How Natural Disasters Impact Long Term Self Storage Demand

The recent fires that occurred on Maui were horrific, and a disclaimer to this analysis is that we don’t wish for them to occur, we wish they didn’t, and don’t aim to capitalize off of the hardship of anyone, but I was prompted to think through this topic because of a project we are developing on the island of Maui.

The question I set out to answer was: Do natural disasters create long term demand for self storage?

There is an increase in demand that occurs after a natural disaster, but is that demand purely temporary or do some customers become long term tenants?

How can we answer this question?

While the effects of the fires in Maui are only just beginning to be felt and will take years to fully understand, we can look at other natural disasters to understand their effects on storage consumption.

Hurricanes are the most frequent type of disaster that affects self storage demand. The demand is driven from flooding and wind damage that creates a need for consumers to relocate items while repairs are completed on their homes and businesses etc.

When Hurricane Harvey hit Houston in August of 2017, massive rainfall caused extensive  damage to a very storage-dense part of the country.

Graphic 1 source: National Weather Service, Graphic 2 source: Radius+

The first chart below shows rental rates spiking considerably in Houston after Harvey and remaining elevated for several months. The second chart demonstrates how long it took for those rates to normalize back to the levels that they likely would have been, which was roughly 12 months.

The complicating factor in running the Harvey analysis is that Houston was in the midst of one of the largest storage overbuilding cycles in its history, so there was already a lot of downward pressure on rental rates and occupancy.

Prior to Harvey, Houston occupancy was on the decline, but those trends reversed during the second half of 2017 and occupancy actually went UP 2.7% at a time when the occupancy across the country went DOWN 1.9%. Ultimately, Houston’s occupancy ended a full 3% higher than the national average.

However, the core question remains, when everything settled, how many customers that moved in because of the storm, never ended up moving out?

I discussed my question with one of the top two REITs, and their commentary led me to believe that 10-20% of the customers who walk in the door after a storm end up staying for the long term.

Why do they stay?

The reason is the same as why non-storm related customers end up staying long term: they initially only expect to use storage briefly, but years later still find themselves paying for the same unit because it’s a learned convenience. Meaning, once people start using it, they realize the benefits of having the extra space or are not burdened enough by the cost to move out, and they end up staying.

In our Houston example, a 10-20% retention of Harvey customers would imply that occupancy in the area is 0.3% - 0.4% higher than it would have otherwise been absent the storm.

Aside from the commentary provided by the REIT, this analysis is somewhat subjective given the lack of customer data to prove it. Do most customers move out, yes? But our view is that there is a group that ends up staying long term.

While natural disasters are not something we wish for by any means, we do believe that this unique source of demand speaks to the nature of why the demand profile for storage is so attractive (especially if you subscribe to the belief that natural disasters are going to be a more frequent occurrence going forward).

Our project in Maui, HI breaks ground early next year. Given the rebuilding process will be underway for years to come, we are confident there will be a considerable demand for storage from and during these efforts. Again, while we would have rather this tragedy not occurred at all, the event should contribute to the asset’s success when it's built and operating.

Demand from natural disasters speaks to why we are so bullish on the sector long term:  demand is diversified amongst a variety of uses and throughout all parts of the economic cycle, which over the long term, creates a very profitable investment.