Current Economic Climate – Wednesday March 18th, 2020
The present economic headwinds facing Canada have intensified significantly. Within the past week, a price war in the oil markets, as well as reduced economic activity across the globe has reduced the price of oil by up to 50% with Canadian Select prices (the price that we sell our oil to the US due to pipeline constrains) hit $7.60 USD a barrel, the lowest level on record. This will have a massive impact on the already suffering energy sector in the country as well as in the revenues paid to governments across the country. To make matters worse, the Covid-19 Pandemic is causing widespread panic and the economic impacts are large and will not be fully understood for at least a few months. As of today, March 18, 2020, the TSX has fallen 27% in the past month and is expected to continue to fall in the short term.
To say the least, the current economic snapshot is bleak at best. The Federal government has introduced an 82 Billion dollar aid package and only time will tell if that is enough to bridge the gap caused by these unprecedented economic times.
New Forecasts
The most recent predictions are for the impact of the Covid-19 virus to last a few months at minimum and possibly into Q4 2020. This prediction has caused RBC economists to say they expect a recession in Q2 and Q3 of 2020. My hunch is that due to the rail blockades in February 2020 and general slowdown of the Canadian Economy seen in Q4 2019 (Stats Canada has revised GDP growth to 0.3% for that period), Canada may enter a recession sooner than these predictions. Additionally, before the most recent shocks to the Canadian economy, GDP growth predictions had already been revised downward. This trend is expected to continue if not speed up now due to the global economic crisis.
Recovery
Unfortunately, I do not possess a crystal ball and can’t tell you when the Covid-19 will start to show signs of lessening however, we can look to past downturns to see how the storage industry fares in trying economic times.
Historical Track Record
Over the past 20 years we have seen 3 major economic cycles in North American. The dot com bubble burst in 2000-2001, We saw storage revenues continue to grow year on year during this period. The mortgage melt downs in 2008-2009 in which we did see a fall off of both occupancy and rental rates however at a much lower rate than seen in the overall economy. This was also true for the energy crisis in Canada in 2015-2019. My personal experiences are with the Alberta market in 2015-2019. I have done work in the major centers on existing and new Class A facilities. In these markets we saw commercial real estate fall between 25-40% and in some cases such as the downtown office market in Calgary, even more. During the same period, we saw previously stabilized Class A facilities have valuations decline between 8-12%. This was due to slight decreases in both occupancy and then later in the downturn rental rates. By the end of 2019, these valuation reductions had been reversed and these facilities showed similar values to the pre downturn valuations. This was proven out by sales in Edmonton and surrounding areas in late 2019.
Reasons for Recession Resistance
Typically, a Self-storage facility will have a diverse pool of tenants renting storage space as opposed to a single user type found in commercial, multifamily and office asset classes. This diverse client base will shelter the self-storage asset class from some of the default risks seen in most commercial and multifamily asset classes during an economic downturn. Additionally, the number of tenants in most modern Storage facilities is large; this helps spread the default risk to a wider pool of tenants than what is seen in other asset classes. These factors provide a great deal of diversification that helps buffer the self-storage asset class from some downward economic shocks.
During an economic downturn, we see increased mobility with people moving to find new jobs or downsizing into more affordable accommodations or move in with family. Additionally, with businesses closing, some owners will move inventory and equipment into storage with hope that better economic times will allow them to reopen their business or move back into a larger space. This uptick in storage use will usually start a few months into a downturn and last for the first year. After this initial increase in occupancies, they will tend to slowly start to bleed off.
Covid-19 Impacts
The impacts on the storage industry caused by the Covid-19 pandemic are twofold. The pandemic will cause an economic downturn and those effects are detailed above. The second thing that will be caused by this Pandemic will be a change in customer behavior in the storage industry. At present, everyone is being asked to socially distance themselves and to stay at home. As of today, March 18, 2020 a shelter in place order has yet to be issues in Canada however this has happened in other countries and in parts of the United States. This will more than likely result in fewer rentals of new units however it will also more than likely reduce the number of move outs in the short term. After the advisories to stay at home are lifted, it would be expected that there may be some pent-up demand for move outs and this could temporarily reduce occupancies in some facilities. After this period, leasing would be expected to increase as well as we move into a more active business season and this should replace any move outs that take place after the stay at home advisories are lifted.
Conclusions
At present, all signs point to the economic downturn caused by the Covid-19 pandemic to be sharp but also to lessen quickly once the pace of infection slows and life starts to go back to normal. Assuming this is the case, we should see storage demand start to pick up by Q3 of 2020 as life returns to normal. I would expect that any occupancy losses will be made up quickly near the end of summer which is also typically the more robust rental season in Canada as well. Unlike the stock market which is predicted to suffer throughout this downturn and then slowly recover into 2021, valuations in storage facilities should remain stable as investors look for more stable asset classes and the cost of capital is reduced due to lower interest rates.
Please feel free to reach out to Patrick Wood with any questions you might have in these trying times. Patrick@Dezwood.ca
Patrick Wood is an exclusive advisor to NationWide Self Storage and the past Director Canadian Self Storage Valuation Services responsible for managing the valuation team and all self storage property valuations and appraisals across Canada totaling approximately $1,461,000,000. Click here to read his full biography