Episode 262: What the Iran Conflict Means for Self-Storage Investors

Announcer (00:03):

This is the Self Storage Podcast with the original self-storage expert, Scott Meyers.

Scott Meyers (00:11):

Hello everyone and welcome back to the Self Storage Investing Podcast. I’m your host Scott Meyers, and we are going to cut through the noise today and give you the real-world insights you need to build and protect your self-storage portfolio. And I am joined today by my producer, Doug Downs. Doug, welcome to the show.

Doug Downs (00:25):

Always great to be here. Thanks, Scott.

Scott Meyers (00:27):

Well, we’re bringing Doug in here as we’ve done from time to time because Doug is also a former journalist, and so he has some real-world experience dealing with real-world issues in many instances. So appreciate you being on here, Doug.

Doug Downs (00:41):

Well, the thing that’s caught my eye as a former journalist is what’s happening in Iran right now, right? And that’s a lot of talk. And ultimately, as I’ve been talking to my kid who works in finance, what does this mean for you and me, including investing in or out of the markets, however you choose? What does this mean to dollars and cents? More important is the lives — more important is the lives in Iran and American lives over there. But what does this mean to you and me over here?

Scott Meyers (01:13):

Well, that’s what we’re going to try to break down today the best that we can, Doug. And we’re going to keep this to a normal podcast length. This is a conversation that you and I — and I think most folks — could have for hours. But when you turn on the news and you see what’s happening in the Middle East, it’s natural to wonder, what does this mean for me, for my investments, and for my family? And so that’s what we’re going to be talking about today. We’ve been flooded — literally flooded — with messages from listeners asking us to address the situation. What does this mean, Scott? What does this mean looking forward, not only this year but going forward in the next several years? Is this starting another recession, a pullback in a macro sense? What does it mean for the economy and for self-storage specifically?

(01:51):

So we’re going to spend the next 30 minutes or so

Announcer (01:53):

Breaking

Scott Meyers (01:53):

it all down in a way that’s practical and actionable. So that is the goal here. There’s a lot of fear and even more so a lot of noise out there right now. And our job is to separate the signal from the noise and give you a clear-eyed picture of what’s happening, what it means, and what you should be doing about it. So let’s start at the beginning. For listeners who may not … What do you say, Doug?

Doug Downs (02:18):

I think I want to peel this away like layers of an onion. I’m tempted to just say, what do you tell people when they ask what does it mean? And of course the answer is going to be, well, it depends on this, it depends on this, it depends on this. So let’s peel this away one step at a time. First off, highest level — not everybody follows the news like you and me. What’s happening, especially the last couple of weeks? Don’t go back to millennia, I haven’t got time — but what’s happening the last couple of weeks here?

Scott Meyers (02:44):

All right. So here we are. As of today, the United States and Israel are four or five days into a joint military operation against Iran. The Pentagon has named it Operation Epic Fury. It began on February 28th when President Trump announced that the US had launched what they called major combat operations against Iran. The stated objectives are to prevent Iran from developing nuclear weapons, to dismantle its ballistic missile capabilities, and to cut off its financial and military support for terror groups throughout the Middle East — which we’ve been suffering under, as many folks in that part of the world have been, for four decades. And this isn’t the first time we’ve seen military action against Iran recently. Context is important here. Back in June of 2025, there was a 12-day military campaign, also a joint US-Israel operation, that targeted Iran’s nuclear facilities.

(03:40):

And that was significant, but the current conflict is being described by analysts as larger, clearly more intense — as you can see if you’ve turned on the TV — and potentially longer lasting. Oxford Economics, one of the leading global research firms, put out a note saying this conflict could last anywhere from one to three weeks. And there are a lot of prognosticators out there making predictions, with a possibility of it stretching up to two months. And as we’ve seen in some of these campaigns — or if they’re looking at a regime change — I mean, we could be multiple years into this. We just don’t know right now. So the current status on the ground is still evolving hour by hour. Iran has been retaliating with strikes against US allies in the region. The US has closed two of its Gulf embassies as a precaution, and Iran’s Supreme Leader, the Ayatollah Khamenei, was reportedly killed in the early rounds of strikes on Tehran, which is an enormous development with massive geopolitical and religious implications.

(04:41):

The Trump administration has signaled that the assault could go on for weeks, and there are real concerns about the conflict widening to involve other regional actors. So now we come to probably the biggest talking point here, Doug, which is the Strait of Hormuz. The term keeps coming up in the news coverage. Why is that so important?

Doug Downs (05:04):

It’s a bottleneck, right? This is where — is it 20% of the world’s oil by ship — has to squeeze through this narrow, I think it’s a 30-mile passageway. Ships don’t get through, that 20% doesn’t get through. That’s a problem. What does that mean?

Scott Meyers (05:20):

Well, I also heard this morning — I think it’s 25% of oil and 20% of the world’s liquefied natural gas — that also goes through there. And if that strait gets disrupted, whether through military action, Iran mining the waterway, or insurance companies refusing to cover ships in that area — as we’ve seen down in the Red Sea as well, which is going to happen and is already happening — the global energy market would be and could be in serious trouble. So the Strait of Hormuz is really the key variable here.

Doug Downs (05:56):

And that is the strategic point that needs to be focused on. Let’s talk about what we’re already seeing in the markets. Every time I go to invest in the market, it’s two steps ahead of me anyway. So the market knows — it’s no Nostradamus, at least it thinks it is. What’s happening in the markets?

Scott Meyers (06:16):

Yeah. So the reaction was immediate and sharp. As always, oil prices surged. Brent Crude, which is the international benchmark, jumped up 7% on the first trading day after the strikes, pushing close to around $80 a barrel, and US crude rose about 6%. The stock markets initially fell sharply — as always, through the normal panic with something like this — although they partially recovered as investors hoped the conflict would be short-lived. The 10-year treasury yield, which is what we pay very close attention to, because that’s what rates are tied to — it’s the benchmark for mortgage rates and a lot of commercial real estate financing — climbed back above 4%. So that was not good news for us. We may not see that for a little while yet, but nevertheless, that was a jump that we didn’t like to see and that probably is not going to come back down anytime soon.

(07:08):

So what does that mean in practical terms for everyday Americans? The most direct and immediate impact is at the gas pump. And I can never understand this, Doug — we’re talking about oil where barrels have been priced at a certain level, and yet immediately over here at the pump, the price goes up. It’s maddening.

Doug Downs (07:28):

I mean, this is not just supply and demand. No, it takes time to unwind, but yeah.

Scott Meyers (07:33):

They’ll

Doug Downs (07:33):

take advantage

Scott Meyers (07:33):

when they can.

Doug Downs (07:34):

At the pumps — groceries — will groceries be impacted? What if I’m one of those new home buyers getting a mortgage and I’m suddenly paying 7% or something on my five-year fixed? All that stuff for everyday Americans is unraveling.

Scott Meyers (07:49):

Yeah. Yeah. So I think we’re looking at … We’re not talking about rampant inflation again, but at the peak of our rampant inflation that we just experienced a few years ago — back in 2022 — it was all around energy costs. It was around the cost of what it takes to make and to ship things around. And so we could be seeing that not only are interest rates going to climb back up again — which could further slow any progress that we’ve made in the housing market and getting consumer confidence up for buying houses again — but we could be looking at $3.50 a gallon or higher within weeks. And that sounds like a small number, but when you multiply it across every fill-up for every American, it’s obviously a significant drain on household budgets. And it’s not just gasoline.

(08:36):

Oil is an input in the production and transportation of virtually every physical product in the economy. And higher oil prices eventually show up in your grocery bill and the cost of shipping packages and airline ticket prices everywhere. And there goes consumer confidence. And then we slide back and claw back any gains that we’ve seen recently.

Doug Downs (08:55):

Okay. And then this taps into inflation, right? So tell me about inflation and the Fed.

Scott Meyers (09:02):

Well, this is mostly above my pay grade, Doug, but here’s the way that we see it. This is the tricky part of the situation. The Federal Reserve has been fighting inflation obviously for years now, and they’ve gotten it down from the peak. I believe it was over 9% in 2022, but it has been stubbornly stuck around 3% for the past year — still above their 2% target, which represents a normal inflationary period. And that’s been happening even as gas prices were actually falling in 2025. Now with this conflict potentially driving energy prices back up and gas prices back up, we could see inflation reaccelerate. And again, for me personally, that is just a bad scenario and puts the Fed in a very difficult position at this point.

Doug Downs (09:47):

What do they have to do? Do they respond by hiking rates?

Scott Meyers (09:55):

Not necessarily. Their job is to control inflation and support employment. So when inflation is high, they raise interest rates to cool the economy down. When the economy is weak, they lower rates to stimulate growth. The problem right now is what we just mentioned — we could end up with both high inflation and a slowing economy at the same time. And that’s what economists call stagflation. And it’s just not a place that we want to be. If oil prices spike and inflation goes back up, the Fed can’t cut rates to support the economy because that would make inflation even worse. So before this conflict started, the market was expecting the Fed to cut rates several times this year. And I think what they said, Doug — and for those for whom it’s your first time on the podcast with Doug here, Doug is Canadian — but what we had seen is that we were going to experience about a quarter-point reduction in interest rates

Announcer (10:54):

was what

Scott Meyers (10:55):

was anticipated — and maybe two of those this year. Now those expectations have been dramatically scaled back, and financial markets are currently pricing in a 53% chance that the Fed doesn’t cut rates at all through June.

Doug Downs (11:06):

Well, and make no mistake as a Canadian — we follow what’s happening in the US because we are tied together by the tin cans around our feet. 53% chance that the Fed doesn’t cut rates. That’s fifty-fifty, partly cloudy, 40% chance of rain — it’s like there’s just no idea. But that is a shift in expectation.

Scott Meyers (11:32):

It is. And my take is that since we’re already hearing this type of noise out there in the markets, once again, all that does is kill consumer confidence. And any momentum anybody had for saving for a house and planning a move — or companies planning for expansion and borrowing more dollars to do so — a lot of that stuff is going to be shelved. And a lot of this money is going to go back on the sidelines. People are just going to sit and wait. I mean, it’s a huge shift, which has direct consequences for real estate investors. The cost of borrowing money is tied to these interest rate expectations — not the rates themselves, but these expectations. And if rates stay higher for longer, it means higher mortgage rates, higher commercial real estate loan rates, and a more challenging financing environment across the board.

Doug Downs (12:16):

Okay. Not to mention that going to war itself — whatever term you want to use — that could affect interest rates as well.

Scott Meyers (12:27):

Wars are expensive.

(12:29):

A little expensive. And yeah, that will have an effect on rates, as we’ve seen historically as well. It’s another piece of the puzzle that just doesn’t get enough attention. Wars are expensive. Based on analysis from the Penn Wharton Budget Model and defense economists, the direct military cost of this operation is estimated at somewhere between $40 billion and $95 billion — yes, that’s with a B — with a likely base case of around $65 billion. And the broader economic loss to the US from trade disruptions, energy spikes, and financial tightening could be anywhere from $50 billion to $210 billion. And that’s just for a conflict that lasts a few weeks. If it drags on for months, those numbers could escalate dramatically.

Doug Downs (13:13):

Yeah. And to Martha and Joe, those are big, big numbers with a lot of zeros. So the criticism is easy. How does it translate to interest rates though?

Scott Meyers (13:23):

Well, when the government needs to fund a war, it borrows money by issuing treasury bonds. And some of you may remember that from your history books, looking back at what occurred during the Second World War. More treasury bonds flooding the market means investors demand higher yields to buy them. And higher treasury yields mean higher interest rates across the country in order to entice them to buy the bonds. It’s a direct transmission mechanism. So the longer this conflict lasts, the more upward pressure there is on interest rates — not just from inflation, but from the sheer cost of financing the war.

Doug Downs (13:59):

Okay. We’ve talked about what’s happening right now and a little bit of the history. We’ve talked about the why and the general impacts on Americans at the high level. Let’s drill down lower though. Let’s talk about impacts on the real estate market. What do you think?

Scott Meyers (14:14):

Yep. That’s the macro. As much as we want to get into the macro for now — there are certainly lots of theories and many ways we could take this — the real estate market was already in a challenging position before this conflict. That was no surprise, no secret. Home values grew a mere 1.3%, 1.4% — depending upon which stats you looked at — in 2025. But what stands out is that it was the weakest gain in over 14 years. And only about 11% of Americans moved in 2024, which is historically very low. And we feel that in storage, obviously, which is what we’re getting to. The housing market has been frozen by high interest rates, with both buyers and sellers reluctant to transact. And the conflict threatens to make that worse by pushing mortgage rates back up just as they were starting to come down.

(15:02):

Mortgage rates had just dipped below 6% for the first time in years, and that was a psychological milestone — and once again, a boost to consumer confidence. But now that progress is at risk of being reversed. And for commercial real estate developers, the impact — well, this is what we’re looking at. And we are heavy into not only conversions but also ground-up construction. And those costs are going to go up, as we mentioned. With inflation, those costs are going to go up, and that’s a direct consequence of higher oil prices. So if you think about all the materials that go into building a self-storage facility — from the steel itself, all the piping, the roofing, the insulation, the asphalt for the parking lot — all of those are petroleum-derived products. Their prices move with oil. And add to that the increased cost of diesel to run construction equipment and to transport materials to the job site.

(15:48):

Some analysts are estimating this conflict could add a 10% or more premium to overall construction costs. I’m really betting on probably more than that. For a project that was already barely penciling out — which we’ve already been struggling with just because of the cost of financing and our cost of capital — this could be the difference between moving forward and shelving it entirely. So it’s a tough environment for real estate overall, but I think what we really need to dive into is specifically self-storage and what the industry looks like heading into this conflict.

Doug Downs (16:20):

Yeah, because you told me early in our relationship — people love to buy stuff and they don’t have as much room to put it. So real simple, you’re providing them a place to put it. Why not invest in that? It’s become a human behavior. What happens here with the self-storage industry?

Scott Meyers (16:38):

So if you’ve been paying attention and listening — not you, Doug, but the listeners out there — we talk about, because these are the facts and the stats, that historically self-storage does extremely well during a boom time. When people are doing well and the economy is doing well, we move and we buy more stuff and we store more stuff. When there’s a pullback in the economy, it is also very recession-resistant and resilient in that when people downsize — individuals downsize, businesses downsize — there’s also a need for storage. When there’s calamity in the marketplace, there’s also a rush and a demand for storage, and sometimes it’s even better. And so we were already in a period of recalibration — this is a somewhat different level. After the incredible boom years from 2020 to 2022, the industry went through a significant correction, which many of you listening have felt. Asset values fell about 25% from their 2022 peak.

(17:35):

Rents have been under pressure in markets that got overbuilt, and the development pipeline had already been slowing down significantly. Projected completions were expected to drop to around 400 new facilities in 2025, down from the peak of the construction boom. And so the industry was in what most people were calling a stabilization phase — which we’re all really thankful for, actually — with cautious optimism about a gradual recovery in 2026. And the most recent stats that we’ve seen from Yardi Matrix and some of our other data-gathering partners have shown year-over-year growth in almost all markets and almost all unit sizes. I mean, we’re beginning to see a clawback and a return to some normal increases in rates and therefore in valuations. Now, this conflict hits right in the middle of that recovery.

Doug Downs (18:20):

Right in the middle.

Scott Meyers (18:21):

So the question is, does this derail the recovery or does self-storage’s resiliency carry it through?

(18:30):

And I don’t have a crystal ball. My answer is that self-storage is always — it’s uniquely positioned to weather the storm better than almost any other real estate asset class. And that is the reason why I’ve chosen this path. It’s not because self-storage is sexy, because it’s not a sexy asset class. But when you look at the fundamentals and the data, the stats, the historical returns, its resiliency — that’s why we’re here. So that’s not out of blind optimism, but because of the specific characteristics of the industry. And so let’s walk through those again to maybe put people’s minds at ease just a little bit.

Doug Downs (19:08):

Why is self-storage potentially weather-resistant in today’s 2026 environment?

Scott Meyers (19:15):

Yeah. All right. So we’ll start with the demand side. The self-storage industry has what we call the four D’s of demand, and we’ve talked about this before: death, divorce, displacement, and downsizing. And these are the life events that drive people to need storage. And they happen regardless of economic conditions. None of those are affected by a campaign or a war or whatever is happening on any side of the world. People are still dying, they’re getting divorced, they’re being displaced, and they’re downsizing. In fact, economic stress like this often accelerates some of these drivers. So when people lose their jobs or face financial pressure, they downsize their living situations. They move from a house to an apartment or from an apartment to a smaller apartment, and they need somewhere to put their stuff. And when economic uncertainty causes stress in relationships, divorce rates tend to tick up.

(19:58):

And when businesses contract, they often need to store equipment and inventory, which was previously in larger spaces. And so really the macro tailwind is that demand for self-storage is driven by life transitions, and life transitions don’t stop during a conflict.

Doug Downs (20:15):

Okay. So that’s the demand side. What about the supply side?

Scott Meyers (20:20):

Yeah. So as I mentioned, the development pipeline was already slowing. With construction costs now going up — and we talked about that 10% or more premium — new supply coming to market is going to slow down even further. That’s actually good news for existing operators. Tighter supply, steady demand — that’s the recipe for stabilizing and potentially improving occupancy and rates. And there’s actually precedent for this. After 9/11 and during the 2008 financial crisis, construction activity fell sharply and existing self-storage facilities actually saw improved performance because the demand held up while new competition dried up.

(21:00):

And we have some hard data on this. Let me walk through the numbers for those of you who are numbers-oriented. And I know many of you are. Let’s look at actual performance during past crises. During the 2008 financial crisis — the Great Recession — while the broader real estate market crashed by 30 to 40%, self-storage REITs held up remarkably well. And for those who don’t know, REITs — Real Estate Investment Trusts — are publicly traded companies that own real estate. And the self-storage REITs, the big public companies like Public Storage and Extra Space, they actually outperformed almost every other real estate category during that downturn.

(21:46):

And I can speak to that firsthand because I was in the industry at that time. I started in self-storage after getting out of the technology industry in 2006, right before the financial crisis hit. And I was doing apartment development at the time, also, with a partner. And we got crushed on that. But self-storage? We did okay, because there’s really only — there was a period of time when people were moving around like crazy and we were absorbing tenants left and right. And then when things froze up, they stayed put because it was too expensive to move. Either way, we were winning.

(22:37):

The House of Cards, which was brought on by real estate. And that is when I got into — I was getting into self-storage. And we saw during that timeframe, thankfully, self-storage income outpaced inflation by 190 basis points. It outperformed the rest of the pack, its competitors in commercial real estate, which means that over a 16-year period that included the financial crisis, the COVID pandemic, and the inflation surge of 2022 and 2023. So self-storage investors were consistently growing their real estate income faster than inflation was eroding it — by 190 basis points — all the way through from 2008 to 2024. And there is no other asset class in commercial real estate, bricks and mortar, something that you can see, touch, and feel, that could boast that. And so again, another reason why we’re thankful that we’re here and why we still have faith in it going forward — that no matter what the economy, the market, or geopolitical instability throws at it, we continue to do extremely well.

Doug Downs (23:34):

Why is that though? What makes self-storage that much more resilient? I get the factors you’re outlining, but why more resilient than real estate?

Scott Meyers (23:45):

Yeah. It’s a number of factors and mostly what we’ve talked about. And I’m going to point back to more of the stats, Doug. Let’s take the financial crisis and let’s just look at 2008 to 2009. The overall REIT index — the Real Estate Investment Trust index, which tracks all the publicly traded real estate investment trusts — it fell by 38, 39%. Self-storage REITs also fell, but by less than 4%.

(24:21):

And that’s a massive outperformance. And during the COVID-19 pandemic, just because of the nature of our industry, when the entire economy was in free fall, self-storage net operating income dipped by just 1.2%. And that’s because, again, there was a rush to self-storage. We saw that when people had to go home — kids had to go home to do school, and people had to go home to work. Well, they’re clearing out the living room to make a classroom, and then they’re clearing out the spare bedroom to make it an office. And so all this stuff had to go to storage. And we saw an uptick during that time, but while there was a freeze elsewhere, we did see rates drop a bit just because we were in a freeze and in a panic mode as an economy no matter what.

(25:06):

And so rates came down a little bit, but only by 1.2%. But during that time — and don’t mistake this, Doug — occupancy went up. So even if rates went down, occupancy went up. And so our net overall income and the valuations, as we talked about at the top of this call, they increased. I mean, those were some glorious times from 2020 to 2022 in self-storage. And so these aren’t cherry-picked numbers. They reflect the fundamental resilience of this asset class. We’ve seen it over and over again.

Doug Downs (25:36):

Okay. And then the demand drivers, the four D’s that you talked about — what’s the nature of them that helps here?

Scott Meyers (25:46):

Well, they’re typically countercyclical. If you break them down one by one, they actually increase during economic stress. Storage has relatively low operating costs compared to other real estate. You don’t have to maintain the interior of the units the way you maintain apartments. Your labor costs are lower. Your maintenance costs are lower. So your margins are more protected when revenue comes under pressure. But the four D’s — it doesn’t matter what’s going on. People, once again: death, divorce, displacement — all of this continues to happen no matter what. And so that month-to-month lease structure means you can adjust quickly in both directions. So when all of these things are happening at the same time, we can raise rents when demand is strong because it brings on those, in some cases, some of those four D’s when things are not going well. And we can offer promotions when we need to fill vacancies if it slows down in terms of the economy and demand for self-storage.

(26:39):

So it’s just an incredibly flexible business model, unlike any other in commercial real estate where they just don’t have these 30-day leases and the flexibility that we have in storage.

Doug Downs (26:50):

So that’s really interesting because even in tough times, there are tailwinds seemingly for self-storage.

Scott Meyers (26:58):

And as much as there are tailwinds, there are also headwinds. And what we have to be honest about is the risk. The biggest risk, as we already mentioned, is the interest rate environment. And if this conflict drags on for months and keeps inflation elevated, the Fed could be forced to actually raise rates rather than cut them. And that would be my bet — I’m in that 53%. And that would be a significant headwind for anyone trying to acquire or refinance a property. And we’ll come back to that because it presents opportunity. So if you have variable rate debt on your portfolio, you need to be stress testing your numbers right now. What happens to your debt service coverage ratio if your rate goes up another 50 or 100 basis points? And so we have been very opportunistic in situations where interest rates go up and loans are coming due and maturing from owner-operators who are now at a reset on their debt.

(27:51):

They have to now either refinance, or the debt resets itself and calibrates after a five-year term on a five-year note. And if they haven’t created value in their facility, well, then they have to sell. And that presents an opportunity in the marketplace. There already are and there will be more facilities coming into the marketplace. The challenge is twofold here. One, we have to model this out and it has to make sense for the facility to either make money — or if it’s going back to a bank or the bank is involved — we have to make somebody whole on this project because it’s going to cost more to buy it. And second, once again, for those that are already in this situation — for those of you that own facilities and have a portfolio right now — this is something you need to be monitoring on a regular basis.

(28:37):

You need to be driving NOI at every turn. That means doing everything in your power to increase income and everything in your power to reduce your expenses so that you’re not caught off guard by this. And so that’s a critical point that I can’t stress enough for operators with floating rate debt. If that is you, that is something you need to mind. It really is the most urgent issue for operators. And the second risk, as we’ve stressed before, is the housing market. Self-storage demand is closely correlated with residential mobility, and people moving creates storage demand. And depending upon your facility and the market, Doug, that’s anywhere from 30 to 50% of our activity. So the base of our occupancy is the folks who have been in there long-term — legacy tenants — but we have churn, and that’s usually 30 to 50% of our occupancy based upon a robust environment in which people are moving because of increased demand.

(29:35):

And if higher mortgage rates freeze the housing market even further, well, that’s a headwind for demand. And so we’ve already seen this dynamic play out over the past two years and this conflict threatens to extend it right now.

Doug Downs (29:45):

Okay. And what about consumer spending? If I’m paying more to buy cantaloupes at the grocery store, does it affect my willingness to pay for storage?

Scott Meyers (29:54):

And I’m not going out on a limb here. This is something that we have experienced, and I’ve lived through 2008. What we saw is that storage is one of the last things that people will give up. You’re exactly right. The last thing they give up is usually the cable bill, because they still need to have their Netflix — to take a vacation when all else goes to heck in a handbasket — or their liquor budget. However, storage is one of the last, but eventually you’re going to get to that place when you’re slashing things off and you can’t slash any longer. It’s like, okay, do I really want that stuff that’s in there? Can I purge some of it, store some of it elsewhere, stack it up here? It will go. So you’ll get to that place eventually where it becomes a budget item that is either a luxury or a necessity that all of a sudden you really have to stress test your need for storage.

(30:49):

And it’s generally considered a sticky expense. Once people have stuff in a unit, they’re reluctant to go through the hassle of moving it out. But if the pressure becomes severe enough, you’ll see some tenants make the difficult decision to vacate.

Doug Downs (31:02):

And for developers, folks looking to build new facilities?

Scott Meyers (31:06):

You mean me? Yeah. Yeah.

Doug Downs (31:08):

Yeah.

Scott Meyers (31:10):

I mean, the math’s getting harder. It was hard enough to begin with. That’s not a stretch. Construction costs were already elevated before this conflict and now they’re going to go higher. And so we’ve got a project right now that we’re trying to lock in, and the folks that we’re talking with are holding off for good reason. And so you combine that with the financing environment — new development is going to be very difficult to pencil out for the foreseeable future. So if your model is based upon that, it’s going to be difficult. And in some ways it’s good news for existing operators if that isn’t your model, because if there’s no new product coming into the market, there’s going to be absorption and therefore the demand that is in the markets will allow for rates to at least stabilize, if not come up.

(31:52):

So less competition coming to market. But if you’re in the middle of a development project right now, you need to be talking to your lender and your contractor about the potential cost implications if you’re not locked into both.

Doug Downs (32:03):

So let’s bring it back to the top. We talked about how you’re getting messages from listeners, from friends, folks who follow you closely, about the conflict in Iran. And the question is, what should I do? And we preface this whole episode with, it depends and there’s a whole onion to peel … Okay. So what is the practical playbook? What should they do?

Scott Meyers (32:28):

This is really something that I feel you should be looking at all the time, which is really stressing your NOI, because that not only protects you but also puts you in a position to be able to sell. I mean, it’s really everything in business. And so these are the three things that we continue to preach over and over again. And for now, the most important thing is to know your numbers. Pull up your loan documents, understand your interest rate exposure. If you have variable rate debt, model out what happens to your cash flow if rates go up another half a point or a full point, as your loan stipulations may show. Know your breakeven occupancy. And if you haven’t run that exercise, folks, that is something you need to do after you listen to this. And know your debt service coverage ratio, because if you don’t meet it, the bank could be calling notes due.

(33:15):

And that’s another piece that I don’t want to spend a lot of time on, but this is

Announcer (33:19):

the

Scott Meyers (33:19):

time to be flying blind on your financials. Because if you all of a sudden recognize that there is a stipulation where your debt service coverage ratio has to be 1.25 or 1.3 throughout your loan — and that’s a covenant — if you fall below that, they could call your loan due. A bank could do that. Why would they do that? Well, they have the right to. A war is just enough of a scare to a lender that they may just call your loan due just because.

(33:43):

The second thing we need to focus on is operations. You’ve got to tighten up your expense management. Look at your utility costs, your insurance, your payroll, and get ahead of all of that. Are there efficiencies you’ve been putting off? Now is the time to implement them. Shop, shop, shop. On the revenue side, make sure your pricing strategy is aligned with the current market because you don’t want to be leaving money on the table. But you also don’t want to be so aggressive with rate increases that you’re driving tenants away. And so revenue management — a good revenue management company or software vendor — is going to be key during this time if you don’t already have that in place.

Doug Downs (34:16):

Okay. And what if I’m a buyer? What if I’m in that lovely position of being able to buy?

Scott Meyers (34:23):

And this is the eternal optimist in me as an entrepreneur and as a self-storage investor. I get excited about these types of things. I don’t get excited about turmoil in the market — don’t get me wrong. But for buyers, this environment, as challenging as it is, is going to create opportunities. Motivated sellers are going to emerge, and some of them are going to be motivated because they have to sell. Operators who are over-leveraged, who don’t have the operational expertise to navigate this market, who are facing those refinancing challenges we just discussed — well, they’re going to need to sell. And if you’ve got dry powder, cash, or access to capital, and you’re patient and disciplined in your underwriting, you can find exceptional deals. Now it’s got to model out. It’s got to pencil out at today’s interest rates and your cost of capital.

(35:08):

And the key is to underwrite conservatively as you’re heading into these. And please — for the love of God, folks — don’t assume rates are going to come down quickly. This is not the time to assume that this is the worst-case scenario and it’s going to get better, and you’re underwriting the future with rates coming down and everything coming back to the best-case scenario like it was in 2022. That is not the way to approach this market. So don’t assume rents are going to bounce back immediately — build in your margin of safety.

Doug Downs (35:34):

Okay. Places to avoid or things to avoid. I

Scott Meyers (35:38):

mean, this is just good business. Avoid speculative, high-leverage deals. We’ve been stressing that in our academy and in our mastermind to our folks. I don’t want to beat that dead horse again, but I still continue to see people who get a little too overzealous and opportunistic. This is not the time to stretch on price or on leverage and say, “Well, I’m going to get into my first deal in this environment because it’s the best. And maybe I’ll break even and I’ll make it up on the next one.” That’s the wrong approach to take in this market. Avoid markets that are oversupplied. It’s one thing to look at a property and look at the numbers and understand where you think you can take it, but you can’t take it there if the market is oversupplied. So it is very critical that you look at the rest of the market to see where occupancy is, because the economic pressure is going to hit those markets even harder now.

(36:28):

And just avoid making emotional decisions based on the daily news cycle. As a matter of fact, I say just turn it off — please turn it off. The headlines are going to be scary for the next few weeks or month. That’s the nature of a military conflict. But the fundamentals of self-storage as an asset class haven’t changed. And so if you panic-sell a well-located, well-operated facility because of short-term market uncertainty, you may regret that decision for years.

Doug Downs (36:52):

Think long-term, long-term perspective. 100%. But beyond today. Yeah.

Scott Meyers (36:57):

This is as big as this seems, Doug, and as scary as this seems. And obviously the news sensationalizes everything. And now even online, everybody sensationalizes things to get eyeballs onto their Facebook page or because they want to be seen as knowing everything. The capital partners that I am talking to in New York this morning, as well as our folks in the Middle East, they look at this as a road bump. And some of them don’t even look at it as that. They said, “This is just a mark that you’ll barely even feel.” And at the end of this, the way that everything is heading, it’s going to do nothing but provide more stability in the financial markets. Once again, we get things straightened out in the Strait of Hormuz and all of this — it’s a conflict, it’s fairly predictable. The only question in just about everybody’s mind is how long is this going to take?

(37:45):

We pretty much know what the outcome is going to be and it’s going to be good for the economy. And so yes, this is a time not to get excited and emotional about things. It is certainly not a time to be emotional in a negative sense, thinking, “Well, I’m just going to sit back for the next five or 10 years and let this all play out.” No, that’s not the case. You’re going to look at properties, you’re going to make smart decisions in underwriting, and just recognize that this is a temporary road bump.

Doug Downs (38:12):

Beautifully said. I really appreciate your insights today, Scott. This explained things to me really well.

Scott Meyers (38:19):

Well, we had enough calls from folks that we thought we would take — I guess — a little bit of a deviation away from the normal format, but this is all things storage. The economy and the financial markets are 50% of it. So it’s very critical to watch at this time. So good questions, good prompting. And I think we’ve covered about as much as we can in a normal podcast-length episode to at least present some clarity to folks out there who are wondering what to do and how to navigate the economy that we find ourselves in right now.

Doug Downs (38:50):

Put on your long-term glasses. Think long-term.

Scott Meyers (38:53):

Yeah. Yeah. We’ve been through this a time or two.

Doug Downs (38:56):

Yeah. Yeah.

Scott Meyers (38:58):

We’ve been through recessions. We’ve been through, no matter what causes it — whether it’s a financial meltdown in the markets or a war or conflicts — we’ve been through this a time or two. I guess the most important thing I can say is this: don’t confuse the volatility with catastrophe. This situation in Iran is serious. I certainly don’t want to minimize that. And there are several real economic headwinds heading into the balance of this year, but we’ve been through difficult periods before. The financial crisis, COVID, the inflation surge of 2022, and self-storage has come through all of them in a position of strength. The industry’s resilience is not an accident. It’s a function of the fundamental human need for storage space, which doesn’t disappear when times get tough. If anything, once again — and we’ve seen this over and over again — it intensifies. And so stay informed, stay disciplined, stay focused on your operations, and keep a long-term perspective.

(39:57):

This too shall pass. And when it does, the investors who kept their heads and made smart decisions during this period are going to be very well positioned for what comes next.

Doug Downs (40:05):

Thanks, Scott.

Scott Meyers (40:06):

Thank you, Doug. Appreciate you going through this with me and providing our listeners with a little more information to hopefully keep their heads on straight and moving in the right direction.

Doug Downs (40:15):

Ironically, thanks for helping us unpack it all.

Scott Meyers (40:17):

Yeah. Yeah, my pleasure. And to all of our listeners, stay safe, stay focused, and keep investing wisely. And I did catch that pun, Doug.

Doug Downs (40:25):

Yeah. Back in the box where it belongs.

Scott Meyers (40:30):

Thanks everyone. Take care. Thank you, Doug.

Announcer (40:34):

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