Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Rolling Up Self-Storage Facilities
Transcript
- Lucas: So self-storage is one of those businesses that barely existed fifty years ago, and now it's a roughly forty-billion-dollar industry in the US alone. And private equity has been quietly rolling it up for the past decade. Luna: Quietly is right. Most people don't think about storage until they need it. But the numbers behind it are wild. Lucas: Yeah, the margins are the headline. The largest operators — Public Storage, Extra Space, CubeSmart — they run facilities with operating margins north of ninety percent on the incremental unit. Once the property is built and leased up, the variable cost of renting an extra unit is basically just the key fob and a bit of electricity. Luna: Ninety-three percent is the number I've seen for Public Storage's property-level margin. That's higher than software. Lucas: Right. It's a cash-printing machine. And that's exactly why private equity firms started piling in about ten years ago. The pitch is simple: go buy a bunch of mom and pop facilities in growing Sun Belt markets, professionalize the management, raise rents, and then sell to a REIT at a higher multiple. Luna: So the roll-up is mostly happening at the smaller end — the two- or three-location operators who built a facility in the eighties and are now ready to cash out. Lucas: Exactly. And there are thousands of them. The industry is still incredibly fragmented. The top four operators control maybe thirty percent of the market. The rest is owned by individuals or small partnerships. Luna: And that fragmentation is exactly what private equity loves. Lots of small targets, no dominant national player except the REITs, and a clear path to consolidation. Lucas: Right. So the playbook has been: raise a fund, buy a platform — maybe 10 to 15 facilities in a metro area — then use that as a base to acquire singles and doubles around it. Over five years, you build a portfolio of 50 to 100 locations and then flip it to a REIT. Luna: And that worked really well when interest rates were near zero. But how does the math change now that the ten-year is at four percent? Lucas: It changes a lot. The multiples paid for these portfolios have come down. In 2021, you saw deals at 20 times EBITDA. Now it's more like 16 to 18. But the operators have also been able to push rents — storage rents have risen about six percent year-over-year for the last two years, even with higher rates. Luna: Because demand is sticky. People don't just abandon their stuff when rates go up. Lucas: Exactly. The inelastic demand is what makes storage such an attractive asset class. Even during the 2008 recession, storage occupancy dipped only about four percentage points. It recovered quickly. Luna: So the roll-up continues, but at a slower pace. Let's talk about the big one — the Extra Space and Life Storage merger in 2023. That was a twelve billion dollar deal. Lucas: Yeah, that was a game-changer. Extra Space was already the second-largest operator. Life Storage was number four. Combining them created a company with over 3,500 facilities and a market cap of about forty billion. It instantly changed the competitive landscape. Luna: And it also signaled to the smaller pe backed platforms that the exit path was narrowing. There are only so many REIT buyers. If Extra Space and Public Storage get too big, they might face antitrust scrutiny on future acquisitions. Lucas: Right. The FTC hasn't challenged a storage merger yet, but the concentration in certain metro areas is getting noticeable. In Houston, for example, Public Storage and Extra Space together control about forty percent of the market. You start to wonder about pricing power. Luna: And that's where the private equity firms are now pivoting. Instead of flipping to a REIT, some are trying to build their own REITs. There's a firm called Storage Investment Management that's been aggregating properties for the past five years and they're reportedly preparing an IPO. Lucas: Interesting. So the strategy morphs from 'buy and sell' to 'buy and hold forever' via the public markets. That works if you can keep occupancy high and rent growth steady. Luna: But there's a risk. A lot of the new supply coming online is from institutional-grade developers. They're building these massive, climate-controlled facilities with retail frontage. The old cinder-block unit in an industrial park might start to look less attractive. Lucas: Yeah, that's the counter-argument. The roll-up is scooping up older assets. And if you're paying 18 times EBITDA for a facility built in 1985, you'd better hope you can either raise rents enough to justify the multiple or find a buyer who believes the same story. Luna: Let me give you a concrete example. I was looking at a deal from last year — a three-facility portfolio in the Charlotte metro area. The seller was a family that had owned them since the early nineties. The buyer was a pe backed platform called Stor-Age. The multiple was 17.5 times trailing EBITDA. Lucas: And what was the occupancy? Luna: Eighty-seven percent. So not full. The buyer's thesis was that they could push occupancy to 93 percent within 18 months by improving the online booking experience and adding truck rentals. Lucas: That's the classic roll-up value creation — not financial engineering, but operational improvements. And truck rentals are a smart add-on. They increase the stickiness of the customer. Luna: Exactly. If you rent a truck from the storage facility, you're more likely to store with them. And you pay for the truck, so it's a profit center too. Lucas: So the roll-up in storage is still active, but it's getting more sophisticated. The days of just buying, holding, and hoping for multiple expansion are over. Now you need a real operating plan. Luna: And that's where private equity can differentiate itself. A good operator can add a hundred basis points of occupancy, cut utility costs with solar panels, and raise rents on existing tenants without losing them. That's real value. Lucas: Yeah, and if these conversations have moved your work forward in some small way, you can support the show at buy me a coffee dot com slash fexingo. It keeps us ad-free and independent. Luna: Totally. We don't run ads, so listener support is what makes this possible. And we really appreciate it. Lucas: But back to storage — the bigger question is what happens when the acquisition pipeline dries up. There are only so many independents willing to sell. And as the REITs get bigger, they'll start competing with each other for the same targets. Luna: Right. And that could push multiples back up. But the PE firms are already looking at second-tier markets — smaller cities in the Midwest and the South where storage is still mostly independent. Lucas: Yeah, places like Wichita, or Knoxville, or Shreveport. Those markets have less institutional capital, so the multiples are lower. But the population growth is there, and the barriers to entry for new construction are higher because of zoning. Luna: So the next phase of the storage roll-up might look a lot like the first phase, just in smaller cities. Same playbook, new geography. Lucas: Exactly. And that's why I think the story isn't over. Storage is a forty-billion-dollar industry that's still mostly fragmented. The roll-up has decades left to run.