State of the Industry Report
|Copyright 2014 by Virgo Publishing.|
|By: Amy Campbell|
|Posted on: 01/01/2003|
A slow economy and declining demand put domestic self-storage to the test. What role will overseas expansion play?
Crowded markets and a lagging economy over the past year tested the myth that self-storage is recession-proof. Some stores faired well. Others saw occupancy levels plummet. Many dropped rental rates. Overall, it was one of the toughest years the industry has yet faced.
Like the rest of American businesses, the self-storage industry was still reeling from the 9/11 tragedies when 2002 began. The last quarter of 2001 proved to be damaging for many self-storage operators. "We certainly saw a slowdown of new business immediately following this tragedy and never totally recouped those lost rentals," says Ken Myszka, president of Buffalo, N.Y.-based Sovran Self Storage.
The plunge in rates and occupancy levels can also be attributed to the recession the country was already experiencing. Sept. 11 simply brought it to the forefront, says RK Kliebenstein, owner of Coast-of-Coast Storage in Boca Raton, Fla. "A lot of people still blame their woes on Sept. 11 or even use it as a benchmark in time," he says. "But if they looked at it realistically, they really had those issues before the Sept. 11 time frame."
In fact, most agree the current recession began as far back as March 2001. It has been a boon and a burden for the self-storage industry. While some self-storage owners squeaked by--and some were forced to sell--those looking to get into the business or expand an existing one found readily available capital--and lots of it. Some markets saw good rental-rate increases. Many, including a few big-name companies, watched rates hit an all-time low.
"We had a very difficult year," says Jim McNamee, regional vice president for Shurgard Storage Centers Inc. The Seattle-based company, which lowered rental rates in several markets, was hit especially hard in California, where it experienced erosion in occupancy and rate levels. "We were down about five percent across our system," McNamee says.
Although occupancy did bounce back somewhat during the first and second quarters of 2002, some say the self-storage market has softened. "Rental rates and occupancies have dropped below historical stabilized levels, and some analysts are concluding there are some overbuilt markets," says Michael Kidd, president of the Self Storage Association. "The good news is the pace of new construction nationwide appears to be slowing down. However, when there is a concentration of new starts in a specific market, existing facilities are experiencing a more severe impact as those markets become more saturated."
Another factor that changed the market in 2002 was the May acquisition of Storage USA by General Electric. With the multimillion-dollar name tag, GE brings even more attention to an already overcrowded industry. "It's certainly driving a lot of new money into the industry," says Len Kosar, the company's president and CEO.
The Law of Supply and Demand
Overbuilding was one of the biggest issues for self-storage in 2002. "A lot of markets around the country are generally overbuilt," McNamee says. "If you're going to be the 10th guy on the same street, I don't know what purpose that serves. We see that happening all over the place." Kliebenstein adds, "It used to be there were just pockets of overbuilding, and now it seems there are just pockets of real opportunity."
One of the reasons for the overbuilding in some markets is available capital. "So long as lending institutions make construction money available, developers will build--whether it's apartments, offices, industrial buildings, retail stores or self-storage. The lack of demand and an oversupply matters little," says Ray Wilson of Charles R. Wilson and Associates, based in Pasadena, Calif.
Another reason is some developers are still not doing feasibility or demographic studies before setting up shop, says Jim Chiswell of Palymra, Va.-based Chiswell and Associates. "If the person had spent a little bit of time and a little bit of money to really research, he would have realized it wasn't a sufficient market to justify building another 70,000-square-foot store in that micro-market." What you end up with is three or more self- storage facilities within a 3- to 5-mile radius. This quickly fills up the needs of a market.
"Now it appears we have reached a point, in certain markets, where 'pent-up' demand has been satisfied and change in demand is not occurring," says Kidd, who attributes this partially to the change in disposable income. "Many consumers have less to spend today, and consumer confidence is declining. The economy may be limiting disposable income to such a degree that where self-storage was previously used for convenience--that is, to just store unwanted property--customers no longer opt to use it that way, at least not at rates paid in the past."
Wilson agrees. "The prolonged recession has caused a lot of uncertainty among the general public, and consumers' disposable income is shrinking," he says. "For some, who have been storing their goods out of convenience rather than out of need, the time has come to either throw them away or bring them home. Using self-storage is no longer an option because they cannot afford it."
The change in demand can also be defined by geography, says Ken Nitzberg, president of the Emeryville, Calif.-based company. "If you're in major markets where there isn't high unemployment or low-wage jobs, you'll probably weather the storm better than someone who's in an area that suffered huge unemployment or has relatively low-paying jobs."
In some markets, however, demand has increased. Chiswell attributes this to more customers using self-storage as a lifestyle choice. "In many of the Northern markets, during this time of the year, people are putting their lawnmowers and backyard furniture into storage and out of the unit come snowmobiles and snow blowers," he says. "Instead of storing these items in their garage, they're integrating self-storage into their lifestyle."
And there are still a number of markets with only a handful of self-storage facilities. "A best guess from some of the largest operators is only 50 percent or so of the general population has ever used self-storage," Wilson says. "If that's true, then we still have room for growth. We still have room for better-designed facilities in better locations with better management."
Kidd agrees. "There is no doubt some markets are overbuilt, and the industry is experiencing a retrenching. However, other markets are still very attractive. It will just require more development experience and management expertise to stabilize and excel than it did a couple of years ago."
Having too many self-storages in one market can eventually lead to a decrease in rental rates. Several self-storage owners, including Glendale, Calif.-based Public Storage Inc. and Shurgard, two of the biggest players in the industry, were forced to drop rates in 2002 because of increased competition and a decrease in demand. "Last year, we saw a tendency for operators in older, first-generation products to discount more heavily than current-generation stores that were just trying to compete on an even basis," Kliebenstein says.
That holds true for Shurgard, say McNamee. "We particularly get impacted at our older stores, and that makes it more difficult for us in the overall total. In our newer stores, we've learned from 20 years of development. We do a better job of site selection and generally ride those out better. But our competition tends to come in those areas where it's easy to develop. They're usually competing against some of our 10-, 15- or 20-year-old properties."
Storage USA also moved rates in some of the bigger markets--Chicago, Los Angeles and New York City--in its battle with competitors, Kosar says. "Overall, our rates are holding this year."
Some markets have simply hit the ceiling, Wilson says. "And now owners can only sustain the same level of occupancy by lowering rents or offering more discounts. In some markets, increasing discounts hasn't been enough; physical occupancy is continuing to decline."
How the industry weathers the supply vs. demand storm will test the theory that self-storage is recession-resistant, says Mike Burnam of Columbia, Mo.-based StorageMart, which was able to maintain rate and occupancy levels in 2002. "In the super-strong markets, where there isn't a lot of competition, we haven't seen that much fall-off. What has affected this business more are new competitors."
On a positive note, new development continues to be on the decline. One reason is tighter loaning restrictions. "The lenders are afraid to loan," Nitzberg says. "They tend to look at self-storage as just another piece of real estate and part of a national market. A lot of lenders are increasing their loan requirements and their requirements for security-collateral guarantees, and that's choking off some of the supply of cash."
Banks are also more discriminating when it comes to their lendees. "Banks are being more selective on the experience factors of their borrowers and the amount of equity they have on their projects," Kliebenstein says. "It is a little more difficult for folks getting into the business for the first time who don't have development or management experience. The banks are looking a little more critically at how they get that experience, and because they don't have it, they may be thinking more equity should be required in the projects."
Surviving and Thriving
How does a self-storage operator--big or small--survive in today's market? "Everyone is looking for the magic answer," says McNamee. One way is through site selection. "Our strategy is to go into markets that have significant barriers to entrance for the traditional self-storage operator," Nitzberg says. "They require more capital. There are extensive zoning issues. There are extensive building-permit issues. It makes everything more difficult, more expensive, more time consuming. In those markets, you tend to have less facilities, lower saturation and higher demand. And in those markets, you can sustain your rental rates and your occupancy."
One trick up Storage USA's sleeve is simply the GE brand name. "It is a recognized brand that has tremendous awareness. Can that help us in the self-storage game? We have some compelling evidence that it can," Kosar says. The company is also pickier about where it develops. "We are sticklers for data and modeling in this industry. We know we can explain 80 percent of self-storage success with two topics: demographics and competitors within 3 to 5 miles. Are there still opportunities for development? Absolutely. You just got to be a lot smarter than you were five years ago."
Another way to succeed is simply by being the best on the block. "We're finding a much more difficult sales environment," McNamee says. "We're focusing on treating those individual opportunities like gold and making sure we close them. You have to convert a lot more customers in fewer opportunities. You have to hire and train staff exceptionally well when it comes to welcoming incoming customers or answering the phone."
Dropping rental rates should be the last option, Chiswell says. "Price is not the No. 1 issue people think it is. Are there certain markets where price is the determinant for the percentage of the market? Sure. But this idea that the only way to compete in a market is to lower your rent is a mistake."
Instead, owners should focus on improving customer service and the overall look of the facility. That includes having a quality retail area with boxes, locks, tape and other supplies. Store owners are also eliminating high counters in the main office. "People don't feel comfortable standing at a counter filling out a rental agreement," Chiswell says. "Offering a comfortable setting--a place for them to sit--creates a whole different atmosphere between that potential customer and the manager."
Customers are on the lookout for more services and amenities when they shop for storage, Myszka points out. "There are--and always have been--two types of customers: those who shop price alone and those who look for value. I believe you will continue to see new products and services added throughout the industry in response to more educated consumers."
Good customer service has become crucial in today's competitive market, Burnam says. "We know more about our customer and our business than we've ever known before because of some of the things we've been doing and researching." That includes how calls come in and from where; how managers answer phones, and handle and follow-up the calls; and the use of phone centers. "I can't imagine operating this year without access to a phone center," Burnam adds. "We can attribute almost 1,000 rentals that we would never have received had we not been a part of a phone center."
While the U.S. self-storage industry has weathered stormy waters, the foreign market is making huge waves. "There is no question international development is getting a great deal of attention here in the United States," Chiswell says. Shurgard and Devon already have presence in the United Kingdom and Europe. Others, including Storage USA, are looking to enter the market.
"Over the next several months, we're looking at what would be our potential entry strategy into Europe. We are keenly interested in the European market," Kosar says. GE has a 35 percent equity position in a self-storage company called Access, which has operations in Europe and Australia. Also, GE already has enormous presence in Europe, owning real estate and several factories.
"It's just still a very immature market, but at least it exists and it's growing," Kosar says. Europe has a population of roughly 292 million and less than 500 self-storage facilities. Compare that to Florida, one of America's most crowded markets, where there are more than 2,000 facilities and a population of about 15 million. "We see the numbers. We see big companies who are really blazing the trail for what looks to be a growing, viable industry, and we want to be a part of it."
However, there are several obstacles standing between American self-storage companies and the European self-storage customer. "The European lenders are still learning this business and financing remains an area that needs to be overcome," Chiswell says. The public also needs to be educated on what the product is and how to use it. One way Devon has done this is through pictures. "In Europe, all of our advertising consists of pictures that show people using self-storage," Nitzberg says.
Another barrier is available land. "Ground-up projects are even more difficult to build than here," says Nitzberg. "It's very difficult to buy land, especially near a city, or find open space near the people. Houses are tiny. Stores are tiny. They're all packed wall-to-wall. Land is very precious. They just don't have the kind of space we have here."
Lease-up is also much slower than it is in the United States. "Because people have to figure out what self-storage is," Nitzberg says. "But what happens is, when you hit about 30 to 40 percent occupancy, it tends to take off and the leasing goes almost vertical. The tenants you do have start telling their friends and associates about the new, neat thing they found."
Americans interested in foreign markets are encouraged to have strong foreign contacts so they have someone with local market, language and custom experience and knowledge, Kliebenstein says. "To try and do it from Des Moines, Iowa, and penetrate Amsterdam is very difficult." He points to Shurgard as an example. "Gaining the local expertise is probably the biggest challenge. We don't know all the customs and the rituals. There are some things we just don't understand from here that are very natural to them. And they don't understand things we do as well. It's a very different environment, and that's why you need local, experienced people to do that."
One niche opportunity for successful U.S. self-storage operators is to provide their expertise in joint ventures or invest in overseas companies. "Many of the companies currently engaged in self-storage expansion in the United Kingdom are publicly traded. I see an opportunity for direct investment in some of these companies through stock purchase," Chiswell says.
Another arena in which self-storage is booming is the Australia and New Zealand market. "The industry in Australia and New Zealand has experienced strong growth over the past two years, fueled by high levels of consumer confidence and a buoyant housing market that has been underpinned by historically low interest rates," says Paul McFadzien, the immediate past president for the Self Storage Association of Australasia. "This has lead to continuing industry expansion that has been most noticeable in the main cities of Sydney, Melbourne, Brisbane and Auckland."
While self-storage has existed in Australia for a few years, the Asian market is entirely new. "Based on existing and known new projects, this market is slowly developing," McFadzien says. "Having said that, Singapore-based StorHub Self Storage is soon to open that country's first two facilities and apparently has a strong growth strategy."
Although in its infancy, many companies are keenly interested in the Asian market. "Self-storage can work in a place like Hong Kong or Tokyo," Kosar says. "The housing costs are so high. The housing is so tiny, and yet you have consumers over there who crave Western-type lifestyles. A lot of people are constrained by the fact they don't have a place to put the bicycle they want to ride on the weekend."
Steel Storage Group, a major player in Australia and New Zealand, has also turned its attention to the Pacific. "Asia has suddenly become interested in self-storage with many large real estate companies and developers now either entering or looking to enter our industry," says Brian Perry, managing director of Australian and Asian-Pacific operations. Steel Storage is currently building several major facilities in Singapore and has more in the planning stages in Singapore and Hong Kong. The company has also completed a new eight-story complex in Tokyo, with eight more in some stage of development.
The key challenge facing the industry in these foreign countries is education. "We need to ensure that whether it's potential customers; local, state or federal government agencies; insurers; or the legal fraternity, they all know our industry, the services it offers and its difference from traditional warehousing," McFadzien says.
The Canadian market is also seeing resurgence. The country currently has roughly 1,500 facilities, according to Gerry Gotfrit, president of StorageMaxx Canada Inc., the real estate company leading the revival of self-storage in Canada. StorageMaxx's first acquisition was Checkerboard Self Storage, a 60,000-square-foot property in Burlington, Ontario, Canada. The goal is to acquire 40 more properties in the next 18 months in major markets including Toronto, Calgary and Vancouver.
"The Canadian self-storage market is unique. Ownership of facilities is fragmented. There are few significant players. Growth potential is substantial--a minimum of 5 percent a year," Gotfrit says. "We're under-stored, and we're also going into a vertical population. People are going into condos and retirement homes that require storage."
Like in Europe, land is at a premium and Canadian investors are hesitant about self-storage. "Our Canadian banks are not in love with the storage business because they view it as month-to-month leases," Gotfrit says. "They don't underwrite it like they do in the United States. They're quite timid about the business and investing in it." However, StorageMaxx has secured financing through a GE Capital and Deutsche Bank. "We just think it's a great opportunity to consolidate the business in Canada. We see a real opportunity to add more stock into the population," says Gotfrit.
Although the foreign market is growing, everyone agrees it will not surpass the American market anytime soon. "There is still too much opportunity in our own backyard," Kliebenstein says. "It is very expensive, and the risk profile is much higher for growing this business in Europe and the rest of the world. U.S. capital may find its way overseas, but there are so many barriers to entry that I do not see the independent owner-operator--the backbone of our industry--packing off to Europe to build self-storage operations. It is amazing how many owner-operators do not want to develop beyond a 25-mile radius, much less 2,500 miles!"
The self-storage industry may have had a rocky year, but everyone interviewed for this story remains positive about its future. "Self-storage continues to be one of the best entrepreneurial opportunities in America," Chiswell says. "One thing for all developers to keep in mind is getting the store built is the easy part. Successfully starting the store and achieving stabilized occupancy is where the 'heavy lifting' comes in but, in many cases, it gets the least attention."