Investing in Self-Storage Amid Market Turmoil

Um, but today is interesting in that last week there's been a lot of market turmoil. Uh, and so for example, the s and p right now, currently on Wednesday, April 9th is up slightly today, but over the last, uh, week, last five days is down 11.5%. Last three months is down 15%. It's about a thousand points off. Its. Highs, uh, just a few months ago, and there's been a lot of volatility.

Major stocks are down and anytime that happens, it's good to kind of level set and talk about risk and talk about, um, correlation, whether that's systemic risk, whether that's track to the market in different ways or different vehicles that you're invested in. And so Paul, I know you have a lot of thoughts around, um, around these different things because you have lived through. Several crises.

I mean, think about, uh, 2008 and, and some of the bank failures and things like that going on then at that deeply impacted real estate as everybody knows. Um, but is this time different? Should we be concerned? There's just a lot of questions and I think it's good to, to kind of talk about that in different ways that you see things. So Paul, I'll turn it over to you. Tell me a little bit about how you see what is happening right now in the market.

And so the market's reacting to that uncertainty, that that's, I think, fundamentally. Uh, what's going on? Um, this isn't a, a political podcast. Um, and I will be political, politically neutral, but I will say from the standpoint of my own sort of worldview of economics, um, I understand that anytime I've had to make a a a, an important but difficult change in my life or in my business, there has been a period of disruption.

Um, I think it's a good thing to correct that, but I do think it's disruptive and I think what we're seeing right now is just the process and we'll have to wait and see how it really turns out in the end. But from a purely economic standpoint, I'm not, uh, against, nor am I concerned about what we're experiencing. I think it's, um, probably, uh, to be expected and could result in some very positive outcomes long term.

They are economic realities. And, um, and I. And, and so regardless of who's in the White House, I am supportive of what I think are sound physical policies for our nation. Simple concepts, like things cost money. So if you want to give more money away, tell me where you're gonna get the money to give away. Um, I think it's, anyway, I'm, I'm really getting off on a tangent. Probably don't need to go there.

Maybe the editors can clean some of that up, but, um, but, but the reality is I am not concerned. I, I, I think there could be some negative outcomes and I, you know, I don't have a crystal ball. Um, I think I was on a, a show with Paul Moore recently, um, with Wellings Capital, and he said those who, uh, believe in crystal balls get to eat glass.

Um. But, uh, but so I don't have a crystal ball, but fundamentally, from a purely macroeconomic standpoint, um, I think trying to reset the environment for an international trade is a good thing. And I'm not surprised that the process has caused some uncertainty in some disruption.

But if you look at the cost of steel as the, as a percentage of the total cost of a project, and assume a 10% increase in the price of steel. It probably results in a 2% increase in the overall cost of the project. So not material. And well within the boundaries of the contingencies, we build into our construction budgets every day. So we're not expecting it to have a huge impact. Um, I, I know there are other industries where, you know, that impact could be. You know, more profound.

Um, I have two children who are very successful in business. Uh, one is in the mergers and acquisition world, and they've seen, um, a lot of hesitancy and sort of deal stopping mid stride because of the uncertainty. So it's impacting, uh, my son and, and my daughter is the president of, uh, durable medical device to company that's. If not the largest, one of the largest in the country.

And they have vertically integrated the manufacturer of certain products that they distribute and they're made in China and there's 20 or $30 million worth of, of, you know, of, of revenue and profit attached to those products. So they went through the effort to design and find a manufacturing partner overseas and all that, and those costs are getting ready to swing dramatically. If this doesn't get resolved, and so it's gonna impact them.

So there are certainly impacts in certain industries for self storage, um, and the world we live in. The business impacts, at least at this point, look pretty negligible, so.

I'm curious what you mean by that, and if you could talk a little bit about how you're, you're thinking about that and, and I, what I'm, what I'm gathering is why you're not worried about what is happening because of that kind of risk assessment that you have. Is that, is that the case?

Typically if stocks are going up bonds, that's because interest rates are low. You know, the economy's great and, and, and bonds are not as in favor. So they're not as in demand and rates are low. So they move inverse to each other. Um. The, the, but, but just understanding what correlation versus systematic risk, which is 2008, was an example of systematic risk in an environment where the banks got over their skis and you saw Lehman go to its knees.

I'll never forget where I was the day that news broke. Um, and, and you saw the entire banking system. In peril. Um, that was a systematic risk and a Black Swan event. Um, that is, you know, may never, hopefully, will never occur in my lifetime again, and, and hopefully never again. It resulted in a lot of new regulation and oversight of banks and, and, and all types of things to help prevent it in the future. But it directly impacted real estate because it directly impacted access to capital.

Um, you couldn't. You, you couldn't borrow money. The banks couldn't loan money. Um, that caused a free fall in real estate values. Uh, it, it caused construction projects to stop mid stride. People that had bought, we had bought at, at, at that time, we had bought a 17 acre piece of land just outside. Charlotte bought it in 2006 and before we could get it developed, all of this happened. Um, and it was literally that project is now just nearing completion. Um, almost 20 years later.

And so fortunately we had the ability to hold that land for an extended period of time, pay the taxes. We actually had debt on the land. We paid off the debt. Um, and, uh, so we just sat squatted on the land and we wound up with a great, so an $80 million mixed use project, 160 apartment units, and, um, a 55,000 square foot Lowe's grocery store and about a hundred thousand square feet of retail.

Um. A great project, but it took us 20 years because of what happened in oh eight, or that was sort of the beginning. But, um, anyway, the, the systematic risk is a different animal. Um, I, and I don't, I certainly don't see any systematic risk in what's happening in the economy and what the markets are. This is not about the banks. Um, this is not about. Um, anything that, that has the ability to directly impact real estate in a, in a, in a traditional sense.

Um, and so it's just something to ride through and, and the fact that our investments are not correlated to the public markets. That's one of the things I came today with on my mind is there are multiple ways to invest in any asset, right? Um, the, the, the tangible assets tend to be inflation hedges, and they tend not to be. Correlated to the emotion and the volatility of the public markets. A great example of that. I'll, I'll give you two.

I'll give you a quick one and then the one I'd rather talk about more, 'cause it has to do with self storage. But the first one's gold. Like if you buy gold, if you bought gold, um, six months ago, it's worth more than you paid for it six months ago. If you bought a gold stock six months ago, it's probably up.

Because of the sort of broad view that gold is sort of a safe haven in times like this when things are uncertain, but it, it might not be because people are selling stocks because they wanna sell stocks regardless of. What that business does or, or what assets it owns. That's, that's not a great one in this case because I, I, I didn't look today, but I, I, I probably, gold stocks have performed pretty well. Here's a better one.

Um, there are actually, there are about nine publicly traded vehicles. They're not all REITs, but they're publicly traded companies that are major players in the self storage space that we live in every day. The names that you would know are CubeSmart Extra Space and Public Storage are the three. Um, national Storage Affiliates is the fourth, and people generally refer to four publicly traded REITs. Uh, but there are about three or four other companies.

For example, U-Haul, um, is a major player in the self-storage business and they're getting, they actually have committed and are expanding their presence in self storage. And so I looked at those stocks, uh, over the last, um, little bit. I looked at 'em on a five day basis as of the close yesterday and a 30 day basis. And I'll go down the list, CubeSmart. Down 14.6% in the last five days, 16.46% in the last 30 days.

Public storage down 10.9% in the last five days, down 15.18% in the last 30 days. Extra space, uh, down 14% in the last five days, almost 20% in the last 30 days. Um, let me ask you a question. Do you think the real estate those REITs own has decreased in value over the last 30 days?

There are privately traded REITs that, that offer the same type of vehicle, um, to invest in self-storage and office and medical office and industrial and all kinds of things. And the privately traded REITs don't have that same share price correlation. They're typically valued based on appraisals that are done of their portfolio on a semi-annual or annual basis, so low volatility.

The trade off is, and I should have mentioned this upfront, the reason people invest in REITs is because of liquidity

I. Stocks in our industry that have correlation to the public market. I just think you have to avoid having a false sense of security. If you're looking at your portfolio and you've got a bunch of ETFs and mutual funds, I. And you, you're smart. So you've invested in real estate and you've invested in self storage, but you've done it through buying, um, stock in one of these publicly traded REITs.

You're not as diversified as you think you are, um, because everything you own is, is correlated to the emotion and the volatility of the public markets. And I think. I've said this before in some of our conversations. I am an absolute firm believer and my own personal portfolio would reflect this, that any. Person of substantial network. If you're an accredited investor, um, you almost have to have an allocation in your portfolio that's direct into, I think, real estate.

I mean, I think you can have some, you can have some venture capital stuff. You can have some pure private equity stuff. You can have gold that there, there, those are all assets that are not c correlated to the public markets. All of them are good, I think. I think in terms of risk pyramid, right? Uh, I don't know if you can picture it, but you know, treasuries are at the bottom of the risk pyramid. Commodities are at the top, um, and it's sort of stratas of risk in return going up the pyramid.

If you're looking at an allocation to non-correlated assets, real estate is at the bottom of that risk pyramid. So I think almost every portfolio, whether you like self storage or not, whether you wanna invest in multifamily office retail. I, I, I just am a firm believer that, that, um, that you, you need to have an allocation. And the other thing, and I'm an opinionated guy today, aren't I?

But the, the other thing is, um, I, I think a lot of investors are getting advice or guidance from people whose objective is investing for beta. Um, and that's a very defensive. Posture in my mind, it's a, it's a good way not to lose money, but it's also a good way not to build wealth. And one of the things that we are very focused on in what we do is investing for Alpha, um, which is, you know, trying to get outsized returns on a risk adjusted basis.

And you don't have to do that across your portfolio. Uh, and certainly where you are in that journey depends on where you are in age and retirement and overall net worth, but. But at least a portion of your portfolio ought to be invested for alpha, not beta. And um, and so there, that's my opinion.

In the public markets and, uh, what some people think is, oh, I should diversify my portfolio and I put money into REITs because I need to be in real estate. But that is a false sense of diversification because there's actually not an underlying asset or direct investment in real estate. It's just in a stock that is correlated to the s and p 500.

Um, know, if, if, if there is a real threat of inflation, um, it was already baked in this, this trade war. It might be the straw that breaks the camel's back. Um, but I, I don't think so. I, I, I think if there's, if there's a recession on the horizon, I don't really buy it. The economy's been pretty resilient on the whole, um, it, it, it, it was already baked into what's happened over the last, you know, I. Period of time.

And, um, and recessions aren't necessarily bad either, you know, um, it, it, it sort of shakes things up and repositions things and creates new opportunities and creates a little pain, like I said at the very beginning. Disruption and change is always difficult, but it's a part of the cycles. Just like down markets are part of real estate cycles and they're unavoidable, and they come and they go. Um, we invest, you know, for the intermediate to long term.

I just, I'm too old to worry about it anymore, Brandon.

Uh, so we will see you next time in a few weeks and we'll catch up then. Uh, so Paul, thank you and we'll see you