necessarily dig through it, but everything

from the projections and the proforma
and the underwriting process that we go

through to the market data, including that
square foot for capita in, in one, three

and five mile circles around the property.

Which by the way, we look at 10 mile
circles, but nine times out of 10, you're

not going to get a customer from 10
miles away, not unless you're in a market

where there's just so little storage.

Somebody has to drive 10 miles.

It is a micro market product and
that area out to five miles around

the site is what drives everything
in terms of success of a project.

Brandon Giella: That's so interesting
that the Between five and ten miles or

what you said like ten was a ten rentable
square feet per capita or something like

that that's fascinating that you know
that down to that detail and that that

Microcosm of the market matters so much.

I find that really interesting.

Well, I know we have many more
episodes coming in the future, but

this has been really, really helpful
because part of what we hope to do

with the show Paul, is that we want
to be that kind of reliable place.

of material or trends or, you know,
knowledge base that people can go

to with their questions about self
storage or real estate investing.

And, and we hope that this podcast
serves as that kind of knowledge hub.

And we have a newsletter as
well coming out very soon.

So if, listeners out there do have any
kind of questions or anything, please

reach out to the AAA storage team.

And, I'm excited to keep these kinds
of topics going so that we can be that.

That influencer in the market because
Paul, you have so many decades of

experience with this and I'm so honored
to take part in sharing your expertise.

And, I'm glad for listeners
to take part in that as well.

Paul Bennett: Yeah, I
always enjoy Brandon.

Brandon Giella: Okay.

Well, we will see you next episode.

Thanks, Paul.

Paul Bennett: Take care.