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FAQ's
Q. What effect will Portable On Demand Storage have on the
traditional self-storage industry?
A. First, let’s classify each of
these storage options. The Portable On Demand Storage (PODs) concept
is essentially a business and not a real estate investment, which is
how traditional self-storage facilities are categorized.
While PODs offer convenience by
delivering a unit to renters’ driveways, they do not allow the
access of a traditional self-storage facility. The POD is stored in
a warehouse and stacked atop many others, making it difficult to
access the unit.
Most importantly, lenders are not
giving credit to PODs as a real estate investment and will not
underwrite them the same way as traditional self-storage property.
If you have PODs and a traditional storage facility both
economically occupied at 85%, their values will differ dramatically.
The PODs will be valued as a business and not as a piece of real
estate, which will limit your abilities in the current debt and
disposition market.
At first glance, both of these
storage methods seem similar, however they attract an entirely
different customer. We believe that PODs do not currently pose an
immediate effect on the occupancy of traditional self-storage
facilities. However, we will continue monitoring their market impact
and penetration.
Q. I have been operating at 95% economic occupancy and have not
raised rates for years. Is this something I should consider?
A. Unequivocally, YES! This is among
self-storage’s most misunderstood management techniques. Believe it
or not, you are likely leaving a tremendous amount of money on the
table if you have this level of economic occupancy. Time and time
again we have to explain this to clients when a property valuation
comes back with a value below their expectations. Their response is
typically: “But I am 95% occupied. How can my facility only be worth
$X?”
The reason is because of your rental
rates. Lending institutions and self-storage buyers are going to
run, at most, 3% to 5% rental escalations each year they hold the
property. If you have not increased rental rates for a long time,
lenders and buyers will start their analysis based on your current
rental rates. If you had raised your rates consistently, the
benchmark for lenders and buyers would be higher, thus creating more
value for the property.
The advice we give clients is to
increase rental rates 3% annually for a property that is
approximately 70% economically occupied and 5% for one with 85% or
higher economic occupancy. The best way to pass these rate increases
to tenants is to send them a letter referring to new improvements to
the property, or rising utility and maintenance costs.
Implementing annual rental rate
increases will do wonders for you in terms of cash flow and value.
If you are currently running at 95% economic occupancy and raise
rates, but lose 10% of your tenants, you will still be in better
shape. You will have more available units than previously and likely
have a waiting list of tenants who can now move in at a higher
street rate. If you raise rates annually and recycle new tenants at
a higher street rate, you increase your ability for higher cash flow
and facility value should you decide to sell.
Q. What are some steps new investors can take in order to enter the
self-storage market?
A. There is more competition today
for self-storage deals than ever before, with both experienced and
novice operators chasing property opportunities. Currently,
experienced owners/operators have the upper hand in winning deals,
however there are several ways new market entrants can dramatically
improve their chances at success.
We suggest that new investors spend
as much time as possible learning the self-storage property type.
Educate yourself by joining the Self Storage Association and local
state associations. Contact area self-storage real estate brokers to
request packages for currently listed deals, then review their pro-formas,
study their expenses and analyze their income expectations. We’d
also suggest you speak with major industry lenders to get a better
understanding of current interest rates, loan-to-value ratios, and
the variety of available financing programs. By doing your homework,
asking a lot of questions and learning about the self-storage
property type, your chances of winning a deal will increase
dramatically.
That being said, institutional
investors trying to enter the self-storage market are now
establishing joint ventures with large experienced operators in
order to place capital into the market. Institutional players are
approaching seasoned operators with the opportunity to increase
their buying power through a significant influx of capital. This
approach has fared quite well for current high net worth
investors/institutions to make a market entrance.
Q. Will the new development pipeline continue at its current pace,
and how will this impact property values?
A. The development pipeline has been
red hot in recent years. However, many major cities and infill
locations nationwide are not allowing future self-storage properties
to be built. While not occurring in every market, this trend is
beginning to increase. The primary reason is that self storage does
not generate as much tax revenue as, say, an office building or a
retail strip. In considering development requests, municipalities
and zoning boards evaluate the amount of land needed to build a
self-storage facility and balance that with the fact that the
resulting facility creates fewer jobs than other commercial real
estate development types. Given this, many cities have instead
decided to evaluate the amount of storage currently in place and
base future development decisions on that data, thus increasing the
pain and headaches for self-storage developers.
This trend, however, does not
necessarily apply to markets located outside of major cities where
land availability is typically more plentiful. Most new home
developments constructed in the past five years have very strict
homeowner’s association rules. These rules can limit boat or
recreational vehicle storage in driveways, which in turn creates an
immediate need for self-storage, RV and boat storage in the
community and supports a developer’s case for new self-storage
facility construction.
From our viewpoint, we have seen
development opportunities still moving forward thus far in 2007,
however the entitlement process has become more time consuming than
in years past. Given this, we feel the development pipeline will
continue to decrease in major metropolitan infill locations, but
will remain strong in outlying cities. An important factor to keep
in mind is if you are thinking of developing in a city with an
abundance of land, you need to be aware that a new competitor could
build another facility in the immediate area. Although you will be
able to develop a property in this market, be aware of how an influx
of competition could drastically affect your lease-up velocity.
Q. What criteria should I look for in selecting a facility
management company?
A. Selecting the right management
company for your facility can be a daunting task. You are, in
essence, entrusting this company to run one of the largest financial
investments you will likely make in your lifetime. Given the
significance of this decision, you must do plenty of homework to
understand the track record and experience of any management company
under consideration. This research is, by far, the most important
element in the selection process.
The first step is to research as many
management companies as possible. Take time to search websites,
attend state or national self-storage tradeshows, and speak with
industry peers to ascertain whom they use. Narrow the list to three
candidates and then conduct further research on the geographic areas
where these companies manage properties. Conduct site visits to at
least one property managed by your three candidates. Closely examine
such issues as site cleanliness and upkeep, the staff’s
customer-service orientation, sales styles of managers, and whether
everything at the property appears to be in order.
If everything checks out at the site
visit, contact a senior-level executive at the management firm to
discuss a request for proposal. Meet to discuss the issues of
primary importance at your property. If you believe your company
culture and business philosophies align with the management company,
and their pricing meets your budget, consider signing them on to
work with you.
Most companies charge a five to six
percent management fee, as well as a bonus fee for increased
occupancy and revenue performance. In the long run, it will be worth
it to create an incentive program that helps ensure your management
company works hard year after year.
Q. What are some
of the most common and effective concessions in today’s marketplace?
A. With the dramatic proliferation of
self-storage properties creating greater competition nationwide,
concessions have grown by leaps and bounds in recent years. We have
all seen them advertised in print, on the web, and on television,
with some of the most popular being: the first month’s rent for $1,
sign up for three months and get the fourth month free, free truck
usage with move in, first month free with a three-month lease.
As self-storage property owners, you
may wonder which concessions work best. The answer depends on two
key factors: A) Your market, and B) Your facility operations.
Frankly, if your facility is 85% to 90% leased, it may not make
sense to offer any concessions at all. Instead, you more likely
should think about boosting your revenue by increasing rents on
existing tenants.
If you don’t fall within this
occupancy range and your local competitors are offering concessions
to lure new business, it may be wise to consider concessions as part
of your property’s marketing strategy. A good starting point is to
examine your competitors through a “secret shopper” approach. Have
your managers call every self-storage facility within a five-mile
radius of your site and ask exactly what specials are available.
Examine the results of their secret
shopping. You will likely notice concession patterns among the
competition. For example, in your market, the best concession may be
to offer tenants an offer of $1 for the first month’s rent. If
that’s the case, you may try running that special for a short time
to determine if it has any impact on your occupancy levels.
Baseline customer research is an
important part of this equation. Be sure to have your managers ask
each new tenant why they chose your facility. If they tend to site
the $1 first month rent deal, then you found a concession that works
well for your market. If your current efforts do not achieve a large
response, try switching to another concession until you find one
that works for your property and your market.
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