While many small, private operators fear the increased competition and possible changes the REITs may bring to the industry, these companies also bring lower capital rates, which raises facility values, not only for them but for all operators.
"Consolidation in general is good for the industry," says Chris Sonne, the executive managing director of Cushman & Wakefield's SSIG. "It may seem scary to a small operator, but transaction demand drives down capital rates, which raises values. Capital interest by both lenders and equity helps all operators, not just the large ones."
Consolidation brings other benefits to smaller operators as well, such as improved technologies, higher rates and standardization of the quality of products and services offered. It can also lead to less competition for consumers, says Nicholas Malagisi, national director of self-storage for Sperry Van Ness International and managing director of Sperry Van Ness/Commercial Realty, a commercial real estate brokerage firm in Buffalo, N.Y.
"This may translate into increased market share by the operator, who can further his economies of scale that are so prevalent in our industry and reduce his operating costs per property or per square feet," Malagisi notes. "While these economies of scale should reduce his operating expenses, this does not necessarily translate into reduced prices for the consumer."
While small, private operators still maintain their role as heavyweights in the industry, REITs are bringing new aspects to the game, like more advanced technologies and nearly unlimited marketing resources. Experts agree small operators must stay ahead of the curve to compete with larger companies.
Doing so may be a challenge for some smaller operators, says Kevin White, director of business development for Virtus Real Estate Capital in Austin. "The result of consolidation will be that it makes it much more difficult for the single-site operators to compete. They don’t have the Internet-marketing capabilities or revenue-management programs to compete with the large operators."
To come out on top, operators in busy markets need to be smart about their advertising and marketing, especially online, Malagisi says. "The Internet was originally thought to be the great equalizer in that a small business could create a website to advertise its products or services to compete against the larger companies. We now know the large operators dominate the Internet by paying mega dollars to have their company names on page."
Wilson has no fear for small operators who are up for the challenge. "There will always be room for the single-site operator who can stay competitive," he says.
Is New Construction on the Horizon?
Self-storage real estate experts agree that while acquisition is still the strongest trend in the industry, some companies may be gearing up for development. This is in part because the self-storage industry is at the bottom of the real estate cycle, moving from recovery into expansion, Wilson says.