FEATURE ARTICLE, OCTOBER 2005

SELF STORAGE SAVVY
The new era of self storage facilities offers first-class amenities in high-traffic settings.
Nicholas Malagisi

Malagisi

Self storage was originally designed to provide the general public and small business a relatively low cost service to store goods for a short period of time. The industry has developed from a simple one-story garage-type building complex (first generation product) built primarily in industrial-zoned areas to three- to four-story big box buildings constructed on main retail corridors next to high-volume shopping centers.

The newer self storage facility that has emerged is a mainstream business that is catering to the more discriminating customer needs. Amenities at the new facilities include state-of-the-art security systems, climate-controlled environments along with cleaner, brighter, better-landscaped “retail stores.” Self storage is no longer just used for times of death, divorce and natural disasters.

Dean Jernigan, founder of the Storage USA chain of self storage facilities, was always imploring his audience at the national self storage conferences to build the company's vision of new self storage product rather than the same, first generation product still being promoted by the metal building companies. Jernigan wanted institutional quality facilities to buy for his newly formed real estate investment trust. Meanwhile, he was providing a plausible exit strategy for those owners to sell their facility to his company.

But the smarter self storage developers had already begun the process of building better facilities as part of a conscious development strategy. They were re-examining established neighborhoods where the existing self storage product had shed its industrial image. In these neighborhoods, developers were paying the extra cost for a retail site versus an industrial site, and were obtaining the necessary zoning approvals, provided that the developer didn't build a warehouse-looking garage with orange doors facing the street.

Early industry surveys reinforced what the national companies, such as Public Storage, Shurgard and Storage USA already knew about their customer base: that customers, especially women customers who are the real shoppers for most families, were used to and appreciated a store/office that resembled a retail environment more than a warehouse.

Consolidation is growing slowly within the self storage industry as industry surveys indicate that the top ten 10 operators in the United States control approximately 15 percent of the total number of facilities, including a large percentage within the metropolitan urban areas. Capitalization rates for self storage product have been, until recently, 100 to 150 basis points above the nation's industrial product. That capitalization rate differential is now virtually diminished as self storage has proven to have the lowest default rate of all mortgage loans in the conduit markets. The investment and banking communities are now better appreciating that fact along with the better returns self storage provides over other real estate product. As further indication of the confidence in the self storage market, two new publicly traded self storage real estate investment trusts   were formed last year bringing the total number to five.

The acceptance of the product type to the institutional investor and the investment/banking community is now stirring the debate of what constitutes an investment grade self storage facility. The classification of investment grade facility versus non-investment grade has already begun to affect the capitalization rate that certain investors are willing to pay for a facility or, whether they will even consider making an offer on a certain property depending on its location and features. Equally important, the kind of financing an owner can obtain for his facility may depend on the type of product he is developing or buying. Another consideration that a buyer may begin to think about is his exit strategy with a non-investment grade facility. His options for selling it in the future may be limited.

The classification of self storage product will likely be determined similarly to other real estate types. Example criteria include if the facility is located in a top 10 to 20 SMSA; does it have a retail location versus an industrial location; what type of construction and how old is the property; urban versus suburban location; what amenities/features are built into the facility; and what constitutes a mixed-use property. It would probably help the industry itself by providing an incentive to current owners to upgrade their older product or give the potential buyer of an older property an incentive to upgrade it. As it stands now, it is not uncommon to find the older facilities as the low-cost providers of space in a particular market with the newer, modern facility being the price leader.

It is incumbent upon the self storage industry itself, including the national Self Storage Association (SSA) and its membership to lead this debate by instituting standards that NAIOP and ICSC have done to define and categorize their own product types. The Self Storage Association should begin this process now in conjunction with industry leaders in the appraisal, brokerage, mortgage brokerage, consultants and representatives of the larger national buyers. The self storage industry is no longer a trend but a mainstream service provider with a valuable real estate asset base.

Nicholas J. Malagisi serves as senior advisor/national director self-storage with Sperry Van Ness, operating independently in Williamsville, N.Y., Sperry Van Ness Storage Realty.



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