History recap: The Great Recession

In 2008, at the brink of the financial collapse now known as the great recession, autoworkers in Detroit watched as GM closed 11 factories, shut down 40-percent of its 6,000 dealerships, and cut more than 20,000 jobs. In one fell swoop, an area already known for its population decline, spiraled downward fast. As the government swooped in to bail out the “Big 3” automakers, the damage was already beginning. The country slipped into a financial recession shortly thereafter.

If, like me, you were curious about the impact the recession had on Metro Detroit’s self storage market, please read ahead.

“In looking back at the recession, one of the first signs of distress was the automotive market and Michigan was one of the first markets to lose occupancy.”

-Brett Hatcher, senior vice president of investments, The Hatcher Storage Group of Marcus & Millichap

Hatcher, a prominent real estate broker specializing in self storage properties in the State of Michigan, added that rental rates went down as well.

"When we saw the loss of jobs from the big automotive companies, we saw the loss of discretionary spending. So when tenants have to make payments such as house, car, utilities, cell phone and groceries, the least important tends to be the storage unit payment.”

On acquiring Michigan self storage facilities during the recession from 2008-2010, Peter Spickenagel, chief executive officer of Citizen Storage in Royal Oak, Michigan, stated, “At the time, my previous employers were buying cheap. This appeared to have had more to do with expanded cap rates, low occupancies, and properties that may have been over-leveraged. The recession played a part in the low occupancies, but poor operations at some facilities also played a role.”

Spickenagel was vice president of operations for a Michigan-based self storage company that once had over 80 facilities under its umbrella prior to selling part of its portfolio to a REIT for reportedly over $240 million in 2015.

Is history repeating itself?

On November 26, 2018, GM announced the slashing of over 14,000 jobs, and the closing of eight plants. These plants include five factories in North America; three of them in Metro Detroit. On January 13, 2019, Bloomberg released an article on what economists and media have dubbed the “car recession”, states the overcapacity plaguing U.S. automakers is the equivalent of 10 excess plants which would account for at least 20,000 jobs directly, and thousands more as it ripples through the suppliers and support services to the massive industry. An estimate from The New York Times indicates three additional jobs were lost for every one cut at the plant.

But local operators are not getting nervous just yet. Regarding concerns of plants closing in the local markets, Adam Pogoda, director of acquisitions for Pogoda Companies says, “Really, it’s more that American consumers are shifting their tastes away from sedans with gas being so cheap and changing tastes. I think the auto companies see the writing on the wall and know that the boom times won’t last forever and are being proactive with lessons learned from 2008. Michigan’s economy is more diverse than it was in 2008 and for every “plant closing” article, you read one about 'Ford adding 1,000 jobs at this other plant’ or ‘Rivian gets a $700M funding round.’

Storage is still doing well in Michigan. Although, we’re starting to see the end of double-digit rent increases year over year, and have moved back towards more modest inflationary type increases. 

"I think all of the new supply is going to hurt us in a lot of submarkets much more than any 'car recession'," added Pogoda.

Pogoda Companies is one of Michigan’s largest self storage operators and brokers with over 3 million square feet of self storage space in Michigan and Ohio.

What can data tell us?

In reviewing the fundamentals in Metro Detroit, we are finding that the economy is already slowing. As you can see in the chart below, Detroit's employment growth has started to lag behind the rest of the nation.

Employment growth is the largest incremental driver of self storage demand (see: Unpacking the Truth) and it is having a slight impact on the self storage market. Asking rates in the metro are trending down low single digit. This is despite the metro having very little relative supply growth. Detroit has had a 1.3% annual supply growth compound annual growth rate over the last three years versus the top 50 markets average of 3.7%.

The outlook for Detroit’s automotive industry is positive in spite of the layoffs and plant closings. GM’s move is said to be one of strategic repositioning in its effort to remain competitive in a shifting consumer landscape. GM will focus on electric vehicles and autonomous driving techonlogy, in addition to streamlining the number of models it produces. With these changes, sources estimate that it will amount to around $6 billion in savings by end of 2020.

For more information on Storage in Detroit, the ‘car recession’, or advice on the best coney dog in Michigan, drop me a line.

Theresa Gallas

Theresa is Chief Business Development Officer for Union Realtime and is responsible for leading the company’s growth and managing client relationships. She has over 10 year’s experience in the self storage industry. Prior to joining Union Realtime, Theresa was the co-founder of List Self Storage, an online platform for marketing and selling self storage properties nationwide. She currently serves as Chairwoman of the national Self Storage Association’s Women’s Council and is a committee member with its Best Practices Group. Theresa is a licensed real estate professional in the State of Michigan and has been active in the commercial real estate industry for over 13 years. She received a B.S. in Political Science from Oakland University. When Theresa is not attending self storage events, she enjoys spending time with her son and pet rabbit, Stu.