The model looks doomed to fail: undesirable land and short leases. But self-storage is big business with big payoffs.
The best businesses take unpromising resources and conjure from them a stable stream of profits. Self-storage firms fall into this category. They offer space-strapped customers a secure nest in which to store things they don't need right now but can't bring themselves to throw away. They invest in land most developers would shun and use tenancy contracts that would make other landlords shudder.
Yet they are big business in America, where one family in 10 uses one of the countries' 50,000 facilities. It's a sector that has seen robust performance and rapid growth, according to the Self Storage Association, an industry body. It is popular elsewhere, too: Britain has seen an 8 percent growth in the number of stores in the past year.
To appreciate the magic of the business model, start with the questionable ingredients. The base is in commercial property, a sector hit hard in the financial crisis. The facilities are generally in unglamorous locations, on noisy roads or the outskirts of town. Tenants renting space pay little or no deposit and are free to leave at a moment's notice. It sounds like a recipe for ruin -- yet storage firms make huge profits.
Structured as real-estate investment trusts, which pool cash to invest in property, they have avoided the sinking feeling that has dominated the REIT sector for the past five years. While property values have fallen, profits and cash flow have held up, lifting share prices. Public Storage, Extra Space and Sovran, three publicly traded American self-storers, were up between 30 percent and 140 percent since August 2007, while REIT indexes have lost ground.
Public Storage, one of the largest self-storage firms in the country, has 43 of its 2,058 locations in Minnesota. The 43 Minnesota locations include 2,931 net rentable square feet. There are two reasons for the storage firms' success.
The first is that demand keeps growing. American workers are quite mobile and often need a temporary spot to stash their stuff while they line up a move. More important, they keep acquiring stuff that cannot be consumed and never rots or rusts: plastic toys, metal garden furniture, porcelain knickknacks.
For some reason they seldom chuck out any of this rubbish. This baffles economists, who assume "free disposal," meaning that things that aren't needed can be thrown away without making anyone feel bad about the loss. The fact that so many hoarders pay lots of cash to keep unneeded things shows that the assumption needs re-examination.
The second is that a short-term contract does not mean short-term profits. Stored stuff is like a bank deposit -- it's contractually short term, but usually stays where it is. Contracts are often only for a month or so, yet hoarders stash things away for far longer. At Big Yellow, a British firm, 37 percent of space is filled with stuff that has been there for more than three years.
A cynic might compare human squirrels unfavorably to the wild sort, which usually remember to dig up their nuts come springtime.
Self-storage firms are also well-placed to deal with the problem other landlords dread: nonpaying tenants. They have the upper hand because they have your stuff. If you don't pay up, they will sell it. This last trend has even spawned a television show, "Storage Wars," in which rent dodgers' possessions are sold, often for surprisingly high prices.
The lessons of hoardonomics are clear: Don't store your stuff; sell it.
Then invest in a storage business.