The Pack Rat Indicator: Why Hoarding Is a Good Sign

(Bloomberg) -- For John Bull, a Portland, Ore.-based contractor who specializes in self-storage centers, a typical day entails supervising a crack, 10-person crew that uses light-gauge steel and screw guns to build 100,000-square-foot monuments to American materialism. They can finish one every four months, but these days that’s just not fast enough. Bull’s services are in high-demand—so much that he’s been forced to supplement crews with less-experienced workers. “I haven’t seen this much business come on line at once in 20 years,” he said.

Following the Great Recession, it seemed that U.S. consumers regained confidence faster than people who build and finance these mini-warehouses. That was good news for landlords and bad news for people with cluttered basements, as storage rents rose and venture capitalists began to descend.

But there is good cheer for holiday shoppers eager to fill their parking lot sleighs: The self-storage industry is building again. By the end of October, developers spent $1.5 billion putting up new storage units and fixing old ones, according to U.S. Census data. That’s more than the industry spent in any full year since 1993, when the government started counting.

Americans, in other words, are buying enough new stuff that developers are building storage space for their old stuff—at a record rate. Call it the Pack Rat Indicator. It illustrates just how confident U.S. consumers have become.

The storage business, which gained a foothold in U.S. consumer culture back in the 1970s, is based on a simple premise: U.S. homes, which get bigger every year (having grown more than 60 percent since 1973), are still too small to hold everything Americans buy. Storage operators say their business is driven by death, disaster, and divorce, but this implies that customers are using facilities only temporarily. Anyone who has watched the personalities on the A&E Network series Storage Wars wade through abandoned storage units knows that’s a load of junk. The rule of thumb is that storage customers stay engaged three or four times as long as they intended to, said Ryan Burke, an analyst at Green Street Advisors, a Newport Beach, Calif.-based research firm.

“The American self-storage consumer is absolutely one of the most irrational creatures on the face of the planet,” Burke said.

Emptying a storage unit is an unappealing way to spend a Saturday, an axiom that generates a lot of procrastination. But lazy customers are only one of the things storage facility operators have going for them. It takes just one or two employees to run a typical storage center, significantly limiting costs. The buildings themselves are simple concrete-and-steel structures that are cheap to maintain; according to Burke, the typical storage operator spends 5 percent of net operating income on upkeep, compared with 15 percent for more traditional properties. 

The recession didn’t make it easier for Americans to discard possessions, but it did make it harder for builders to get loans and erect new storage centers. Vacancy rates fell, allowing operators to jack up rents, tripling share prices for publicly traded self-storage landlords over the last decade. 

The supply shortage helped give birth to a new business model—called full-service or valet storage—pioneered by startups that pick up storage items and truck them to warehouses. New players include New York-based MakeSpace, which has raised $30.5 million in venture capital, and Los Angeles-based Clutter, which has raised $32.3 million.

For builders, labor and materials costs have recently risen, and regulatory hurdles have popped up as cities seek to limit storage centers, which—unlike manufacturing plants or traditional warehouses—don’t come with a lot of new jobs. Trouble spots for industry growth include New York and Miami, which is considering new zoning rules that would require storage centers to include ground-floor retail and prevent warehouses from going up near old ones. 

Chuck Gordon, chief executive officer of SpareFoot, a website that lets storage customers comparison shop, doesn’t think these headwinds will end the building boom. In many parts of the country, a storage center can be run profitably at 50 percent occupancy, he said. These days, it’s not uncommon to find occupancy rates near 95 percent. “There’s a lot of money to make,” said Gordon. 

This is bullish for small business because the self-storage industry comprises an army of mom-and-pop operators, with only a handful of real estate investment trusts. More than 26,000 self-storage landlords own a single establishment, according to the Self Storage Association, a trade group. The largest storage REIT has a market capitalization of about $38 billion and controls more than 150 million square feet of rentable space. That includes a 270,000-square-foot warehouse conversion overlooking the Major Deegan Expressway in New York's Bronx, which Gordon said could serve as a blueprint for operators seeking to crack tough markets. 

The current pace of construction is also good for self-storage customers, who are likely to benefit in the form of more convenient access and lower rents. Is it distressing that Americans are consuming so much stuff that they can’t fit it all in ever-larger houses? That land used for storage centers could be used to build job-creating businesses or affordable housing? Maybe, but why worry when you could be shopping?

1. The Census Bureau doesn’t adjust for inflation; is likely to be a record year, even if it did.  

2. The self-storage business has been slower to catch on outside the U.S.

To contact the author of this story:
Patrick Clark in New York at pclark55@bloomberg.net

To contact the editor responsible for this story:
David Rovella at drovella@bloomberg.net