Josh Cantwell: So, hey there. Welcome back to Accelerated Real Estate Investor with Josh Cantwell. I’m your host. And today, I’ve got a fantastic Part 2 follow-up podcast interview with Scott Krone. Scott is the owner/founder of Coda Management, and they hang their hat on doing brand-new self-storage development and building. They also do self-storage conversion.

If you listen to my first podcast episode with Scott back in July of 2020, you can check that out at AcceleratedInvestorPodcast.com, or you can find that on Spotify or iTunes, you can listen to Episode number 1. This Episode number 2, Scott and I are going to specifically talk about the changes that have happened in the self-storage business because of the pandemic-related behavior changes of people. Number two, we’re going to talk about some of the resources that Scott uses to evaluate markets. One of them is Radius.com. Write that down.

We’re going to talk to Scott a little bit about how he is protecting his investments through recessionary-resistant investments in self-storage, specifically in the path of progress. And number four, we’re going to talk about scale, people, and software and how that’s helped Scott build a massive self-storage portfolio. You’re going to love this follow-up interview with Scott Krone from Coda Management and One Stop Self Storage. Again, don’t forget to listen to the first interview with Scott from July of 2020. Here we go with interview number two.

[INTERVIEW]

Josh Cantwell: So, hey Scott, listen, welcome back to Accelerated Investor, my friend. It’s been almost two years. So, welcome back. I’m excited to peel back the onion again on self-storage and conversions and see what’s new. Thanks for joining me.

Scott Krone: It’s great to be back. Thanks for having me again.

Josh Cantwell: Absolutely, guys. So, for my audience, we released, Scott and I recorded almost two years ago in July of 2020. You can go to AcceleratedInvestorPodcast.com or go right to Spotify or to iTunes to find that episode. And Scott and I talked back then about conversions, a lot of whether it be factories, whether it was the old Lincoln log that you guys bought and converted, whether it was a Kmart or an old Sears is being converted to self-storage. That was when COVID had first hit. We didn’t realize the impact of how people’s habits would change.

So, I’m interested, Scott, for my own purposes because I’m interested in investing more in self-storage. Tell us a little bit about how the market’s changed over the last two years. How have people’s behaviors changed? And how has it impacted the self-storage investing business?

Scott Krone: Well, we see self-storage is addressing people’s needs and that we can serve them because they’re going through a difficult time. The difference now is that how people use their homes has changed. Now, it’s a part-time school, it’s a part-time gym, it’s a part-time office. And I think less people are going back full– I mean, I should say the opposite way. More people are going back to the office less than what they were before. So, they might be going back two or three days but not full time.

But then they still need a place to work. So, that extra room where they had stuff now has become an office and they need more space. So, whether it be in the basement or an extra bedroom or whatever it may be, which was storage is now becoming a utilitarian purpose. And so, as a result of that, they need more storage.

Josh Cantwell: So, somebody has the same house, and we know that one of the metrics that we track with our business is how long people are staying in their homes. And that has almost quadrupled during the pandemic where people just aren’t leaving. There are less homes for sale. People are willing to kind of hunker down with the space that they have. But like you just said, now it’s their home gym, now it’s their office, now it’s the schooling for the kids.

So, how have you guys capitalized on that? What bets did you make maybe two years ago or five years ago? Give us an example of how that’s paid off because of the pandemic and because of how people have changed their behavior and now needing more space to store their stuff. Maybe this is something that you didn’t anticipate happening that worked in your favor because of the pandemic.

Scott Krone: Well, the other thing we’ve experienced is that over 50% of our customers are businesses. So, supply chain issues with the pandemic have greatly impacted the need, and I need to buy a thousand widgets now because I won’t be able to get them later and I need a place to store the widgets. We just had a vendor call us up. They’re building an apartment building near one of our facilities, and they have to deliver all their appliances now. And so, they need a place to deliver all their appliances. And so, they’re looking at taking my 12,000 square feet.

Josh Cantwell: Wow.

Scott Krone: Because they know that they can’t get them normally. When they get them, they have to take them. They don’t have a choice. So, in that sense, that has changed on the business side. How we’ve been planning for it, I think the pandemic has changed the economy.

We were betting on a recession. We bet on recessionary markets with our self-storage. That’s why we moved into this because of how well it does in recessionary markets. And that’s why I deemed it recessionary resistant. A lot of people deemed it recessionary proof. I don’t think there’s any proof within real estate, let alone life. Things are always open to change.

So, as a result of that, we’ve been gearing up for this recession. And I believe this recession is two negative downward quarters or two months. And I think that we’re in that first cycle so that they’re not wanting to call it that, but there’s every indicator that we’re in a recession. In fact, I gave a speech about it back in March when I won a leadership award in the industry. And I was predicting that this was happening. I was comparing this to 1979, and the correlations between the two time periods is uncanny, except for now, when I did– here’s a funny thing, I compare the price of fuel. In 1979, it was $0.85 and adjusted to $2.35. I went to the pump yesterday. It was over $6 per gallon. So, we’re much higher than we were in 1979.

Josh Cantwell: So, I haven’t seen or heard the comparison between today and 1979. Tell me more about that. What comparisons, what correlations are you seeing that we should know about?

Scott Krone: Well, I looked at unemployment. They’re both around 6 million. People are now actually getting Tesla. Elon Musk was saying, “Hey, we’re pulling back. We’re starting to lay people off after we’ve had this shortage of people who are not going back into the workforce.” We were looking at housing starts. They’re exactly the same. We’re looking at the rate of inflation. We’re actually now higher than what we were in 1979, gas prices when OPEC did it.

The other interesting thing was Russia. Russia invaded Afghanistan, and now, they even invaded Ukraine, and how that’s impacted the world economy. And so, I was looking at all those, and then the GPI and what was happening with the GPI. But back in March, the invert of the U-curve actually hit zero across from the positive and a negative. And so, that was one of the last indicators for me that this is going into a recessionary market. And the funny thing that I compared was the US Olympic hockey team. In 1980, they won the Miracle on Ice. This year, quarterfinal loss. So, they didn’t do as well. So, that was the one hope.

Josh Cantwell: That one funny comparison.

Scott Krone: The one funny comparison, yeah.

Josh Cantwell: Scott, in your self-storage investing business and doing your conversions, prepping for a pandemic-induced recession, that didn’t happen, obviously, with the lack of supply. The housing values went up. And now, it’s also inflation happened.

So, the recession now is not really pandemic-induced, it’s really Federal Reserve-induced because of pushing up the cost of money. Either way, this recession is going to happen over the next six months to two years. So, you plan for it. It’s happening regardless. So, how will that benefit the self-storage business? When you say self-storage is recession-resistant, how so? And how will that actually help you if there is a recession? Or how is the self-storage business recessionary resistant? And what could an investor, whether they’re an active operator or a limited partner, how do you calm them down a little bit to say this is why you want to be in self-storage?

Scott Krone: Well, we went back and looked at every major recession since 1979, and we compared them in terms of what was happening with the GDI, and then also, occupancy within self-storage. And we overlaid these two charts, and every time there was a recession, self-storage went down 1% and then rise. And so, it’s been over 90% in every major recession and continuing to rise.

And the reason is that it’s addressing change. People don’t like change. And it’s a difficult time. And self-storage helps alleviate that difficult time. So, that’s what we’re focusing on. And so, that change could be like they have to downsize. It could be they’ve lost their house. They have to move to a different city to take a different job. It could be divorce. A lot of things happen when people have a little bit of financial pressure on them, and as a result of it, that causes a change in the pressure. And it’s a lot easier to put things into self-storage than it is to address them on a bigger scale.

Josh Cantwell: I like it. I like it a lot. I also think about the people who have wanted to buy a house who are the millennial generation that’s now in their 30s. They’re hitting 35 years old, their prime house-buying mode, but they’re forming households. Right now, there are 128 million households in our country versus during the last recession of 2007, 2008, 2009, there were only 116 million households. Those households need a house to live in. They’re accumulating more stuff. They’re getting married. They’re forming partnerships. They’re having children. They need a house.

But as we’ve seen the cost of housing has gone up 35% to 38% in the last two years since the pandemic hit, so houses are way more expensive. So, if you’re in accumulation mode, accumulation of stuff, you’ve got to find somewhere to put that because if the house values just went up by 30% or 35% and you can’t afford as much house as you really probably need, you can’t afford the square footage that you want because prices just jump by 35%, but you’re accumulating more stuff – cribs, highchairs, another car, more workout equipment, just everything that a 35-year-old family would want, but they can’t afford the house that they want, I would think those people are also maybe buying a house a little bit smaller than they expected and needing some self-storage space to store their extra stuff. Have you seen that? Like, this is just my gut. Based on those metrics, is that something that you’ve also seen in your business?

Scott Krone: Absolutely. But it’s not just the value of the homes that have gone up, but with the interest rates climbing, the cost of the home, so they can’t afford as much. And so, it’s a combination. It’s not just that the price has gone up, but if the interest rate is lower, you can effectively buy more. And so, those two pressures are definitely causing.

And you mentioned earlier that it is not necessarily the result of the recession, but I do believe that the recession had an impact because of all the government spending. So, now that with all the government spending, they don’t have any more tools at their disposal to offset what’s happening. And so, the only thing they can do is raise the interest rate in order to stop the inflation, which is going to slow down the housing market. It’s going to slow down all these other industries because people can’t afford as much.

Josh Cantwell: Right. And I can concur on the use of businesses using self-storage. We had a lease that came up in September of 2020. We had an office space for about five years. Nice, beautiful class-A office space. We decided to let it go because nobody was going to the office. So, just the lease was up, the term was up. We decided to let it go. Well, what are we going to do with all of our desks, printer, commercial-sized printer, stuff that was in the kitchens, cubicles, chairs, conference room tables, conference room chairs? It all went into self-storage. So, we’re one of those business customers that used it.

Now, we just bought a new apartment complex. It’s a 300-unit with 8000 square foot management office. So, we’re taking that over, part of it for the property management, part of it for our HQ office. My CFO, my directors, some of my people are going to move back in there, and we’re going to slide the stuff finally out of self-storage and move it back in there. So, I’m one of those customers that you probably didn’t see needing your services that actually used it.

So, Scott, going forward now. So, we’re recording this, it’s June 28^th. This is going to be released probably in July pretty soon because it’s very timely based on what’s going on in the market. What metrics are you looking at today to make future investments in self-storage? What things are you looking out for regarding a recession – the cost of money, cap rates, occupancy rates? Maybe geographically, what areas are you bullish on? Or are you pulling back from doing new deals because of a possible recession coming?

Scott Krone: I wouldn’t say we’re pulling back, but we’re definitely being more, I don’t know if conservative is the right word, but we’re looking harder at the underwriting in terms of not just the demographics, but that’s always the main factor – demographics. What’s happening? Are people moving in? Are they moving out? But then also, more importantly, the cost, so the cost of construction. We’re just seeing huge spikes. So, we’re making sure that our underwriting is really conservative on the construction side of things in order to support it. Because if your costs are out of whack, then the economics of the deal doesn’t work. So, what we’re really focusing on is on the construction side of things to make sure that our costs are accurate.

Josh Cantwell: Yeah. Got it. So, you’re bullish on still doing more self-storage, more conversions, whether it’s an old building that was being used for a different purpose and doing the conversion, but doing it still where people are moving in the path of progress because people are still moving. There’s still a lot of bullishness happening. People moving to Arizona, specifically Phoenix; people moving to Texas, specifically Dallas, Fort Worth; and people moving to Florida, specifically Orlando. If I had to bet on three markets for 20 years from now, those would be the three that I would bet on. So, because of the population migration still moving to those places and people still work from home, there’s still lots of opportunity to kind of do a conversion or build new in the path of that progress because people are going to need, they’re going to move there, they’re going to store the stuff. Is that right?

Scott Krone: Absolutely. And we’re looking at both, new construction as well as conversions, and that’s driven by what the marketplace is. The one that we’re looking at for new construction, the cost of land was so cheap that there wasn’t any built-in there to do it. So, it makes sense because of how inexpensively we were able to pick up the land. Obviously, it entailed entitlements, we had to reach. We had to rezone it for self-storage. It was zoned agricultural. And so, we had to change it.

And then the other one is a conversion. And so, in both of those markets, we’re looking at what is happening in that market. Is it expanding or contracting? We want to make sure that the markets are expanding in those locations.

Josh Cantwell: When you’re looking at expansion, you’re looking at things, like I look at on the multifamily side, which is population growth, income growth, rent growth, household formation growth. Are those some of the things that you look at? And if other things, what are they?

Scott Krone: Those are all the exact same things. In fact, there’s a lot of correlation between multifamily and self-storage. In fact, we’ve had this intern who I’ve known since he was born, and then he wanted to explore a different area of real estate. So, he’s working with a massive multifamily developer out of the southeast.

And the first thing he said to me was like, “I can’t believe how similar these things were.” And I thought, I kept telling you it’s apartments without toilets. I mean, that’s where I came from. I came from the whole multifamily world. He goes, “All the reports, all the indicators, all the things are exactly the same. It’s just a more simplistic model.” And he finally saw the light working in for multifamily company across the country compared to what we were doing, he’s like, “Yeah, yours is just smaller,” smaller in cost basis. And so, we compared the same things.

Josh Cantwell: Scott, I’m always curious to see what other successful operators and general partners, what kind of research and what resources they’re using to get their data. So, I’m always looking for that kind of extra silver bullet to add on some of the different reports and different research places that I go. Is there anything that you really like? Is there a backbone, a certain report, or a certain website or a certain data provider that you lean on to get some of the data that you’re talking about?

Scott Krone: Well, we do a couple of different things. One, we hire a feasibility consultant, and so, they’ll pull from a broader range than what we can. And so, they’re always looking at each of those indicators as well, and they put that into that report. And so, that is one of the things that we do rely upon. But then we also use software. For instance, we use Radius. Radius gives us a good snapshot of what’s happening in the marketplace in terms of self-storage, in terms of rental price, occupancy, how many lockers, supply index, what’s coming out in the market, all those different things.

Josh Cantwell: Love it, yup. Sounds good to me. CoStar’s a great kind of well-known commercial resource as well. Radius is something I’ve heard of before and used this as well. So, great stuff there. Scott, I’m curious when it comes to branding, like I love to hear whether it’s an apartment operator or self-storage operator, it could be an office, I’d love to hear how they’re separating themselves and being different in the marketplace because you build a 10×10 or a 10×20 self-storage facility, locker, garages, but then you’ve got to find a way to be slightly different than the next guy who’s maybe down the street.

We have certain colors and brands that we do on every one of our buildings. We have a certain finished product. When we do a conversion of one of our multifamily units, we want a certain type of backsplash, a certain countertop, certain appliances, certain color schemes so that when somebody walks into a Freeland apartment building, whether that’s the exterior, the interior, the management office, the parking lot, they all look the same.

So, I know you do a number of things to brand your businesses to be different and to have a brand have a backbone. So, when somebody says, “Hey, this is one of Coda Management’s deals, this is a Coda Management product. This, I know what I’m going to get and I can see it in the marketplace. So, what things have you done to brand yourself or market yourself to really build that regular, recurring sort of credibility within your portfolio that people recognize?

Scott Krone: Well, the first thing that we do is we actually create our own brand, which is One Stop Self Storage. We felt that when we were looking at the performance of the reach was not there. They were just milking us in terms of raising their expenses or their salaries and they’re having more people there charging us for unknown fees, almost to the tune of 40%.

And so, these were some of the major things, the reason why we started our own brand, One Stop Self Storage, and beginning with our logo, one stop for all your self-storage needs. Some of the things, we also refer to our customers as clients as opposed to customers. And we’re training our staff to find out how they can solve their clients’ problems because we feel that it’s not– the first thing you say is how much is a 10×10. Well, there is no distinction then other than pricing at that point in time. I mean, we’re all renting a box, but if we’re solving a problem, that will give us a greater rapport with the client in terms of understanding what it is they need.

So, for instance, are you planning on coming here every day? Are you planning on coming here every six months? Then, obviously, we can alter the price structure based upon if you’re coming here every six months, then you don’t need one right by the door. You can pay a little bit less and be maybe a little bit further walk or up on the second or third, fourth floor, whatever it may be that it can serve you better. Understanding what size, all these different things that we can go into to understand what the challenges that the person is facing so that we can solve those challenges.

And so, that begins with the training of our staff. And that’s one of the things that, for instance, this week, we’re going to continue to have another continuation call of how to further train our staff to make sure that they’re all responding the exact same way from everything from how they answer the phone to when the person first comes in, all those sorts of things. So, we’re having that consistent message across the board.

And it’s also why I’m wearing this hat. The Toledo Mud Hens, they’re one of our neighbors. And they’re like, we want to support our local businesses and we want to support our local universities. And so, those are some of the things that we are emphasizing with our staff is let’s see how we can work within the community so that they know that we’re contributing to the community as a part of– I mean, a lot of people think that self-storage is not really contributing to the community, but we are serving the community and we want to make sure that everybody knows that.

Josh Cantwell: Yeah, that’s great stuff, Scott. I love it. You mentioned your team, and I preached on this podcast and to my own team that really good entrepreneurs know that the business of running a business is the people. The business of business is people, like running a business and being good at it and doing it on a daily basis is really about focusing on your people. And you mentioning training your people a certain way, talking to them a certain way, making sure they talk to the client a certain way, not a customer, we refer to our people as residents, not tenants, and we want them to dress and look a certain way.

But how important, like software is the great silver bullet in a business. It also could be the devil if it’s not used properly. And when people are trained well and then use software appropriately, I think that’s the ultimate mix to make a business really work, training the people, and then we tell our people if it’s not in the software, it didn’t happen because it’s the only way you can scale. What are your thoughts on that software and people? How important are they, and to be adopting and using them and growing them to grow your self-storage business?

Scott Krone: Oh, absolutely. Especially with the pandemic, when people didn’t want to interact with people, I mean, the movement within self-storage was to go personless, that you don’t even have to walk in, you don’t even have to interact with a single person. You could just find your unit, have your lock, lock it up, and not have to deal with someone.

And we still think there’s a combination. We have some facilities which are totally remote, 100%. And so, we’re relying upon software predominantly. But then we saw the call center. You have to have that personal interaction because if someone can’t find what they’re looking for, then they’re going to go someplace else. But if someone walks into a self-storage facility, the conversion rate should be 90%.

And so, when we’re looking at those metrics, what is our conversion rate? And what we found was the biggest disconnect was when people have an expectation and when they walk in, it’s not met. And so, we want to make sure that those expectations are actually in alignment. So, when they walk in, we can convert it.

Josh Cantwell: Love it. So, I love to hear that metric. That sounded very important, that 90% conversion. Tell me about that. I mean, if somebody walks into a facility, they obviously know they’re walking into a self-storage facility. They’re not walking into a park course. They’re not walking into a restaurant. It’s obviously self-storage, they have a need they’re walking into. So, that 90% number, where did you come up with that? And how do you hold your team accountable to meeting it?

Scott Krone: Well, it’s a standard that we get from the Self Storage Association in terms of how they do their metrics across the board. And so, we were part of those associations to make sure that we’re seeing the latest trends and knowing what’s going on and the growth and things that are changing. And so, that’s where we got the data from was the Self Storage Association.

But what we’re again noticing is how we’re tracking that. So, we’re beginning it from the point of a click in terms of social media all the way to a reservation, and then once they come in, actually to a closing. And so, we’re looking at the whole metrics all the way down from how effective our advertising is to either a click or a phone call or someone going onto a computer to log in. Each of those things, we’re monitoring the conversion rate all the way down to when we get a signed contract.

Josh Cantwell: Love it. Fantastic stuff. Scott, listen, this is great information, guys, for my team or my audience. Go back, July of 2020, Scott and I recorded the first episode with Scott on the Accelerated Investor podcast. Obviously, this one coming about two years later. Fantastic. If you listen to Episode 1 from July of 2020, and now, this one back to back, find a way to listen to them both. And that’s going to really put together a lot of the pieces for you about how to invest in self-storage, the foundation of it, and then a lot of the changes that have happened over the past two years.

Scott, you’ve been a fantastic resource for me and for my audience. If some of my team or my audience wants to engage with you, whether it’s as a limited partner where maybe they have a JV deal, just learn more about your business, where can they go to get more information?

Scott Krone: Well, I appreciate that, Josh, and thanks. And what we offered, I believe, the last time was a feasibility study, which was a report about how we got to it. And I mentioned that feasibility study earlier. If anyone does mention the show, we will give them that, but we’ve also developed a self-storage analyzing tool. And so, we will give them that, which they can take. All the formulas are plugged in. All they have to do is plug in some assumptions, and we’ll tell you how profitable the deal is. And so, we will pour that on. They can reach out to us at info@codamg.com, that’s info@codamg.com.

Josh Cantwell: Perfect stuff, Scott. Listen, thanks so much for carving out some time. I know you’re super busy. Good luck with your investing moving forward, and thanks for joining me on Accelerated Investor.

Scott Krone: Thank you very much. I’ve always enjoyed being together.

[CLOSING]

Josh Cantwell: So, hey there. Listen, I hope you enjoyed that episode with Scott. Man, what a wealth of information around the self-storage business. And I love it because there are so many connections between self-storage and multifamily. So, that was really helpful for me to hear how Scott’s navigating this post-pandemic world of self-storage investing, as well as making his business recessionary-resistant as he talked about fantastic stuff. Don’t forget to reach out to Scott at info@codamg.com.

And if you’re looking for places to really be around guys like Scott, be around guys like me, be around other operators that are really doing a lot in today’s market, you should go apply to be part of my mastermind. It’s called the Forever Passive Income Mastermind. We’ve got self-storage operators, multifamily operators, private investors, and you can apply to be part of that mastermind at JoshCantwellCoaching.com. We’ll see you next time on Accelerated Real Estate Investor. Take care.