This post first appeared on Minyanville.
Now's the time to put that old cliché, “necessity is the mother of invention,” to the test, because we desperately need banks. Lots of them.
Most of the ones we have are essentially insolvent, surviving primarily on generous donations from the American taxpayer. Outraged about the AIG (AIG) debacle? How about Bank of America (BAC), which made 2 horrendous buyout decisions that nearly torpedoed the bank - Countrywide in late 2007, then Merrill Lynch just a year later. Nevertheless, B of A still received hundreds of billions in government guarantees, cash, and loans - and CEO Ken Lewis still has his job, despite running the company into the ground.
Meanwhile, banking clients are seeing credit lines chopped, fees increased, services suspended, and interest rates reduced to just a shade more than a slap in the face.
As a result of the competition just to stay alive, opportunities in the banking sector are substantial. So substantial, in fact, that both Goldman Sachs (GS) and Morgan Stanley (MS) morphed into bank holding companies late last year. The move was partly to allow the struggling firms to tap government-backed debt markets, but also to take advantage of the impending void in the country's banking system.
Far away from the ivory towers of lower Manhattan, a few intrepid bankers are seeking to profit from these troubled times by founding small community-focused lenders. And although just 78 banks opened their doors in the past 12 months, compared to 173 the year before, demand for their services is through the roof.
The public’s growing wariness of Wall Street and large, impersonal banks is a boon for local banks and credit unions, where familiar faces, not fine print, greet customers at the door. Likewise, upstart banks can begin fresh, not only with customer relations but with squeaky clean balance sheets, devoid of the toxic assets weighing down most of their more established competitors.
But opening a bank is far more difficult than just renting some cheap retail space and buying a couple ATMs. Regulators, under heavy fire for their failure to perform even the most modest oversight duties, are making it well nigh impossible to get a new bank up and running. Capital requirements in particular are tough to meet, since most potential investors reflexively seize up at the sound of the words “invest” and “banks” when uttered in the same sentence.
Further, seasoned management must be brought in, preferably with a clean resume. Try finding an experienced banker these days who won't have to explain why he or she played no part in his or her former employer's demise.
Recessions, despite their lousy reputation, foster creativity, innovation and entrepreneurship. Risk-takers can separate themselves from the herd and create real productivity in an environment where merely surviving is seen as pretty damn good.
The opportunities in banking are just a few of the many currently being made available to those willing to take the plunge. It isn't easy -- in fact, it's a neverending slog -- but these are times when fortunes can be made.
Wednesday, March 18, 2009
Thrift Takes Hold, Rich Take Cover
This post first appeared on Minyanville.
While AIG (AIG) isn’t the only company eager to send its executives to swanky retreats at lavish resorts, other firms have taken note of the decidedly negative press generated by its transgressions.
As a result, they're scaling back expenditures, canceling conferences, and generally demanding their employees adopt a lower profile in the T&E (travel and entertainment) department.
Goldman Sachs (GS) recently announced its business travelers would no longer be put up at the Ritz Carlton. BB&T (BBT), a recipient of $3.1 billion in bailout money, also shunned the Ritz, canceling a March event for top sales people.
This trend bodes ill for states like Florida, a popular vacation destination for firms looking to reward star employees. According to the Wall Street Journal, in the last quarter of 2008, Florida tourism dropped more than it has at any point since the period following September 11. Hotels are receiving cancellation requests from companies wary of showering employees with expensive trips as others lay them off in droves.
Stranger still, this new allergy to perks extends even to language. One client of Amelia Island Plantation, an upscale resort north of Jacksonville, even told the hotel it wouldn’t consider a location whose name had the word “spa” or “resort” in it. Another bold customer even asked the hotel to drop the word “Island” from its moniker. (Oddly enough, the word "plantation" didn't sound any alarms.)
Welcome to the Age of Austerity, the polar opposite of our recent love affair with bling for the sake of bling.
Already, we're hearing anecdotes of shoppers uncomfortable with carrying bags emblazoned with the logo of high-end stores like Saks (SKS) or Nordstroms (JWN). Leering onlookers, disgusted at such lavishness, are shaming the well-to-do into buying their overpriced trinkets online. 2009's version of the "walk of shame" isn't down Frat Row on a brisk Sunday morning, but down Madison Avenue during the midtown lunch rush carrying bags from Prada or Coach (COH).
Purveyors of the inessential are hoping this is just a passing fad, that fast times and big budgets will be back faster than you can say AmEx Black Card.
Others, however, are shouting paradigm shift, as credit has distinctly disappeared from the American spending arsenal. Just how long it will be unavailable is anyone's guess. But as the rich are scorned and public displays of wealth are decried, the Age of Austerity rambles on, gaining momentum.
The next thing you know, that little blue box from Tiffany (TIF) will cease to carry the near-magical power to make up for that really really stupid thing you did once you were 12 beers in.
While AIG (AIG) isn’t the only company eager to send its executives to swanky retreats at lavish resorts, other firms have taken note of the decidedly negative press generated by its transgressions.
As a result, they're scaling back expenditures, canceling conferences, and generally demanding their employees adopt a lower profile in the T&E (travel and entertainment) department.
Goldman Sachs (GS) recently announced its business travelers would no longer be put up at the Ritz Carlton. BB&T (BBT), a recipient of $3.1 billion in bailout money, also shunned the Ritz, canceling a March event for top sales people.
This trend bodes ill for states like Florida, a popular vacation destination for firms looking to reward star employees. According to the Wall Street Journal, in the last quarter of 2008, Florida tourism dropped more than it has at any point since the period following September 11. Hotels are receiving cancellation requests from companies wary of showering employees with expensive trips as others lay them off in droves.
Stranger still, this new allergy to perks extends even to language. One client of Amelia Island Plantation, an upscale resort north of Jacksonville, even told the hotel it wouldn’t consider a location whose name had the word “spa” or “resort” in it. Another bold customer even asked the hotel to drop the word “Island” from its moniker. (Oddly enough, the word "plantation" didn't sound any alarms.)
Welcome to the Age of Austerity, the polar opposite of our recent love affair with bling for the sake of bling.
Already, we're hearing anecdotes of shoppers uncomfortable with carrying bags emblazoned with the logo of high-end stores like Saks (SKS) or Nordstroms (JWN). Leering onlookers, disgusted at such lavishness, are shaming the well-to-do into buying their overpriced trinkets online. 2009's version of the "walk of shame" isn't down Frat Row on a brisk Sunday morning, but down Madison Avenue during the midtown lunch rush carrying bags from Prada or Coach (COH).
Purveyors of the inessential are hoping this is just a passing fad, that fast times and big budgets will be back faster than you can say AmEx Black Card.
Others, however, are shouting paradigm shift, as credit has distinctly disappeared from the American spending arsenal. Just how long it will be unavailable is anyone's guess. But as the rich are scorned and public displays of wealth are decried, the Age of Austerity rambles on, gaining momentum.
The next thing you know, that little blue box from Tiffany (TIF) will cease to carry the near-magical power to make up for that really really stupid thing you did once you were 12 beers in.
Biotech Startups: Nothing Ventured, Nothing Gained
This post first appeared on Minyanville.
It’s a rotten time to be raising money. And for small biotechnology companies, most of which have little or no revenue and are dependent on investor capital to stay afloat, times are tough indeed.
According to the Wall Street Journal, 120 of the 360 publicly traded biotech firms have less than 6 months of cash on hand. And while this isn’t an entirely foreign position for industry upstarts to be in, the challenging fundraising environment means many of these companies could go under.
The business of developing experimental drugs, procedures and devices has always been one of high risk and high reward. Investors, often venture capitalists, are willing to lose their entire outlay many times over for the chance of hitting it big.
During their initial years, biotech startups undertake research, complete lengthy drug trials, and navigate the labyrinthine bureaucracy that is the Federal and Drug Administration, with investors pouring in more cash all the while.
The lucky few either get swallowed up by one of the industry heavy hitters or go public.
As noted in the Journal, the biotech business as a whole had its first profitable year in 2008. As fledgling companies blow through cash, giants like Genentech (DNA), Amgen (AMGN) and Gilead Sciences (GILD) rake in mountains of profits.
The fundraising troubles these startups face are emblematic of the broader difficulties for small businesses. Despite promises of help from the Obama Administration, investors are reticent to back nascent ventures. With investor cash drying up, getting by on a shoe string is becoming increasingly challenging.
This also reflects a sift in time and risk preferences, something discussed at length by Minyanville's Kevin Depew. With a decidedly cloudy economic outlook, investors are drawn to more certain, lower risk bets. Biotech startups represent the pinnacle of investor speculation, as evidenced by their challenge to find fresh backers.
One positive, and something many in the scientific community are pointing to hopefully, is President Obama's support for stem cell research and increased funding for the National Institutes of Health. Greater government assistance, they expect, could give fledgling companies the time and resources they need to make the next big breakthrough.
It’s a rotten time to be raising money. And for small biotechnology companies, most of which have little or no revenue and are dependent on investor capital to stay afloat, times are tough indeed.
According to the Wall Street Journal, 120 of the 360 publicly traded biotech firms have less than 6 months of cash on hand. And while this isn’t an entirely foreign position for industry upstarts to be in, the challenging fundraising environment means many of these companies could go under.
The business of developing experimental drugs, procedures and devices has always been one of high risk and high reward. Investors, often venture capitalists, are willing to lose their entire outlay many times over for the chance of hitting it big.
During their initial years, biotech startups undertake research, complete lengthy drug trials, and navigate the labyrinthine bureaucracy that is the Federal and Drug Administration, with investors pouring in more cash all the while.
The lucky few either get swallowed up by one of the industry heavy hitters or go public.
As noted in the Journal, the biotech business as a whole had its first profitable year in 2008. As fledgling companies blow through cash, giants like Genentech (DNA), Amgen (AMGN) and Gilead Sciences (GILD) rake in mountains of profits.
The fundraising troubles these startups face are emblematic of the broader difficulties for small businesses. Despite promises of help from the Obama Administration, investors are reticent to back nascent ventures. With investor cash drying up, getting by on a shoe string is becoming increasingly challenging.
This also reflects a sift in time and risk preferences, something discussed at length by Minyanville's Kevin Depew. With a decidedly cloudy economic outlook, investors are drawn to more certain, lower risk bets. Biotech startups represent the pinnacle of investor speculation, as evidenced by their challenge to find fresh backers.
One positive, and something many in the scientific community are pointing to hopefully, is President Obama's support for stem cell research and increased funding for the National Institutes of Health. Greater government assistance, they expect, could give fledgling companies the time and resources they need to make the next big breakthrough.
AIG: Contractually Obligated to Spit in Face of Taxpayers
This post first appeared on Minyanville.
The AIG (AIG) rabbit-hole keeps getting deeper.
Reports of the $165 million in bonuses shelled out to executives (the ones the New York Times said were "at the very heart of AIG's worldwide conflagration") are eliciting fresh cries of outrage from the public.
Lawmakers, intent on demonstrating their aggressive stewardship of taxpayer money, are up in arms about bonus payments AIG is making to retain top executive “talent.” Barney Frank, chairman of the House Financial Committee, questioned the wisdom of the bailout, saying "clearly there was a mistake from the beginning."
AIG's chief executive Edward Liddy, for his part, argues the payments are not only a legal obligation but essential to retaining key employees -- in his words, "the best and brightest talent" -- and maximizing the value of business units it aims to unload in an effort to repay taxpayers.
The Wall Street Journal reports $450 billion has been paid to employees of the company’s Financial Products unit, the group responsible for much of the trading losses that torpedoed AIG in the first place. In addition, more than $700 million in bonuses and retention payments are being paid to another roughly 10,000 employees.
Liddy, the CEO, said he found the arrangements “distasteful,” but that they were set up before he took the job last year. In defense of the payments, he argued, “Honoring contractual commitments is at the heart of what we do in the insurance business.”
Meanwhile, the company and its government shareholders are facing increasing pressure as we learn just where our $170 billion in bailout money has gone. Trading counterparts have reaped big payments on credit default swaps gone bad: Goldman Sachs (GS) got almost $13 billion, Deutsche Bank (DB) received around $12 billion, and tens of billions more was doled out to trading clients and other banks.
As AIG executives and regulators struggle to untangle the truly nightmarish mess that was once the largest insurance company in the world, the public will demand further retribution against those it holds responsible.
No matter that some, like Liddy, weren't even there when the troubles started. Others, like Congressman Frank, Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke are being tasked with the cleanup of a mess they were very much complicit in creating.
Perhaps elected and non-elected government officials alike will acknowledge their role in this mess by refusing both salaries and lobbyist money from the financial sector until the problems are sorted out.
Hey, a guy can dream, right?
The AIG (AIG) rabbit-hole keeps getting deeper.
Reports of the $165 million in bonuses shelled out to executives (the ones the New York Times said were "at the very heart of AIG's worldwide conflagration") are eliciting fresh cries of outrage from the public.
Lawmakers, intent on demonstrating their aggressive stewardship of taxpayer money, are up in arms about bonus payments AIG is making to retain top executive “talent.” Barney Frank, chairman of the House Financial Committee, questioned the wisdom of the bailout, saying "clearly there was a mistake from the beginning."
AIG's chief executive Edward Liddy, for his part, argues the payments are not only a legal obligation but essential to retaining key employees -- in his words, "the best and brightest talent" -- and maximizing the value of business units it aims to unload in an effort to repay taxpayers.
The Wall Street Journal reports $450 billion has been paid to employees of the company’s Financial Products unit, the group responsible for much of the trading losses that torpedoed AIG in the first place. In addition, more than $700 million in bonuses and retention payments are being paid to another roughly 10,000 employees.
Liddy, the CEO, said he found the arrangements “distasteful,” but that they were set up before he took the job last year. In defense of the payments, he argued, “Honoring contractual commitments is at the heart of what we do in the insurance business.”
Meanwhile, the company and its government shareholders are facing increasing pressure as we learn just where our $170 billion in bailout money has gone. Trading counterparts have reaped big payments on credit default swaps gone bad: Goldman Sachs (GS) got almost $13 billion, Deutsche Bank (DB) received around $12 billion, and tens of billions more was doled out to trading clients and other banks.
As AIG executives and regulators struggle to untangle the truly nightmarish mess that was once the largest insurance company in the world, the public will demand further retribution against those it holds responsible.
No matter that some, like Liddy, weren't even there when the troubles started. Others, like Congressman Frank, Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke are being tasked with the cleanup of a mess they were very much complicit in creating.
Perhaps elected and non-elected government officials alike will acknowledge their role in this mess by refusing both salaries and lobbyist money from the financial sector until the problems are sorted out.
Hey, a guy can dream, right?
Keepin' It Real Estate: Foreclosure Wheel Keeps on Turning
This post first appeared on Minyanville and Cirios Real Estate.
Despite herculean efforts to stop the foreclosure juggernaut, Americans are still losing their homes at near-record pace.
According to RealtyTrac, a firm that sells default data, foreclosure filings rose in February to nearly 300,000, up 6% from the month before. This figure is the third highest for any month since the housing market turned south in 2005.
As property values fall, more borrowers are finding themselves underwater - owing more on their homes than they're worth. This, coupled with job losses, means homeowners are missing payments at an alarming pace.
Sky-high foreclosures are even more astounding when myriad loan-modification efforts and short-term foreclosure moratoriums enacted by big lenders like Fannie Mae (FNM), Freddie Mac (FRE), JPMorgan (JPM) and Bank of America (BAC) have been taken into account.
And while President Obama’s hotly debated $275 billion housing-relief package is barely a month old, its becoming clear that no cleverly worded press release or inspiring oratory can reverse the trend that’s firmly in place: Housing supply remains elevated, with buyers sitting on the sidelines awaiting better deals. Prices, as a result, will keep falling for the foreseeable future.
In fact, Rick Sharga, executive vice president at RealtyTrac, told Bloomberg he believes the country’s biggest lenders have yet to list over 700,000 bank-owned homes.
This “phantom supply,” as its known in the real-estate world, paints a bleak picture for the housing market in the near term. Even though strong sales activity in distressed markets is pushing aggregate inventory data back towards historical norms, phantom supply is patiently waiting to punish those bold enough to prematurely call a bottom.
Further, well-to-do areas, formerly immune from home price declines, are starting to follow their more bubbly counterparts over the proverbial cliff. In the San Francisco Bay Area, for example, 15 homes had sold for over $5 million by this time last year. This year: Just one.
Many of the most distressed markets are in their last gap of depreciation. And while material appreciation is simply fantasy, high-end markets will pick up where they left off and keep broad measures of property values under pressure.
But as this dynamic plays out -- and the depreciation torch is passed from the "subprime" people to those who are "prime" -- opportunities will emerge in markets that stabilize first. Just as housing prices overshot to the upside, they will likewise overshoot to the downside.
The opportunities are currently few and far between. But with each day that passes, the world of possibilities grows, if only ever so slightly.
Despite herculean efforts to stop the foreclosure juggernaut, Americans are still losing their homes at near-record pace.
According to RealtyTrac, a firm that sells default data, foreclosure filings rose in February to nearly 300,000, up 6% from the month before. This figure is the third highest for any month since the housing market turned south in 2005.
As property values fall, more borrowers are finding themselves underwater - owing more on their homes than they're worth. This, coupled with job losses, means homeowners are missing payments at an alarming pace.
Sky-high foreclosures are even more astounding when myriad loan-modification efforts and short-term foreclosure moratoriums enacted by big lenders like Fannie Mae (FNM), Freddie Mac (FRE), JPMorgan (JPM) and Bank of America (BAC) have been taken into account.
And while President Obama’s hotly debated $275 billion housing-relief package is barely a month old, its becoming clear that no cleverly worded press release or inspiring oratory can reverse the trend that’s firmly in place: Housing supply remains elevated, with buyers sitting on the sidelines awaiting better deals. Prices, as a result, will keep falling for the foreseeable future.
In fact, Rick Sharga, executive vice president at RealtyTrac, told Bloomberg he believes the country’s biggest lenders have yet to list over 700,000 bank-owned homes.
This “phantom supply,” as its known in the real-estate world, paints a bleak picture for the housing market in the near term. Even though strong sales activity in distressed markets is pushing aggregate inventory data back towards historical norms, phantom supply is patiently waiting to punish those bold enough to prematurely call a bottom.
Further, well-to-do areas, formerly immune from home price declines, are starting to follow their more bubbly counterparts over the proverbial cliff. In the San Francisco Bay Area, for example, 15 homes had sold for over $5 million by this time last year. This year: Just one.
Many of the most distressed markets are in their last gap of depreciation. And while material appreciation is simply fantasy, high-end markets will pick up where they left off and keep broad measures of property values under pressure.
But as this dynamic plays out -- and the depreciation torch is passed from the "subprime" people to those who are "prime" -- opportunities will emerge in markets that stabilize first. Just as housing prices overshot to the upside, they will likewise overshoot to the downside.
The opportunities are currently few and far between. But with each day that passes, the world of possibilities grows, if only ever so slightly.
Local Governments Bail Themselves Out
This post first appeared on Minyanville.
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
Americans Stop Living in the Past, Say No to Self-Storage
This post first appeared on Minyanville.
When times were good, self-storage firms made brisk business out of junk repositories.
Now, with consumers eager to cut monthly expenses, paying to keep useless bric-a-brac just doesn't seem like that brilliant an idea. The Wall Street Journal reports that self-storage companies, many of which are organized as real-estate investment trusts, or REITs, are seeing customers flee en masse.
As KeyBanc analyst Jordan Sadler told the Journal, “Consumers are having to choose between a mortgage payment, a car payment and a self-storage payment. It’s an easy one to get rid of.”
When the economy began to sour, storage firms were actually highlighted as a potential pocket of strength. After a strong performance during most of 2008, the sector followed the broader equity markets down the proverbial rabbit hole last fall. Public Storage (PSA), the largest storage company in the country, fell from over $100 per share in September 2008 to below $50 last week.
U-Store It Trust (YSI), Sovran Storage (SSS) and Extra Space Storage (EXR), the other 3 publicly traded storage companies, fared slightly worse. Margins are dwindling as tenants vacate, defaults rise, and the industry is forced to increase advertising to replace its shrinking client base.
Investors also fear that the big storage companies may have a hard time rolling over their debt when it comes due, since, as REITs, they're heavily dependent on borrowing against real-estate assets.
In recent years, as new electronics and furniture piled up in the homes of American consumers, demand for storage facilities jumped. After all, we had to make room for the latest models of those "essentials" we just couldn't live without. Real-estate developers, snapping up land with cheap debt, found erecting and filling up storage units a simple, profitable business.
Old photos, antique sewing machines and other reminders of years long past don’t notice freeway noise; they don't require curb appeal. As long as the sites were accessible, location didn’t really matter. Land was cheap, and revenue -- the average lease currently sits at over $80 per month -- more than made up for the minimal upkeep and paltry debt service.
But now that budgets are stretched, customers are parting with the past in favor of the future. Indeed, in many cases, the future be damned - making it to next month is good enough.
When times were good, self-storage firms made brisk business out of junk repositories.
Now, with consumers eager to cut monthly expenses, paying to keep useless bric-a-brac just doesn't seem like that brilliant an idea. The Wall Street Journal reports that self-storage companies, many of which are organized as real-estate investment trusts, or REITs, are seeing customers flee en masse.
As KeyBanc analyst Jordan Sadler told the Journal, “Consumers are having to choose between a mortgage payment, a car payment and a self-storage payment. It’s an easy one to get rid of.”
When the economy began to sour, storage firms were actually highlighted as a potential pocket of strength. After a strong performance during most of 2008, the sector followed the broader equity markets down the proverbial rabbit hole last fall. Public Storage (PSA), the largest storage company in the country, fell from over $100 per share in September 2008 to below $50 last week.
U-Store It Trust (YSI), Sovran Storage (SSS) and Extra Space Storage (EXR), the other 3 publicly traded storage companies, fared slightly worse. Margins are dwindling as tenants vacate, defaults rise, and the industry is forced to increase advertising to replace its shrinking client base.
Investors also fear that the big storage companies may have a hard time rolling over their debt when it comes due, since, as REITs, they're heavily dependent on borrowing against real-estate assets.
In recent years, as new electronics and furniture piled up in the homes of American consumers, demand for storage facilities jumped. After all, we had to make room for the latest models of those "essentials" we just couldn't live without. Real-estate developers, snapping up land with cheap debt, found erecting and filling up storage units a simple, profitable business.
Old photos, antique sewing machines and other reminders of years long past don’t notice freeway noise; they don't require curb appeal. As long as the sites were accessible, location didn’t really matter. Land was cheap, and revenue -- the average lease currently sits at over $80 per month -- more than made up for the minimal upkeep and paltry debt service.
But now that budgets are stretched, customers are parting with the past in favor of the future. Indeed, in many cases, the future be damned - making it to next month is good enough.
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