Urban Exodus: Should Storage Shift To The Suburbs?

Posted by Poppy Behrens on Feb 4, 2021 12:00:00 AM

In March 2019, when the initial threat of COVID-19 became evident and mass lockdowns were ordered, almost everything stopped, including many transactions in the real estate sector.

According to a recent NPR story, many people hunkered down, but then something happened when the lockdowns were lifted: People began leaving the more cramped urban areas for the suburbs.

However, this only escalated an already growing trend. The NPR report cited data that showed in New York City, for example, home sales were already dropping an average of 56 percent year over year, while home sales in the surrounding suburbs of the city were increasing 44 percent.

In the first months after the pandemic, the U.S. Postal Service reported that largest number of change of address requests came out of New York and New Jersey.

“In past years, we were seeing many moves to larger cities, and now people are leaving the cities,” says Lior Rachmany, CEO/founder of Dumbo Moving & Storage Inc., located in Brooklyn, N.Y.

Rachmany has been noticing the trend over the past two to three years and saw firsthand the expedited exodus from New York that began last year after the lockdown. One of the reasons people began moving from the cities is that they are seeking a slower pace of life and more room to grow families. “They are finding they can work remotely, and they want to condense their time in the city to one or two days per week,” says Rachmany.

According to Eric Blum, president of BMSGRP Self Storage Consulting, there have been other factors that began the trend in moving from cities, especially in larger cities like San Francisco and New York. “Taxes are a big reason people are leaving, as well as needing more space,” says Blum.

Shawn Hill, principal for Chicago-based The BSC Group, LLC, notes that crime also plays a big part in why people are fleeing the larger cities. “It’s been hard to tell last year if it was COVID or crime or a combination of both,” says Hill. “I think it would have happened even without COVID.”

Peaceful protests that attracted some criminals who took advantage of the situation led to fears in many larger cities last year. “It’s a tough call if the protests had anything to do with the moves,” says Michael Baillargeon, senior vice president of operations for Store Space Self Storage in Winter Garden, Fla. “We had a window smashed at one of our locations in Philadelphia, but I think we need to come to grips with some issues and, as a storage operator with urban locations, we might be a little more sensitive to those issues. We’ve responded to those challenges with staffing increases in some cases and more security, including patrols, to ensure people’s things are safe.”

Tim Hobin, executive vice president of real estate for The William Warren Group, Inc., in Santa Monica, Calif., states that for San Francisco the pandemic was “just the straw that broke the camel’s back. Increasing home prices, taxes, and government regulations were driving people out of the city prior to COVID.

Migrating Markets

As NPR points out, much of the data to date, because it’s so new, is anecdotal. However, it seems that many reports have focused primarily on two of the largest cities in the country: New York and San Francisco.

“I have a lot of anecdotal information from friends and personal experience,” says Maurice Pogoda, president of Pogoda Companies in Farmington Hills, Mich., who has an apartment in New York where he and his wife spent a considerable amount of time before the pandemic. “We haven’t been there since Thanksgiving 2019 and don’t plan to go back until maybe this summer.”

Pogoda explains that many people are now able to work from home, which has partly led to the exodus. As well, people don’t want to ride mass transit; in fact, the subway system in parts of Manhattan was seeing 85 percent fewer riders in 2020 than the same time in 2019.

“People just don’t want to be packed into the major cities, especially right now,” Pogoda says. “They don’t want to be in high rises where there is a limit for number of people in the elevators and they can’t use some of the amenities such as the gyms and common areas in their building.”

Pogoda also has a personal story. His youngest son, who was in real estate, moved from a “highly desirable” upper East side apartment back to his parents’ home last March. “Younger professionals are moving back with their parents because they were laid off or because they can work from home now and save money,” he says, adding that as of last fall his son’s apartment remained vacant. The area, which was one of the hottest in the city, then had a 39 percent vacancy rate and rental rates had decreased between 10 and 20 percent since summer 2020.

According to Cushman & Wakefield, the top storage industry markets in the U.S. are:

  1. Dallas
  2. Houston
  3. New York City
  4. Chicago
  5. Los Angeles
  6. Atlanta
  7. Phoenix
  8. Miami
  9. Riverside, Calif.
  10. Washington, D.C.
  11. Philadelphia
  12. Seattle
  13. San Antonio
  14. Tampa
  15. San Francisco

It would stand to reason that if people like Pogoda’s son have moved out of the larger cities, self-storage operators should be concerned. However, at least in the short term, this doesn’t appear to be proven true. Instead of leasing a self-storage facility for his things near his parent’s home, Pogoda’s son hired movers and stored his belongings in a facility near his former home in the city, indicating that the son, and many like him, haven’t made a definite, long=term plan about not returning to the cities.

This is apparently true for many who fled the city during the pandemic, as data shows occupancy in self-storage remained steady throughout New York and rental rates showed only a 0.1 percent drop from 2019.  

Moreover, according to NPR story, not all of the cities listed among the top 15 in the self-storage industry are seeing an exodus. As a matter of fact, many of the people who were leaving the largest cities were moving to other large cities, such as Chicago, Atlanta, San Antonio, and Seattle.

However, instead of moving right back into the heart of the city, Blum says that people are moving to the outskirts of major metropolitan areas such as Ashville and Charlotte in North Carolina; Charleston, S.C.; and Atlanta, as well as outside of major cities in Florida.

Rachmany has seen a trend in moving to cities that allow people to be at a greater distance from each other such as Dallas, Miami, Houston, and Philadelphia.

Storage In The Cities

Of course, no one has a crystal ball to foresee what the future holds for the self-storage industry, the facilities already in cities, or the speculators and developers who may be looking to build outside of major metropolitan areas.

Although the industry has seen an uptick in business in the past 10 months since the pandemic began, Rachmany believes storage is just the steppingstone to a permanent move. “Once people see how much more pricey the cities are and they can also provide better for their families outside of the cities, they likely will not come back,” he says.

This means many families will eventually collect their goods from storage and move them to their new homes.

However, other industry experts see the moves from the urban areas as temporary.

Dennis Shirshikov, a real estate analyst for RealEstateWitch.com, says people who left their things in the city are planning to go back. “A lot of the people who are leaving the city are temporarily renting outside of the city or staying in their summer homes,” says Shirshikov.

While many millennials may decide the cities are no longer great for their growing family lifestyle, many young professionals, as well as new younger professionals, will eventually move back to the cities that are now being abandoned. “What we’re really seeing is not so much people fleeing but people in transit, and that is good for self storage,” says Hobin. “The millennials are ready to have kids and a backyard, but there will always be a demand in the cities.”

However, that demand may not prove as high in the future, depending on how employers are adapting to office closures and having their employees working from home. Andrew Maguire, commercial real estate attorney and partner for McCausland Keen & Buckman in Philadelphia, Pa., says only time will tell the story.

“I think the long-term effect is that more employers are reading the conclusion their employees do fine working at home,” says Maguire. “This means they won’t have to spend as much money for office rent in major cities. No matter if they’re leasing 100,000 square feet in New York City or 10,000 square feet, they can still claim their headquarters is in New York City.”

Others in the industry, such as M. Anne Ballard, vice president of marketing, training, and developmental services for Universal Storage Group in Atlanta, Ga., believes whether people return to the cities may have a lot to do with the area of the country as well. “We know the greatest market in the Sunbelt cities is for the over 60 crowd,” says Ballard. “The younger people under 40 may still want to be in urban areas, but the older people are, the more at risk they are for the virus, and the further away they will move.”

Storage Hot Spot

Cushman & Wakefield reported figures from the U.S. Census Bureau that construction spending on self-storage had increased 584 percent from January 2015 to January 2020. That trend was already expected to slow due to oversupplied markets in many areas, but the pandemic-related recession is thought to slow that even further.

Rental rates also declined over the past three years, per that report, and further declined through April 2020, but according to many industry players, business, as well as rental rates, picked back up after lockdowns were lifted due the transitions many people were experiencing, either voluntarily or due to furloughs or layoffs.

“COVID is turning out to be a big boon to the industry,” says Hobin. “We were very nervous during March, but since March, business has been very strong.”

Hobin adds that the pandemic also caused personal transitions resulting from marital discord. “People were together all the time,” he says, “and that increased the divorce rate.”

Many people are speculating that the next market for self-storage will be the first ring of the suburbs outside of cities. “There is a lot of land available in many of these areas, but it can get overbuilt if the speculation is wrong and the rooftops never come,” says Hobin. “We’d like to see people moving where we already have facilities.”

Baillargeon says they hadn’t made any changes to their staffing or plans for their urban area locations, but they did start increasing the staffing at some of their suburban locations last year.

“For us, it’s all about the customer experience, so we want to make sure we have sufficient staff on site,” says Baillargeon. “We’ve taken some of our locations that had part-time managers and made them full time and we’ve increased the staffing at others.”

Baillargeon’s company is moving forward with the renovation of some locations that were growing prior to the pandemic and expanding staffing at those locations as well. “Overall, we’re looking at an expected 18 to 24 months of increase in suburban activity,” he says.

Rural Storage

Hill, who has a second home in rural Wisconsin, says the area around his home is growing at an enormous rate. “Our home is in the woods where we spend the summers,” he says. “There were homes on the market for two to three years that sold last year. Now you can’t find a home within a reasonable price range; they’re all selling for above-market rates.”

What’s more, a person cannot find a builder who isn’t already booked. “Contractors are telling me that people have accelerated their life plans, retiring and moving to the country five to 10 years ahead of schedule,” says Hill. “I think there are a lot of factors, including crime in the cities and COVID, but I think people can also work from home if they need to and broadband is becoming more available in these areas.”

Blum says rural areas, such as the one Hill describes, may be ripe for development. “Many of the rural locations have first- and second-generation facilities where people just drive up to the door and load and unload their stuff,” he says. “They don’t have the modern facilities many people moving from the cities or suburbs are used to.”

Count On Research

Though Blum is still doing many feasibility studies, he reminds developers and investors that the key to success, especially during this uncertain time, is to do your research.

“I would say if you can sit on your hands and wait to develop, sit and wait a little and see where this all is starting to lead,” says Blum. “But if you’re wanting to develop, do your research and hire a reliable third party to do it. People who do their research aren’t scared, and it can make the difference between having a successful facility or having an empty building waiting for those rooftops.”

Kerri Fivecoat-Campbell is a freelance journalist based in the Ozark Mountains. She is a regular contributor to MiniCo’s publications. Her business articles have also appeared in Entrepreneur, Aol.com, MSN.com, and The Kansas City Star.