Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Self-Storage Facilities
Transcript
- Lucas: Luna, I want to talk about something that most people drive past every single week without thinking twice about it. Self-storage facilities. Those beige metal boxes off the highway that somehow always seem to have a 'Now Renting' sign out front. Luna: Oh, absolutely. The ones that look like they were built in 1985 and haven't been touched since. But I'm guessing private equity sees something different. Lucas: They see a $40 billion industry in the U.S. alone, growing at about 4 percent annually, with a business model that is almost absurdly simple. You build a bunch of concrete rooms with roll-up doors, you rent them month to month, you collect cash, and your labor cost is basically one part-time manager and a security camera. Luna: And the tenant turnover is low because moving your stuff out is a hassle. People will pay $150 a month for years rather than deal with a U-Haul on a Saturday. Lucas: Exactly. The average self-storage tenant stays about 14 months. The average unit generates about $1,200 in annual rent. And the operating margins are routinely 60 to 70 percent. Compare that to a hotel or an apartment building, where you're dealing with constant maintenance, turnover costs, and regulatory headaches. Self-storage is basically a cash-printing machine with a roof. Luna: So it's no surprise that private equity has been piling in. How much money have they put to work recently? Lucas: According to data from Green Street Advisors, private equity funds have spent roughly $8 billion acquiring self-storage assets over the past 24 months. That's about double the pace from 2021 and 2022. The big players — Blackstone, Ares Management, Brookfield — they've all built dedicated self-storage platforms. Blackstone alone now owns over 1,000 facilities through its non-traded REIT, Blackstone Real Estate Income Trust. Luna: And the public markets are in on it too. The two largest publicly traded self-storage REITs are Extra Space Storage and Public Storage. Combined, they control maybe 15 percent of the market. Lucas: That's the key number. The top 10 operators control only about 20 percent of the total supply. The other 80 percent is owned by thousands of independent operators — family-run businesses, small partnerships, maybe a dentist who bought a storage yard as a side investment. That kind of fragmentation is a private equity dream. You can roll up mom and pop operators one by one, centralize management, apply a better tech stack, and expand margins further. Luna: And the roll-up play works especially well in secondary markets. I was looking at a deal in the Atlanta suburbs last week. A private equity firm bought a portfolio of 12 facilities in the metro area, all of them older, independently owned, with occupancy around 75 percent. After rebranding, adding digital rent collection, and raising rates, they pushed occupancy above 90 percent within 18 months. Lucas: That's a classic value-add move. And it matters because the underlying asset itself hasn't changed. It's still the same concrete boxes. But the operating platform creates the return. Now, there are risks. One is construction. Self-storage supply has been growing rapidly in Sun Belt markets like Phoenix, Nashville, and Austin. In some submarkets, new supply has pushed occupancy down to the mid-80s. That's still healthy, but it puts a ceiling on rent growth. Luna: And cap rates have compressed significantly. Three years ago, a well-located self-storage facility might trade at an 8 percent cap rate. Now it's more like 6.5 percent. That means acquisition prices have risen, and the margin of safety is thinner. Lucas: Right. So the thesis works best when you can buy cheaply and improve operations. If you're paying top dollar for a Class A facility that's already well-run, the upside is limited. That's why most of the PE activity is in the lower end of the market — older facilities, secondary cities, properties that need a coat of paint and a better website. Luna: There's also the longer-term structural question. Is self-storage a recession-proof asset? During the 2008 financial crisis, the industry actually held up pretty well. Occupancy dipped, but rent collections stayed strong because people were downsizing and needed a place to store furniture. Lucas: That's the counter-intuitive angle. Self-storage demand tends to be counter-cyclical. In a downturn, people lose their homes, they move in with family, they need to store stuff. In an upswing, people buy more stuff and need a place to put it. So demand is surprisingly resilient across the cycle. That's part of why institutional investors have started treating self-storage as a core real estate allocation, alongside apartments and industrial. Luna: But there is a wild card. What about the cultural shift toward minimalism and decluttering? Marie Kondo, the tiny house movement — could that reduce long-term demand? Lucas: It's a valid question. But so far, the data doesn't show it. The average American still lives in a home that's about 2,500 square feet, and we own more stuff per capita than any generation before. The self-storage industry's revenue has grown every single year since 2010, except for a tiny dip in 2020 during the lockdowns. And even then, it bounced back within six months. Luna: So it seems like a pretty compelling private equity thesis. Stable cash flows, fragmented market, low labor intensity, recession resilience. What's the catch? Lucas: The catch is execution. If you overpay on the acquisition side, or if you can't drive occupancy above 85 percent, the returns get squeezed. And there's also an environmental angle. Older self-storage facilities often have asbestos roofing, old HVAC systems, and poor energy efficiency. Retrofitting those can eat into the budget. But the firms that have done it well — like Blackstone with its Simply Self Storage platform — have generated solid double-digit returns. Luna: I've also been watching the public REITs. Extra Space Storage acquired Life Storage in 2023 for about $12.7 billion in stock and cash. That merger created a combined company with a market cap around $47 billion. It's the largest self-storage REIT by number of properties. And the synergies they projected were about $100 million annually, mainly from overhead consolidation and technology. Lucas: That deal was a turning point. It signaled to the market that consolidation would accelerate. And it also validated the operational leverage model. When you have thousands of properties under one management system, you can negotiate better deals on insurance, security systems, even trash removal. Those small efficiencies add up. Luna: And a lot of that is driven by software. The best operators now use dynamic pricing algorithms that adjust rent in real time based on local occupancy, seasonality, and competitor rates. It's basically revenue management, just like airlines and hotels. Lucas: Exactly. A few years ago, most independent operators just set a price and left it. Now the sophisticated firms use software that might change the rate on a unit three times a week. That alone can lift revenue by 5 to 10 percent. And since the marginal cost of a software subscription is essentially zero, most of that flows to the bottom line. Luna: You know, this reminds me of why I enjoy this show. We dig into these quiet corners of the economy that most people ignore, but where real money is being made. And if you find these conversations useful, I want to mention something quickly. Lucas: Sure, go ahead. Luna: We keep the show ad-free, which means it runs entirely on listener support. If these episodes have helped you understand a business or an investment better, a small contribution goes a long way. You can do it at buy me a coffee dot com slash fexingo. Just a one-time thing, no pressure. Lucas: And it genuinely helps us keep doing this. Even a few bucks covers hosting and research tools. So if you're into it, great. If not, we're still glad you're listening. Now, back to self-storage. Let's talk about one specific deal that illustrates the whole playbook. Luna: What deal do you have in mind? Lucas: In 2024, a middle-market private equity firm called Westport Capital Partners acquired a 14-property portfolio in the Midwest — mostly in Ohio and Indiana — from a family that had owned them since the 1980s. The portfolio was 70 percent occupied, the facilities were outdated, and the family had no online rent payment system. Westport paid about $35 million, put in $5 million in capital improvements, and within two years projected occupancy above 90 percent and a 15 percent net operating income increase. Luna: That sounds like a textbook value-add play. And the key was buying from a motivated seller who didn't want to invest in the asset anymore. Lucas: Exactly. The family had run it for 40 years, the next generation wasn't interested, and they wanted liquidity. That's the classic entry point for PE. And because the facilities were in secondary markets, there was less competition from institutional capital. The cap rate on entry was around 8.5 percent, which gave Westport a nice cushion. Luna: One thing I wonder about: as more and more capital flows into self-storage, will we see a bubble in asset prices? We've seen it happen in other real estate sectors like apartments and office. Lucas: It's a risk. Cap rates have compressed from 8 percent to 6.5 percent in three years. If interest rates stay elevated, that compression could reverse. But self-storage has one advantage over office or retail: the tenant base is diversified. No single tenant represents more than a tiny fraction of revenue. And leases are month to month, so you can adjust rents quickly if inflation heats up. Luna: That flexibility is huge. Especially compared to office leases that lock in rates for five or ten years. Lucas: Right. And self-storage is also less capital-intensive than other real estate. You don't need to renovate kitchens or bathrooms every ten years. The buildings are simple. The main capital expenditure is replacing roof panels and paving the driveway. That's part of why operating margins are so high. Luna: So where do you see the industry in five years? Do the independent mom and pop operators get largely squeezed out? Lucas: I think the market will bifurcate. The top 10 players, both public and private, will grow their share from 20 percent to maybe 30 or 35 percent. But there will always be a tail of small operators in rural areas or niche locations where the economics don't justify institutional ownership. And some of those independents will thrive by offering personalized service and local knowledge that a national brand can't replicate. Luna: That's a fair prediction. And it's a reminder that even in an industry being transformed by private equity, there's still room for the small operator who does it right. Lucas: Absolutely. Self-storage is a great example of how PE is reshaping Main Street businesses, but it's not a complete takeover. The smartest independents will adapt, and the ones who don't will sell. That's the dynamic we see across dozens of fragmented industries. Luna: Well, on that note, we'll leave it for today. Thanks for listening, and we'll be back with another deep dive soon. Lucas: Take care, everyone.