Kenneth Nitzberg On the Attractiveness of Self-Storage Real Estate

18th May, 2021

Episode 07: Show Notes.

The age-old question of how to get the most out of investing in property prevails in 2021. If Storage Wars is your only frame of reference for the self-storage industry, it’s time to get educated! Today, we talk to Kenneth Nitzberg of Devon Self Storage about why this real estate sector is one of the most reliable profit-bearing avenues of investment you could take. Kenneth talks us through discerning when it is a time to buy, sell or build and how Devon Self Storage has prospered through the COVID-19 pandemic. Kenneth tells us how the online market and failed retail has supported the self-storage industry. Next, he details the perils of being too honest when you’re putting in a bid, why cities are hesitant to accommodate self-storage, and why Storage Wars is, in fact, a big scam. Lastly, Kenneth unpacks the ways in which self-storage is recession-resistant, but not quite recession-proof because the only industry that may fall into the latter category is likely to be beer. Kenneth concludes with the truth-bomb that the best way to make money is not to lose it in the first place. Tune in to better understand this underrated area of the real estate market and to learn how to capitalize on it as you plan your own capital investments.

Key Points From This Episode:

  • Why the self-storage industry is one of the most reliable and profitable real estate sectors.
  • Understanding the four food groups of the retail industry: office, industrial, multi-family, and retail.
  • How to avoid or navigate permit issues when you’re establishing storage space.
  • The three groups that form Devon Self-Storage’s primary client base – large institutions, high net worth family offices, and third-party property management.
  • Identifying when it is time to buy, sell, or build in the real estate space.
  • What has lead to Devon Self Storage’s boom and success during and after the COVID-19 pandemic.
  • The counter-intuitive concept of making money when you buy and not when you sell.
  • Ways in which failed retail supports the self-storage industry.
  • What happens when you’re too honest about converting the use of the space you bid for.
  • Three reasons why cities are reluctant to afford zoning rites to self-storage companies.
  • Defining occupancy goals in overbuilt markets.
  • Why the REITs occupation rates are a misnomer and how Devon Self-Storage has been able to raise their rates from January 2021.
  • Why Storage Wars is a total scam and how it changed Devon Self-Storage’s auction culture.
  • The implications of a recession on self storage; why it is more accurately described as being recession resistant than recession proof, and how the trick to making money is not to lose it in the first place.


[0:00:18.5] JM: Hi, I’m Jenny Merchant, co-founder of PitchBoard and welcome to The Pitch Podcast. We’re here to have thoughtful discussions with forward-thinking managers who are taking unique approaches to professionally investing capital. Through these conversations, we hope to introduce you to new ideas and strategies that will help you better manage your own portfolios.


Before we begin, we want to remind our listeners that everything in this podcast is for educational purposes only. Nothing here is tax, legal or investment advice. We don’t endorse any products, services or opinions made by our speakers. Some statements in this podcast may contain forward-looking projections. These projections do not guarantee future performance and any past performance does not guarantee future result. Finally, nothing in this podcast is an offer to buy or sell securities. Speak to your own advisor before making any financial decision.


[0:01:04.8] AH: Hi, this is Andrew from PitchBoard. I spoke with Ken Nitzberg of Devon Self Storage. He explains how the storage business is better than other classes of real estate and why the show Storage Wars isn’t based on reality. You’ll hear about that and so much more on the conversation that follows, I hope you enjoy.

Hi, this is Andrew Hepburn from PitchBoard and I have the pleasure to introduce our listeners to Ken Nitzberg, chairman and CEO of Devon Self Storage. Founded in 1988, Devon owns and operates 183 facilities and is active in 24 states. Ken, welcome to the show, it’s great to have you here.

[0:01:38.5] KN: Thank you, my pleasure to be here.

[0:01:41.1] AH: I’d love to just hear about how you sort of started from scratch in the self-storage industry and have sort of risen to become something of a giant in the field, I understand that your firm is either in the top 10 of self-storage operators in the US or just outside it, but clearly a very large company.

[0:02:01.1] KN: Well, let me correct a couple of things, first of all, we don’t have 180 storage. We’ve built, purchased, constructed, operated, managed, since 1993, about 185 storage. Today, we operate 51.

[0:02:15.7] AH: Okay.

[0:02:15.9] KN: I’ll explain why in a second here. To answer your question, we got into the storage business like a lot of people, totally, 100% by accident. Prior to 1993, we were in what we call the four basic food groups of real estate. Office, industrial, retail and multi-family.

One of our acquisition guys was living just outside of Houston in an area called the Woodlands which today is the largest planned unit development community in the country. It’s just growing to be the amoeba that ate Detroit if you were to choose. He was in the throes of a divorce and of course, he got kicked out of the house and went looking for a storage place to put his few belongings and there were two little ones there and they were full and with waiting lists, those were the days.

[0:02:59.4] AH: Yeah.

[0:03:01.1] KN: That doesn’t happen today. There also happened to be a vacant strip center right across the freeway from the woodlands that had been through the old RTC if anybody listening remembers, that was the Resolution Trust Corporation that the government full bail out all the fails, savings and loans back in the early 90s.

This little center was 50,000 square feet, it had four tenants, all on month-to-month leases which were the ones I used to joke were the obligatory ones in Texas, we had a hair and nail salon and a tanning salon and a karate school and a lightbulb store.

It had never even been finished; it was a total financial scam. The loan was four million dollars, we bought it for $600,000, simply because it was so cheap, we figured, we had to do something with it. Our guy suggested we convert the stores, we said, “No, no, no. Real real estate guys don’t do storage, that’s for wannabes.” We said, “How difficult could it be, this isn’t brain surgery.” We converted it to storage, we built two more buildings in the parking lot and 14 months later after putting in a million six, we sold it for four million cash to what is today QSmart, the third largest street and said, “This is pretty interesting business.”

We discovered something nobody else knew, we were so wrong and so naïve, you could write with it, but what we discovered, we thought we were the only ones that could make conversions. If you want to be in the storage business today and it doesn’t hold through for the other categories anywhere near as much, there’s basically three ways to do it.

You can go buy one from somebody else, I call that the ‘Greater Fool Theory’. He was a fool, you’re going to do better. Sometimes that happens, sometimes it doesn’t. The second way is, you can build one. It entails a great deal of risk, a lot of permit issues in the US today, we’ve looked at candidates, impossible to get permits in Canada almost so we just looked and we said, “Have a nice weekend” a nice couple three days in Toronto and flew home.

The third way is conversion, what that simply means is we want to buy buildings that have failed in their current use and have gone dark. Classic cases, I mean, the big box retail stores, K-Mart’s my favorite company in the world. They’re like cockroaches, you can’t kill them, even though they’ve gone bankrupt 20 times, there’s still K-Marts out there.

When the building goes dark and the longer it’s been dark, the more times the police have been out there on Sunday morning because there was a homeless camper, a meth lab or a rave or something and it was broken windows and 10-foot-high weeds. The more distressed the seller is, the more we like it. So if the building itself, the property has the right demographics, we can buy it really cheap, we can salvage the walls and sometimes the roof and the parking lot and other things.

We can typically get open in less than a year whereas the Ground Up deal can take two to four years with permitting issues. We can get in for about two thirds the cost of a Ground Up because we’re salvaging some of the building and most importantly, we generally get better locations than a Ground Up because the city isn’t fighting us now, they want to get rid of this eyesore. It’s not looking good for their particular city.

We get great locations and we’ve done like I said, almost 200 of them in 27 states in the US and three countries in Europe. That’s our business, we don’t own these stores, we are a management company primarily but our clients break into three very succinct groups. One is very large institutions. Institutions that want to get into the storage sector because it’s done so well, figure out pretty quickly, you can’t do it yourself.

We have 51 stores today and we have 21,000 tenants all on 30-day leases. No one tenant moving out is going to bust our chops as it were, but if you don’t have your systems in place, you’ll get trampled by a herd of mice. You really – it’s really, really hands-on management intensive, that’s not what a big pension fund is set-up to do.

What we do and our clients over the years within the State of Michigan Retirement Systemthe General Mills Profit Sharing Planthe Harvards Endowment FundHouston Fire and PoliceTaft Harley Labor Fund, our biggest account today is the Texas Employees Retirement System, a little 30-billion-dollar fund based in Austin.

We find the properties, we buy them, we finance them, we operate them, we manage them and we refinance them and when the time comes, we sell them. The second group of our clients are high net worth family offices and we have a number of those. They’re a little bit different. The institutions are more shorter term holds, four to six years, they’re more IRR interested so the individual running the real estate sector of this huge pension fund wants to show a track record, wants to show a huge profit so they can go to their board and say, “Look how great I’ve done, I need a bonus and a pay raise and more money to invest, okay?” Take it away from those stock and bond guys, give it to the real estate department.

The high net worth family offices are taxable whereas the pensions aren’t. They tend to hold these things and instead of selling, we tend to refinance. Our longest tenured property if you would, has been 25 years. It’s been refinanced three times. The owners have no equity in it and they’re getting a cash distribution of about $80,000 a month from one store and the family patriarch in this family office, the grandkids will die with this property because their cost space is negative, they’re not going to sell it, the taxes would eat them alive.

The third thing we do which we do very little of, because it’s a lousy business where the only guarantee is you will be fired, the only question is when is third-party property management, where we have no share of the upside, we have no equity investment, we tend to put a little bit in all these deals ourselves, not much. We only do the third-party property management if they’re in markets where we have other stores so that we can get some synergy on the expense side of the PNL.

The more stories you happen to give in to the market, the more you can spread your fixed cost for marketing, for regional supervision, for all kinds of different things. That’s what we do, that’s where we’re, you know, always buying, always building, always selling. We’re probably never going to have 500 storage because our partners will sell them before that. That’s just not our business.

[0:09:13.6] AH: Always focused from the sounds of it on conversions rather than –

[0:09:17.7] KN: No, it depends, you know, the old adage in the real estate business, there’s a time to buy and a time to sell and a time to build. Right now, the self-storage market is extremely hot because the sector has done so well. I mean, during the pandemic if you would, of all the different real estate sectors, only three have done very well.

The rest have been basically massacred, the three are distribution centers which is a code word for Amazon, call centers, which is a code word for Amazon and storage. I mean, our business and I can’t speak to Canada that much but in the US, everything started about mid-March last year, it started shutting down.

[0:09:56.3] AH: Yeah, same here.

[0:09:57.7] KN: We were nervous as the proverbial cat on a hot tin roof, we didn’t know what would happen but by about April, we figured it out and our business has gone straight up, we’ve probably had our best year in 2020 than we’ve had in 10 or 15 years. Everything is significantly up. Occupancy, gross revenue, NOI. For two reasons.

One is, if people downsize or they’re – you know, some of the sites to work from home and not commute to the office anymore but they got to clean out that extra bedroom to make it an office, got to put the stuff somewhere. Our leasing has actually gone up. The other thing is, our move outs have gone down.

Normally, in a good year, we have about 75% turn of our tenants because usually it is a 30-day leases, it’s not designed to be 10-year leases, although we have some tenants who are with us 20 years but the average is about 14 to 16 months which is a 75% turn on an annual basis.

Well, that dropped down to about 40% and our leasing increased. Hence, our occupancy went up and since these are all 30-day leases, we were able to raise the rents pretty aggressively once some of the controls we’ve taken off. A lot of cities, counties, states put rent control in them.

It’s primarily aimed at apartments and residential but many of them are so poorly written and kind of swept us under the rug with them. Our occupancies have gone up, our gross has gone up and our net has gone way up because the expenses have gone down too because we have moved dramatically to the Internet. Prior to the pandemic, about 40% of our leases came through the Internet, online.

By July or so last year, it was up to 90% and today it’s running at about 70, 65, 70. We’ve cut back a bunch of other expenses, you know? People, bottom line. The industry’s done very well, which means there’s been a huge influx of new money chasing deals. Buying an existing site today is very expensive. I mean, cap rates for good properties and good markets are down on the fours, that’s never ever happened, not in our wildest dreams.

I mean, if you’re an institution, it’s going to hold this thing for 10 years and are happy with the 6% return, that’s perfect. If you’re a little more entrepreneurial or you want little higher returns in the teams, it doesn’t work, it can’t get there from here. That’s why we’ve gone back to doing the conversions, that’s what we’re doing today, so there’s a time to buy, for example, after the market crash in 2008, there was a lot of properties that got upside down, they were overbuilt in the early 2000, over-leveraged, we bought a whole bunch of them in 2009, ‘10 and ’11 from banks, form REO’s, from savings and loans, from institutional CMBS holders.

Because we bought them way below replacement cost and we sold a lot of those in 2016/17 and made almost embarrassing profits because in the real estate business, it’s very simple. You make money when you buy, not when you sell.

You buy it right, even if you manage it poorly, you’ll probably come out okay. If you manage it well, you’re going to have an embarrassment of riches when you sell. If you buy it wrong, you’ll probably never get out of it. There’s a time to buy, a time to sell and a time to build. Right now, we think it’s a time to build. In the last three years, we have bid on more than 60 existing properties to buy.

We’ve gotten three. We weren’t the high bidder, we were just close but not the high bidder but the seller just liked us better for whatever reason, while we were talking millions of dollars, probably we’re talking a few dollars. It’s been – we usually get crushed by a whole bunch of new private equity funds that have raised hundreds of millions of dollars and as many of you know, the private equity funds typically don’t get paid when they raise the money, they get paid when they place it. They’ve got to spend it. We don’t have that problem.

[0:14:00.0] AH: Is there a lot of money that’s chasing storage because interest rates have been so low?

[0:14:06.6] KN: Well, that’s certainly a factor, if you can borrow money at 4%, you’re going to look a whole lot smarter in five years and if you borrowed it in 10. That’s the case for all real estate categories. We still don’t see a rush of people running out to buy retail. It may be the real estate equivalent of a dinosaur.

What is Amazon doing? A billion dollars a day in sales. I mean, that takes all the retail change, put them together and dwarfs them. Money is cheap today by all kinds – any kind of historical standard, that just makes the returns better but you still have to have a good real estate project in the right sound demographics to make it work because just getting a low interest in the loan is not going to save you, especially if you’re over-leveraged.

[0:14:53.5] AH: Right. I was going to ask about how the huge move towards online and Amazon has impacted your business, are you seeing more potential for conversions with brick-and-mortar seemingly on the decline?

[0:15:09.5] KN: Well, obviously, a prime target for our conversions are failed retail for a couple of reasons. One is, they usually have great locations, I mean, they’re retail locations, a lot of traffic counts, a lot of people in the neighborhood. That’s exactly our hot button.

You go back 30, 40 years in the self-storage industry and the big driver was the cheapest land you could buy to build these, so everybody bought some land behind the sewage treatment plant, under the freeway by the hobo camp. Now it’s a hobo scamp, then it’s a hobo camp. If you build one there today, you’d never rent a unit, nobody would find you.

Yeah, retail locations are great because they’re usually on heavily trafficked streets with lots of cars, lots of people seeing us. We’ve got, I don’t know, six or eight projects going now, one’s a furniture store in Orlando that is on a six-lane highway that is – I forget the name and the street right now but it’s outside of Orlando, it becomes a state highway and literally buy six floor from East to West. There’s six lanes of traffic in front of us, it doesn’t get any better.

We’re doing one, we just bought a vacant sports authority store in New Jersey, it shares a parking lot with a Home Depot which has 5,000 cars a day into the parking lot. It’s open from seven in the morning till ten at night. Those are as good as it gets and they’re all over the place, there’s not a lot of people competing with us to do that, simply because most people don’t know how to do it. They’d rather go buy that piece of dirt and fight the city for two years or four years for zoning changes and building permits or they’re not that smart or lazy but we just rather do it quicker, faster, because money has a time value, big time.

[0:16:53.8] AH: Does it surprise you that more people aren’t fighting you for those kinds of deals?

[0:16:59.3] KN: We rarely have any competition for the deals. The only time it really happens, Andrew, is when we put in some real low-ball bids. I mean, we are absolutely bottom feeders because that’s part of the profit margin. If we put in a bid for something, this thing’s been vacant for four years and the seller is really distressed because he’s not going to make mortgage payments, he still has to pay property taxes, the city is on his case because of the weeds and the appearance and he hasn’t cleaned it up, which just cost more money. If the building’s empty, you typically can’t buy insurance because the insurance companies won’t do that.

He’s not a happy camper, we offer some real low-ball prices and if we make the mistake, which we always do because we’re pretty honest, and tell the seller what we intend to do with the building, all of a sudden, his eyes light up. “Are you going to convert it to a different use?” Then he goes and tells his broker who has done nothing for four years. See if you can find another storage company or somebody else who can bid against these guys but going in up front rarely do we have competition for the site, almost never.

[0:18:07.2] AH: Is part of it related to – there’s only a certain number of companies that have the expertise to, in conversions, if you’re not a company that’s comfortable doing that, you’d rather go and build your own, even though it’s maybe not as economic a thing to do?

[0:18:20.5] KN: You know, when you’re building new, assuming you can find a piece of dirt that has the demographics you want, population, traffic counts, competition in the immediate market that you have to face and you can buy it for a reasonable price, then you have to worry about zoning. Cities don’t like storage, they don’t want us. If you have to get the land rezoned, you’re in, typically, for a battle. The cities don’t like us for three very simple reasons.

Number one, cities historically live off sales tax whereas school districts and counties live off property tax and states live off income tax. We don’t pay any sales tax, that’s why they want to have back that retail store. I mean, we tried to convert an old grocery store in Madison Wisconsin. We went to a hearing of the zoning board to get it rezoned, been vacant two years and they flat out said, “We’re not going to change it, we want a grocery store back” and the poor lady that owns it has been paying property taxes for two years and there isn’t a hundred thousand square foot grocery tenant in America today, forget it.

She’s never going to leave. We’ll go back in two years, it will still be there. Maybe there’ll be different people on the zoning board. Getting it zoned is a battle, what cities want are retail or secondly, what the city wants is the city council person over that district wants to be able to brag in their next election campaign that they brought this new business to town that creates a hundred jobs. We create too. We’re not an office building, even a CVS or a Walgreens creates 20 jobs, we don’t create anything more than two once the construction’s done.

Number three is perception, when you walk into the zoning department or the planning department or the mayor’s redevelopment apartment and say, we want to convert this former K-Mart, this former whatever, car dealership, we love car dealerships too, to storage, what they see in their mind’s eye is a 1970 vintage property with long rectangular metal buildings with orange doors, courtesy of our friends in public storage, with dented corners everywhere and a cyclone fence with concertina wire on top and dead cars and trucks parked everywhere and a couple of rottweilers running around at night, calling security, howling at the moon.

They say, “You want us to give you a permit to put up what? On a corner of main and main in our town? Not going to happen. You will make that zoning change immediately after pigs fly, so come on back when you see that pig going by.”

[0:20:45.3] AH: Right, as you can say, minus the rottweilers, I think I’ve definitely been to exactly what you just described at the rolling door. I’m sure –

[0:20:53.6] KN: Right, we don’t build those things anymore. I mean, the ones we build today or convert, look like an office building or a shopping center. If you didn’t see the sign, you couldn’t tell it was a storage facility because you’d never get permits for it but the battle is not the building permit because you’d always get the building permits but the guy in the building department might want to, you know, it is his only chance of powers, right? It might want to make you move. I’m going to have the inspectors make us move something five or six feet before giving us a permit or move a ramp somewhere.

The issue with zoning, that’s the killer and if you can’t get zoning, you can’t build it. About a third of the time, if you’re interrupted, about a third of the time the properties that we find that meet all the demographics that would work for us if it were storage are already zoned because the city screwed up and you know the population has moved in one direction or another and they didn’t changed the zoning. The sports authority I mentioned in New Jersey was in an area that was already zoned by right.

We closed on it and started construction two weeks later. We did the demo of the interior we’re going to do because that is a no brainer permit. They don’t care what you are doing if you’re tearing it down, they care if you are building it up.

[0:22:05.7] AH: Can it ever be rezoned out of what you’re currently using it for? If you are using it for storage, can a state or a county or a city rezone it to?

[0:22:17.7] KN: Prohibit that is.

[0:22:18.9] AH: To prohibit it and then do you get any compensation if they do?

[0:22:22.1] KN: Well, that’s basically what’s called a condemnation or a taking and they would have to pay from fair market value. They could also rezone the area but you would be a grandfather so you could continue to run your business. I’ve never heard of any situation where they’ve gone in on an existing facility and changed the zoning from allowing storage and every municipality has a different set of codes, so what it’s called, it’s called R3.

In this city it’s called L7 in this city for the zoning code. I’ve never heard of one being [capiscatory 0:22:52.8] but there have been some that have been taking in takings for example, where the city said, “We want this whole area to redevelop into a master plan community and we’re scraping everything” but they would have to go in and pay you for a fair market value for your asset, which always becomes a bit of a contest determining what fair market value is.

[0:23:11.3] AH: Right, how do you think about yourself and your company, as far as, on the one hand, you’re buying real estate and on the other hand, you’re an operator? Do you see yourself as primarily a real estate investor that has an operating business as well or – and how do you think your investors, what’s their primary motivation for investing with you?

[0:23:34.1] KN: It depends on the client. Again, the institutional investors are typically looking for capital appreciation in the form of an IRR. That’s the yardstick by which they measure every management firm they hire, be it for stocks or bonds or currency or forest or international or real estate or whatever. That’s, everything comes down to what’s the IRR and is it sufficient to meet our contractual agreement with our employees regarding our pension fund, okay?

Family offices are different, individuals are a different critter in that first of all, they’re taxable. Typically, what we would do with an institution on a conversion is we would buy the property, we take a year to convert it, two or three years to fill it, a year to stabilize it and so in year five or so, we start looking to sell it because an IRR is very time sensitive. The longer you hold something with the same sale price, the lower the IRR.

Institutions, if they are looking for IRR’s, we’re typically looking at a four to six-year window. Family offices on the other hand, if we get to the probate in five years where it’s worth selling, it might be better just to refinance it, pull all your capital out, which is a non-taxable transaction, still own it, still get cash flow, which then on return on equity becomes infinity, you have no more equity and own it and not have a tax bill to pay and like I said, our oldest property is 25 years. It’s been refinanced three times. It has a negative cost basis.

[0:25:08.4] AH: Are there certain areas in the country, certain kind of markets that you see as the most prospective right now?

[0:25:16.3] KN: Well again, the common wisdom is that there are certain markets that today are grossly overbuilt and we agree with that. Typically, in the sub-built cities like Houston, Dallas, San Antonio, Austin, across Florida, in Arizona and the reason is real simple, if you look at the demographics where are people moving so if you are going to build something where are you going to build? It’s where the jobs are going, where the people are going and also in Texas, you go where it’s easier to build.

Houston, in this state, doesn’t have any real zoning laws. The idea there is if you have enough money to build something, you’ve got to be smart enough and go do it. Those markets are overbuilt and it is very hard if you build something there today or buy something there today to get your proformas in terms of lease up rates or rental rates. If you’re a tenure holder, you’ll be fine because those markets with in terms of new development are slowing down dramatically but they’re problematic.

We like some of the major secondary cities. You know we’re still going to be in the top 50 MSAs. We’ve done a lot of work in Michigan and Illinois and New Jersey, we’d love to get into California but it is almost impossible here to get zoning changes and building permits but we have six sites in California and they’re all screaming. I mean, they’re just doing great. I was on the phone before we got on the call here with my head of operations telling me about one of our storage in Palm Springs and it is 97% leased and the rates are up 70% since the first of the year on new tenants coming in.

That means if something was a 100 bucks a month before, it’s 170 today. That’s good for us, not so good for them on end, that’s what the market will bear and the reason is because you can’t build anything there.

[0:27:00.9] AH: In the overbuilt markets, what do you think sort of occupancy would be or I don’t know if that’s the right term but what is the occupancy like in those sort of markets if you prefer a new entrant?

[0:27:11.3] KN: Yeah, first of all, in the self-storage industry, 85% is considered stabilized and let me explain why and what I mean. If you look at what you call the four basic food groups, you get office, industrial, multi-family and retail, typically before the pandemic because the rules are a bit screwed up right now but typically, it took about 65% occupancy to simply cover the cost of running that asset as a business. On-site salaries, taxes, insurance, utilities, janitorial, you know whatever it is, throw them all in the pot that’s what it costs.

If you add historical debt of about 65 to 70% of course depending on the interest rates, you had about 25 more basis points. Now, you typically need 90% occupancy before there’s one dime of free cash flow as a current return on the invested equity and that’s why when investors see packages from brokers selling those assets, they’re typically projecting 95, 97, 98, 99, 100% occupancy forever. The world doesn’t work that way and anybody who is not –

[0:28:17.2] AH: Right, yeah it’s a cyclical world to them.

[0:28:19.1] KN: Reminded big time in the last 12 months, right?

[0:28:21.9] AH: That’s right.

[0:28:22.6] KN: Let’s look at storage now. It takes about 40% occupancy, they had cash flow breakeven before debt service. Why? Real simple, two things, with any of those four basic food groups, when a tenant moves out, you’ve got to hire a broker to find you a new tenant and pay that broker a big old commission and you’ve got to do something called TI’s or tenant improvements. The new tenant says, “I want to move that wall on the office two feet to make it a little bigger” or “I want to change the lighting.”

In New York today, tenant improvements in an office space are 200 bucks plus a foot. None of that on the PNL is above the NOI line. It’s all below like the tooth fairy is going to pay for it. I don’t know if you have ever rented a storage unit personally or if anybody who’s going to listen to this has but we have three metal walls, a wire mesh top, a metal roll-up door, a concrete floor and no utilities. When a tenant moves out, our manager goes in and sweeps it out with a broom and re-rents it.

There are no tenant improvements, no broker’s commissions and hopefully, very little downtime. I mean, I’m in a 16-story office building. I am sitting in my office, two thirds of the floor is vacant and they’re not coming back. If you take that 40% and add the same 25 basis points for debt because the debt doesn’t know what it’s on, you need 65% occupancy to breakeven cash flow wise. If you get to 85, you are making a lot of cash.

If you get to 90, you’re doing even better. However, if you get much above 90 and what that tells me is that you’re not managing it very well because they’re all 30-day leases. You can go in and raise the rents every 30 days until some people say, “I don’t need it anymore” and move out but if you’re that full, it’s quite likely you can back fill that vacant unit pretty quickly so you are leaving a lot of money on the table. For example, in the US, all the REITs today are talking about being 93, 94 or 95% occupied but I think it’s a misnomer for two big reasons.

Number one, they typically only count sites that have hit stabilized occupancy for at least six months. Anything that they have recently built or bought that is under 85%, they don’t count and secondly, they all do their books on an accrual basis. We do ours on a cash basis, so if you have a tenant who hasn’t paid you for three months, on the first of each month you count that unit as unit as occupied. You are not getting any revenue.

If you take the REITs, just know about it, pick one, QSmart, which is the third biggest, manages, I don’t know, 13, 1,400 stores and if you look at their filings with the SCC, their averages are based on 700 stores. What happened to the other 600? They’re not in there. Anytime we get much above 90, I get pretty aggressively on top of my operations people and say, “We need to be raising rents faster and higher and quicker” because obviously the market is going to pay for it, which is that example I gave a little bit ago of this one store in the Palm Springs market, we’ve raised rents 70% since January one and not for the existing tenants. We don’t want to force all of them out but that is for new tenants coming in.

[0:31:48.7] AH: You must think a lot about consumer habits in general. I mean I think if we sort of like step back and think about it, one of the reasons, I assume why the self-storage business is an attractive business is because we have a very big consumer culture that tends to –

[0:32:03.6] KN: We’re a bunch of hoarders, we’re a nation of hoarders.

[0:32:05.6] AH: We’re bunch of hoarders, yeah.

[0:32:07.1] KN: You know, let’s cut to the chase here.

[0:32:08.2] AH: That’s right, I am thinking about two shows, I’m sure you’ve heard of them and one is Hoarders and that was different and the other of course was Storage Wars.

[0:32:15.7] KN: Yes.

[0:32:16.5] AH: I don’t know if any of your investors ever bring that up and –

[0:32:20.1] KN: Well, Storage Wars is kind of funny because it is a total scam. Let me explain how it works. Every state in the US and I am not familiar with Canadian law in this, basically that gives us as a landlord a lien on what’s in your unit, whatever you store and if you don’t pay your rent, we have the right to take that lien and execute it and auction off what’s in that unit to pay your back rent. Typically in the storage business in the States, your rent is due on the first and in almost every state, it’s late if not paid by the morning of the 6th and three things happen when that happens.

Number one, we immediately impose a late fee. Late fees run typically 10 to 20% of your rent, so if your rent is a 100 bucks the late fee is $20. We just got a 20% rent increase that month. Typically 20% of our tenants pay us regularly every month late and incur a late fee. We love them. Number two, we over lock your unit. I don’t know if you’ve ever rented a storage unit but the hatch that you put in to lock the door has two holes in it. One for you lock, one for ours, so if you don’t pay by the morning of the 6th, we go put our lock.

If somehow, you can get into the facility because most have gate codes, you know, you tailgate somebody in. The third thing we do is turn off your date code, you can’t get in. We put our lock on the other hole and until you come into the office and pay your back rent and pay your late fees, you can’t get to your unit, period. Now, what Storage Wars is, is a show designed to show these auctions. Now think about it for a second.

You have 20 grand worth of stuff in your unit and you owe me 300 bucks for two months back rent, you’re going to let me auction off 20 grand worth of stuff for $300? No, we’ve probably auctioned, I don’t know, 10,000 units in the last 28 years. Rarely, if ever, do we get the money that’s owed us and every state that we’re in, if you owe me 300 bucks and we actually sell your unit for a thousand, we got to find you and give you back the 700 excess and if we can’t find you, guess where the 700 bucks goes.

[0:34:31.5] AH: Probably the government, I’m guessing.

[0:34:32.8] KN: The state, absolutely. A hundred percent right, good guess. Ever my motto, “Hi, I’m from the government, how can I help you?” there’s no profit in it. The only reason we do the auctions, and I hate them, is we want to get that unit empty so we can rent it to somebody who might pay us and more often than not, we don’t do an auction. We call the tenant and say, “Look, you owe me 300 bucks, come on in and give me a 100 bucks and take your stuff out. If you do it by tomorrow, we’ll call it a day.”

We don’t want to do the auctions, it’s a joke. Storage Wars, we actually had them do a couple of their shows at one of our stores and they bring everything in and they stock the empty unit. It is not a real live unit. It is not a real live tenant because again, you don’t find 10 grand worth of gold coins and antiques and cars and guns and everything else.

[0:35:19.6] AH: Or Bitcoin these days, right?

[0:35:21.9] KN: Well, Bitcoin is on a computer or you can’t even find it but the – if you find firearms, we’re not allowed to sell them. They have to go to the police department. If we find vehicles, we can’t sell them, we’re not a car dealership. We have to have a licensed tow truck company come take them. Yeah, we stopped doing it. I hate it and we had a couple of rules. We can only – they paid us a lot of money for the use of the site for one day to rent to have their show, so we did a few.

[0:35:47.7] AH: It’s interesting to hear that the show is sort of built on that lie. I think –

[0:35:54.0] KN: It’s all planted. I mean, think about it.

[0:35:55.7] AH: Yeah, no and I am not surprised it’s planted. I think it appeals to sort of the treasure hunter in most.

[0:36:01.7] KN: Oh, you know what happened, which is interesting, we used to get about 20% of what we were owed in these auctions. If you owed me 100 bucks, we’d be happier than the proverbial pig in mud if we got 20 bucks in the auction then that show came out and we’ve had these auctions. We had to publicize them in the local newspapers and we’d have four people show up and they all knew each other and they took turns bidding.

“All right, Fred you can buy this unit. Sam, you buy that one. Sally, you buy this one and Nancy, you buy that one” they wouldn’t bid against each other and then they take whatever was in there, they put half in the dumpster and the other half they take to the local flee market on Saturday. That is where all of that stuff comes from. Well, the show came out and all of a sudden instead of four, we had 30 even 40 people showing up. They were all looking for hidden treasure, cheap.

You know in a couple of places, we had to call cops to break up the group. We have since changed, we don’t do any auctions on the sites anymore. There’s a couple of firms in the industry, one that we use that does them all online electronically. If there is a unit that we need to sell because we couldn’t work out a deal with the tenant or we couldn’t find them, we open the door, which our lease lets us do, we take pictures of the unit, we give it to this company they’re based in Phoenix and they put it on the Internet and they have a list of like 400,000 bidders that they’ve been selling to over the years.

Anybody can bid online and then once they bid, if they win the bid, they’ve got 48 hours to come pick up the stuff or we relock it and we put it back on the auction again. If the unit’s in Palm Springs and you’re a bidder in Toronto, you have 48 hours to come pick it up or call us and you can rent that unit and keep the stuff there until you get around to it.

[0:37:42.9] AH: Right.

[0:37:43.3] KN: Our take has gone from 20 to about 40 with the online auctions and we don’t have the people there anymore, which is I mean having 30 or 40 people in the facility all crowding around trying to look in the door and bid is a disaster.

[0:37:59.1] AH: Well especially these days, right?

[0:38:00.9] KN: Well, in these days you couldn’t because of COVID.

[0:38:03.2] AH: Yeah, how does the storage business do in a strong economy and how does it do in a weak economy?

[0:38:11.0] KN: Well historically, the consensus was that storage was recession-proof. I don’t think anything is recession-proof, maybe except beer, that’s it, but we are recession resistant. Let me give you an example, if you buy something, be it a storage facility, a shopping center, a stock or whatever at a dollar and the market goes into tank and it goes to 50 cents, you need a 100% increase to get back to even. Alternately, if you buy it for a dollar and the market is bad and goes to 90 cents, you need a 12% increase to get back to even.

The trick in making money is to not lose it first and so what storage does is we tend to be recession resistant, not recession-proof, so on bad markets, hotels go in, forgetting the COVID period here, which is unique in my many, many years of doing this but hotels in bad markets would go down 50 to 60%. Very tough to come back to that in a reasonable period of time. Storage in bad markets, we tend maybe to lose a little occupancy.

Remember, we only need 65 to breakeven after debt services, so we have a lot of cushion there and the ultimate proof, if anybody doesn’t believe me, which I would certainly understand is go look at the CMBS default rate. CMBS is the collateralized mortgage backed securities and look at the default rates and what you’ll find is again, before the pandemic, hotels around eight to 10%, retail’s around six, apartments around four, storage is around 0.5.

[0:39:46.2] AH: Quite the difference.

[0:39:47.8] KN: Because again, we just – when things get bad, people tend to hunker down and they’ll put their stuff in storage and get rid of the office or the store or the bigger house to get an apartment or whatever it is and when times are good, they’re buying stuff. They have more stuff. We love stuff.

[0:40:06.6] AH: Yeah, we’re an economy and a culture built on stuff, right?

[0:40:09.7] KN: There is, remember, if you remember the comedian George Carlin, who has since passed away? I love the guy, he was just crazy funny and filthy dirty but funny. He did a whole shtick and you can find that on YouTube on self-storage, on storing all the stuff he doesn’t need. It’s hysterical. If anybody has any takeaway, go to YouTube, look up George Carlin and look for his storage rant of about five minutes. It’s funny, very funny.

[0:40:34.7] AH: He had his finger on the pulse of a lot of issues. I’ve not seen that one but I definitely watched a lot of his other – his political rants and I’m a fan.

[0:40:45.9] KN: They’re amazing. I saw him live once in Vegas and he was hysterical.

[0:40:51.2] AH: I’m jealous. I wish I’d been, it was sort of before my time. I wish I’d been around for that. Okay, we’ll wrap it up there. Kenneth Nitzberg of Devon Self-Storage, thanks so much for your time. We learned a lot here.

[0:41:03.1] KN: My pleasure.

[0:41:03.9] AH: Thank you to our listeners of The PitchBoard Podcast. We appreciate you listening in as well. We’ll see you here next time. Okay, thanks.

[0:41:12.1] KN: All right, take care.


[0:41:13.6] JM: Thanks for joining us on this episode of The Pitch Podcast. Make sure you check us out online at If you liked our podcast today, please make sure to subscribe to The Pitch Podcast so you don’t miss an episode.


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