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:
- How long has the company been in business, and what is its experience in operating self-storage facilities?
- What is the company’s track record? Does it have the proven ability to meet your goals, whether they be to increase occupancy, decrease expenses, etc.?
- Will the company provide you with references?
- If your ultimate goal is to sell the facility, does the company have experience in self-storage sales, or will you have to hire another company at the appropriate time?
- Will the company provide you with a written proposal that details what changes it will make and how your property will be marketed?
- Will the company prepare an annual marketing plan and budget?
- What fee will you be charged and how is it calculated? (While most management companies charge 6 percent of a project’s gross revenues, many increase or decrease the percentage based on facility size.) Are there any other costs, such as set-up or additional maintenance fees?
- What is the company philosophy? Is it just a bookkeeping service that will maintain the status quo, or does it understand it is managing your investment with a goal of maximizing returns?
- How is the company staffed? Who runs the day-to-day operations? What are their qualifications? How many properties do they manage?
- How does the company maintain control over the facility? How often do its representatives visit each property? What is the company’s audit procedure? How are cash inlays and outlays monitored? Does the company have contingency plans in case of emergency? Does it have relief managers who can substitute in case a manager quits or goes on vacation?
- If the company doesn’t plan to keep your current managers, how are its applicants screened? What type and level of training is offered? Are the managers your employees, or are they the employees of the management company? How are the managers compensated? Are they on straight salary or a bonus plan? Who is responsible for benefits? What benefits are offered? What happens to employees if the management contract is terminated?
- Are the management company’s operations computerized? Does it require on-site computers as a condition of management? If your facility is not computerized, will the company install the technology?
- How does the company pursue delinquent tenants, and what are its auction procedures?
- When maintenance is required, who does it and who will authorize it?
- Is the company affiliated with any national organization, such as the Self Storage Association? Do its employees attend continuing education seminars or conferences that allow them to meet other real estate professionals and exchange ideas?
- What kind of reporting can you expect? In what types of situations will you be asked to get involved? When will you receive financial reports and how extensive are they?
- Finally, why should you hire this company instead of another management company?
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:
- Turnkey Operations—As the owner, your responsibility should be limited to ensuring the management company performs to your expectations. Day-to-day operations are left to the management company.
- Trained Resident Managers—Managers should not be just caretakers, but “storage consultants” who have been trained to determine your customers’ storage needs and satisfy them.
- Employee/Vendor Selection—This includes hiring, firing and supervising everyone from your resident managers to your maintenance personnel and outside contractors. Competitive bidding should be used to control expenses.
- Operating Guidelines—The management company should provide some form of operations manual that offers rules and regulations for how each facility should be run. The company should standardize your operation so the facility runs at peek efficiency.
- Tough Collections Policies—Though you might consider this part of the operations guidelines, collections should be addressed separately and in considerable detail. It is easy to have a facility that is physically 90 percent occupied but has only 70 percent financial occupancy. The difference is often the quality of collections.
- Specialized Marketing Programs—Each facility has unique attributes that must be addressed on its own merits. A program that works on one side of town may not work on the other.
- Constant Supervision—Frequent facility visits and audits are a must to maintain a professional appearance as well as ensure a smooth, honest operation.
- Repair/Remodeling Recommendation and Supervision—The management company should offer suggestions for capital improvements, along with regular maintenance.
- Annual-Budget Preparation—Within a few months after the company assumes management, you should receive a reasonable budget you can use as a guideline for financial expectations and monthly checks of operational efficiency.
- Monthly Status Reports—These are accurate and timely reports that let you compare cash inlays and outlays, occupancy rates and delinquencies, and gauge how well your marketing programs are working.
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.