A Hard-Core Hire
|Copyright 2014 by Virgo Publishing.|
|By: Maurice Pogoda|
|Posted on: 12/01/2004|
Gone are the good old days when all you had to do was build it and they would come. Today’s self-storage market is fiercely competitive. New multistory properties with state-of-the-art security, conference rooms, business centers, free Internet access and offices the size of a typical 7-11 sit next to 1970s garage-style projects whose nod to high security might be a fence with a gate.
Self-storage is no longer the new kid on the block yearning for respect. It is now a mature industry long recognized by Wall Street as a real estate type that offers superior returns. The best evidence of this was the purchase of Storage USA by General Electric, a company known for its business acumen and astute acquisitions in various industries.
The unfortunate downside to this healthy respect self-storage enjoys is everyone wants a piece of the pie. The dot-com bust and stock-market fall of the new millennium left many people searching for opportunities that offered better returns than 5 percent Treasury bills. Many turned to real estate, especially self-storage. Though not as bad as the late 1980s, the past few years have seen a surge in development. The combination of new properties with the recent recession has left many markets saturated, with owners offering deep discounts and specials to bolster occupancies and maintain profits.
With occupancies at their lowest point since the early 1990s and new construction still rampant, professionalism is no longer an option but a necessity. Having a nice retired couple that watches T.V. in the office and waits for the phone to ring between cooking dinner and doing laundry in their apartment next door went out with the '80s. Properties that are not well-run with professionally trained mangers versed in a myriad of skills necessary to compete in today’s fast-paced world are likely to be left in the dust.
One result of this often painful maturation of the industry is many owners have turned to property-management firms that specialize in self-storage to maximize return on investment. The trick is knowing whether a management company is right for your operation and how to choose the right one.
Who Needs a Management Company?
There are three different types of owners who might consider hiring a management company:
Individual Owners. These are not the mom-and-pop variety that own and run the facility themselves and rely on the revenue as their sole source of income. These owners may own one or two properties. Very often, they are involved in other businesses or types of real estate. At one time, they may have planned on owning multiple facilities but found that locating suitable sites was not as easy as they thought. They may live out of state and are looking for someone local for hands-on management of their property. They may have thought of selling but do not want to pay the capital-gains tax.
By turning over operations to a professional management company, these owners get the best of all worlds. They still own the property, do not have to pay capital-gains taxes and get a monthly check without handling day-to-day operations. They have an expert in self-storage who has the tools and experience to help increase occupancy, decrease operating expenses or oversee capital improvements and repairs. This leaves them time to pursue other businesses and know their property is being professionally managed.
Investment Groups. Now that self-storage is a respected member of the real estate community, numerous investment groups comprised of veteran investors have been formed for the sole purpose of buying portfolios of self-storage properties. Typically, they have no interest in managing the properties themselves. These groups are often involved in other types of real estate and find the challenges of self-storage management to be daunting.
Hallmarks of these transactions are the phenomenal prices paid by these groups that outstrip even the REITS, no less smaller investors. Most often, they use pension, insurance or securitized funds and are looking for a stable rate of return with a desire for future appreciation. Often, the source of funds will not allow these groups to manage the properties themselves, even if they want to. Having an experienced management company with a proven track record is sometimes a requirement to close the deal.
Financial Institutions. The abundance of new properties built on more expensive land, combined with the recent recession, resulted in lower occupancies and cash-flow problems for many owners. Banks, pension funds, insurance companies and numerous other funding sources have found themselves repossessing properties after owners default on their loans. Obviously, these “owners” are not in the business of managing real estate. Their goal is to quickly remove the loan from their books and recoup as much of their investment as possible.
Rarely does a facility go back to a lender with 90 percent occupancy. More typical are facilities with 60 percent occupancy or lower. To achieve a sale at a reasonable price, they must find a way to run the facility better than the previous owners and increase revenues and occupancy. The next logical step is to choose a management company to run the property, increase occupancy, decrease expenses and delinquencies, and get the property ready for sale. In all three of the above scenarios, the choice of management company can make or break a property.
What Should You Ask?
Hiring a company to run your property is a big step. Most management companies require complete control over every aspect of day-today operations. If you are willing to trust your valued asset to such a company, there are some specific questions you should ask:
What to Expect
Once you’ve taken the plunge and hired a management company, there is a great deal you should expect for the monthly fee you pay. It is important, however, to realize you must give the management company time to implement the plans you agree on. A complete turnaround will not occur overnight. As a set of guidelines, your management company should provide you and your facility with the following:
No Magic Solution
No management company can be expected to totally compensate for a poorly designed facility in a bad location or saturated market. It should, however, be expected to provide you with services that justifies its fee. The company should do everything possible to run your facility in a professional manner that will not only increase your occupancy and decrease your delinquency, but most important, improve the facility’s profitability, resulting in a more valuable asset.
Maurice Pogoda is president of Farmington Hills, Mich.-based Pogoda Cos., the state’s largest self-storage operator and one of the 25 largest operators in the United States. The company manages 40 facilities in Michigan and Ohio, representing approximately 3 million square feet of self-storage. Founded in 1987, the firm provides brokerage, management, investment and consulting services to the self-storage and manufactured- housing industries through Pogoda Group Inc. and Pogoda Management Co. For more information, call 800.326.3199; visit www.pogodaco.com.