Good Riddance 2020 – Welcome 2021!
February 01, 2021 | by Ken Nitzberg
We now finally get to put 2020 in our collective rear-view mirror, and it couldn’t have come too soon. 2020 was a very difficult year on many levels – the Covid-19 pandemic, a tumultuous election, continued racial strife and an economy deeply in trouble. Fortunately for Devon and its capital partners, self storage has certainly been one of the survivors of the collective malaise.
In the real estate industry, there are many different sectors such as office, industrial, multifamily, retail, hotel, etc. Of all of the various sectors, three stood out during 2020 as being resilient and doing well. Those would include distribution centers (code for Amazon), call centers (also code for Amazon) and self storage. We have all heard the stories of failing retail with retailers large and small closing their doors, many forever. Hotels are bleeding cash while restaurants are dying like flies. Office buildings in most major cities are all but vacant as the workforce is adapting to and starting to appreciate working from home. And home is moving from center city with sky high rents to suburban and even rural locations with much lower costs and a slower lifestyle.
So why is storage doing so well? Normally storage does well in strong markets and OK in weak markets, thus the combination of both provides for an above average return over time. In 2020, after the pandemic hit, leasing activity continued at a normal rate and, in some locations for Devon, actually increased over the corresponding months in 2019. As people downsized their living space or closed or lost their businesses, to the extent they wanted to or needed to keep their possessions they needed someplace to keep them. As home offices ramped up people needed to make room in their homes. Storage was the natural recipient of those changes.
In addition, our move-outs, which normally run about 75% of our tenant base turning over every year as self storage is, for the most part, a temporary solution, dropped significantly. The combination of slightly increased move-ins with significantly reduced move-outs created a strong increase in overall portfolio occupancy which translated to an increase in gross revenues and net operating income across our entire portfolio.
I am strongly optimistic for 2021 in the self storage industry. The pandemic has caused the number of new construction starts to pause thus helping some of the more overbuilt and over-served markets to catch their collective breath and absorb some of the excess capacity. Most of the overbuilding that the industry has experienced over the past four years has been concentrated in sun belt cities such as Houston, Dallas, Austin, Denver, and parts of Florida. Developers have gone to where the people are moving, the jobs are being created, and the cost of living is lower. The pandemic is causing a slow down in the population swings so excess capacity in those cities will be absorbed but it will take a bit longer. However, new construction in those markets will slow down as well.
Devon currently has four sites under construction, but they are in markets with low saturation (the measurement of square footage of storage available per capita), strong economies and stable populations. We are very confident that these sites will do well once they open in 2021. We also have a number of projects in the acquisition pipeline that we anticipate acquiring in 2021.
In 2020 we added six properties to our portfolio. These included a completed conversion project in Grand Rapids, MI; an existing facility in our portfolio with Inland in Athens, GA; two existing sites in our portfolio with Inland in the greater Grand Rapids market, one property management contract in Cincinnati with a previous client, and one property management contract for a site in Charleston, SC. We did lose one site in Chicago when the investor decided to change management companies.
In 2021 we will acquire and begin the conversion process for 8 to 9 Opportunity Zone projects as part of our venture with Inland Property Company for their OpZone Fund. We have one property already acquired that is well into the conversion process plus several additional properties under contract to acquire.
We don’t know when the Covid-19 pandemic will be under control and our economy will return to a more “normal” status, but we do believe that the new normal will not be the same as the old normal. Devon’s marketing program has significantly changed as a result of the pandemic. Prior to March 2019 roughly 50% of our new tenants self-identified as having found us on the internet while 40% said they found us as a result of “drive-by” of the site on a daily basis while going about their lives. During the height of the pandemic that ratio shifted to almost 90% online. That has since slipped somewhat, but on-line is still where the action is with respect to leasing of self storage and the payment of rent. The “contactless” approach to running our business has never been more important. Those self storage operators that are not able to conduct the majority of their operations online will simply be left behind. At Devon we do not see this process reverting to the “old days” and thus we continue to focus our efforts on e-commerce and contactless activities.
The self storage industry normally has two major national conferences each year. Both were cancelled in 2020 and are tentatively back on schedule for 2021. These are important events for Devon as we are able to reconnect with our friends and competitors, learn about new technologies, see what is working for other operators, and exchange ideas. We are looking forward to these resuming in 2021. The Spring conference which is normally held in late March is now scheduled for July and the Fall conference which is normally scheduled for the first week of September is still on the schedule.
Obviously, there are a number of wildcards facing not only our industry but the entire real estate community. Property taxes, which are a county or township matter, continue to rise as cities and local school districts are looking for anywhere they can generate additional revenue. We are constantly appealing and fighting tax increases wherever they occur. Debt financing is very inexpensive today as rates are at historical lows, but still difficult to find as lenders tend to be very cautious. The giant wildcard is the political environment with respect to zoning requirements, building permits, taxes both at the property level and on a personal level, and what the overall business environment will look like as we have a new President and Congress.