The Big Self-Storage REIT Merger: Operator Response to the Union Between Extra Space and Life Storage

Consolidation is natural in most industries as they mature, and self-storage has seen quite a lot of it in recent years. Bigger companies buy smaller ones to fuel growth, take advantage of economies of scale, and capture greater market share and revenue. In fact, there have been many notable mergers in the history of storage; still, the recent acquisition of real estate investment trust (REIT) Life Storage by fellow REIT Extra Space Storage—two of the largest companies in the sector—was a shock to many.

An attempt by Public Storage Inc. to purchase Life Storage in January tipped off the industry that such a transaction was plausible. Add to that, Extra Space made another bold move last fall when it acquired the 100-plus Storage Express portfolio. Still, a purchase of this magnitude rarely occurs.

The all-stock, $12.7 billion Life Storage transaction is expected to close during the second half of the year. Once complete, it’ll add nearly 2,000 facilities and more than 88 million square feet to the Extra Space portfolio. The company will then hold the industry’s largest footprint, with 3,500-plus locations comprising more than 264 million square feet, knocking Public Storage from its long-held top spot (it currently operates approximately 2,900 facilities).

While it might seem like REITs dominate the self-storage industry, the top six only own roughly 20% of the total square footage and provide third-party management services to another 5% of the market, according to a January report published by Hoya Capital Income Builder Marketplace. The remaining properties are still in the hands of independent and regional owners as well as third-party management companies, which are also expanding rapidly.

Nonetheless, a merger of this size is bound to cause some major ripples. The following explores what they might be, what operators think about the union, and whether they plan to make any changes to their business in response.

The Good and the Bad

Self-storage professionals have mixed views on how this merger will impact the industry on a broad scale. While some are worried about negative consequences of one company controlling so much market share, others believe there’s a silver lining to the deal that’ll create benefits for operators of all sizes. Then there are those who think it’s just another day at the office. These operators simply plan to focus on their own path.

“Whenever you have one player in the market with the lion’s share of the storage space, it’s never good for independent operators. Extra Space can sink the market and can afford to do so as a one- or two-site owner [in that specific market], which greatly impacts your site. This move is only good for Wall Street investors, not the self-storage industry,” says Rick Beal, co-founder of Atomic Storage Group, a third-party management company overseeing 65 facilities in 17 states.

The merger could be especially challenging for operators who already have both brands as a competitor. “Unfortunately, some markets will probably see one dominant competitor where Life and Extra Space are already major players, and now that single player will have even more control over the market,” says Kelley Redl-Hardisty, managing partner for Guardian Self Storage, which operates 14 facilities in New York. “Interestingly, where Life and Extra Space are in the same markets, we tend to have higher rates. I am not sure how having the consolidated operators will affect us, but at this time we’re not anticipating anything significant.”

Many storage professionals can’t help but compare this acquisition to those of the past, including the Extra Space purchase of Storage Express, whose properties are fully automated. “Extra Space and Life Storage are essentially the same type of product: large facilities in primary markets. So, now they are bigger, but they don’t dominate the industry,” says Gary Edmonds, owner of Pike Co. Storage, which owns 17 facilities and provides third-party management to another 30. “When Extra bought Storage Express, they went into small tertiary markets with unmanned facilities. That is a change in strategy and is a lot more concerning.”

In addition, the Storage Express purchase enables Extra Space to offer customers different service levels, thus widening its tenant-acquisition funnel. “This may ultimately lead to increased customer-acquisition costs for smaller operators who competed with them and other large operators,” says Ben Vestal, president of industry brokerage Argus Self Storage Advisors.

While many are taking a “wait and see” approach, the REIT merger should be a wake-up call for all independent owners, says Steve Mirabito, founder and president of StoragePro Management, a third-party management company that operates nearly 100 facilities in seven states. “We are experiencing a transformation in the storage industry akin to the disruption that has affected just about every other business sector except self-storage,” he says. “I love to see independent owners succeed. Unfortunately, small management companies and independent owners don’t have the resources, technology and systems to effectively compete for future customers, resulting in a higher customer-acquisition cost and operating costs. Some might say ‘Oh, it does not affect me,’ but it affects everyone, as size and scale affect each independent operator’s ability to compete and get customers.”

There are a few areas in which operators might benefit from the union, including an influx of quality talent. “As with all mergers, there’s the potential to create redundancies in staffing. On the surface, this merger doesn’t seem different,” says Scott Lewis, CEO of Spartan Investment Group, which operates 59 facilities in 11 states under the FreeUp Storage brand. “This may free up REIT-trained and experienced team members for opportunities to join smaller operators, thereby boosting the abilities and capacities of those operators.”

On the competitive side, it also creates a near peer for Public Storage. “With the two giants focused on each other, even more now than they probably were, that could ease pressure on smaller operators,” Lewis says.

Another possible boost is more technological innovation. “The merger has the potential to aid in technology acceptance in the market as both Life and Extra are leaders in that field. Also, this could improve digital placement for mid-sized operators,” says Grace Totty, vice president of marketing for Absolute Storage Management, which operates 137 properties in 16 states.

More Consolidation Ahead

One aspect of this huge transaction that everyone can agree on is the inevitability of more consolidation for the self-storage industry. “This has been ongoing since I’ve been in the business for 30 years, and will continue for the foreseeable future, as there is still significant fragmentation in our industry, coupled with numerous groups working on rollups,” says Ricky Jenkins, founder and president of The Jenkins Organization Inc., which provides third-party management for more than 60 self-storage facilities in Louisiana, Oklahoma and Texas.

Consolidation is a primary avenue for the REITs to grow, particularly because they tend to focus on acquisitions and management contracts over ground-up projects. “With the limited number of deals on the market, the biggest option for them is consolidating,” says Ryan Rogers, a managing Partner for RHW Management, which oversees 21 facilities under the Store Here Self Storage brand. “I would expect more consolidation, as the opportunities to smartly purchase facilities has tightened.”

The industry’s positive performance over the past decade has enticed newcomers flush with funds, which also means increased competition for valuable acquisitions. In some ways, self-storage experienced a “sleepy existence” until the last few years when larger investors began to notice what an amazing asset class it is. “Once that general realization happened, the number of institutional players multiplied very rapidly, which provided the capital for all manner of advancement, from additional supply to tech innovations,” Lewis says. “Now the word is out and, over the next five to 10 years, the industry will become much more consolidated than it already is.”

Many of these investors are backed by private equities eager to gobble up large portfolios rather than just single sites. “These new operators are in many ways the catalyst in how our industry is changing,” Mirabito says. “These owners are acquiring properties in not only the primary markets, but in secondary and tertiary markets. They have the scale, innovative ambitions and desire to collectively dominate the marketplace.”

In addition to bigger bank accounts, they bring a fresh perspective to an industry that’s been historically slow to change, therefore overhauling a business model that has been in place for decades. “They will continue to acquire independently owned properties and add value through their willingness to disrupt based upon experimentation and testing of their proprietary strategies, systems and technology,” Mirabito says.

However, self-storage largely remains a commodity. “The way to win is to have the lowest cost advantages, which is done through having the largest scale,” says Cory Sylvester, principal of real estate firm DXD Capital and Radius+, which provides a data source and analytical tools for the self-storage industry. “This means that the only real way for the largest REITs to continue to dominate is to roll up their competitors.”

On that note, don’t be surprised if Extra Space and Public Storage seek more acquisitions of smaller portfolios and even single facilities from independent owners. Notably, Extra Space will also benefit from a credit upgrade following the purchase. “This would reduce Extra Space’s cost of capital, allowing them to be more aggressive on new acquisitions and grow their bridge-loan program. It’s also possible that Public Storage will take action, and we will see very aggressive prices paid for certain assets within the market,” Vestal says.

Ultimately, Extra Space will become a more educated buyer willing to pay high prices when it finds deals to be accretive to its overall portfolio. “I wouldn’t be surprised to see one of the other REITs take a run at acquiring a large operator before the end of the year,” Vestal says. “However, we are continuing to see new investment groups taking ownership positions in the space, making it harder for the REITs to consolidate the industry on a one-off basis.”

Independent and regional operators won’t be immune to more consolidation, either. There will always be owners and investors seeking to expand their portfolios through acquisitions on a smaller scale. “For the rest of us, there will continue to be some consolidation for regional operators, I would imagine, but it still leaves the bulk of the business in the hands of entrepreneurs,” says Anne Ballard, president of training, marketing and developmental services for Universal Storage Group (USG), a third-party management company that oversees more than 60 properties nationwide.

Changes on the Horizon?

If you’re part of the 75% that controls self-storage, you might be wondering what all this consolidation means for your business. One fear some operators have is a sudden drop in rental rates, which would be a devasting blow to the industry following three years of steady increases. “If they operate the new entity like Extra Space, then I foresee rates dropping in the short term, which is no good for anyone,” says David Dixon, chief operating officer for USG. Being the cheapest in town, however, isn’t the way to win customers. “Don’t try to fight based on rental rates. Customer service and curb appeal will prevail,” he says.

It’s also imperative for operators to convey what makes their property unique within their markets. “Maintain a quality product in your operations, technology and customer experiences, both live and online,” Ballard advises.

Though The Jenkins Organization has no operational changes planned due to the REIT merger, there’s one area of its business that might be affected. “Extra Space will have more marketing clout than previously, so it could cause us to increase marketing spend at select facilities,” Jenkins says.

Lenorah Durel, operations manager for Elmwood Self Storage & Wine Cellar in Harahan, Louisiana, also plans to closely monitor her market before making any operations or marketing changes. “Our area will now have three Extra Space Storages on the same street, blocks from each other. It takes our monthly comp report to over 50% Extra Space. I am interested to see how this change will affect Google AdWords bids,” says Durel, who’ll work with her website developer and marketing company to strategize and formulate a solid marketing budget.

Henry Clark, an owner-operator with eight facilities in the Midwest, also views marketing as a key differentiator, though he doesn’t foresee making changes to his strategy since he’s confident his company is already on the right path. “If we stay in prime locations, we will continue to compete against the REITs,” he says. “But we’re already beating them from both a Google search standpoint and aggregator ranking. You just have to know how the game is played.”

The fact is, Extra Space and Life Storage are already often the biggest competitors for many regional brands, including Access Self Storage, which operates 22 facilities in Connecticut, Maine and New Jersey. “We’re used to keeping an eye on their actions,” says Michele Cavaliere, company president and chief operating officer. “We can’t compete with their marketing budgets, and we don’t try. We are well-respected in our neighborhoods. I don’t foresee making any changes, but we’ll watch the integration.”

Even though self-storage operators should have a pulse on their market, they should also look internally. “We don’t truly compete with the big players,” Edmonds says. “We use them as a measuring stick sometimes, but we compete against ourselves. If we constantly strive to beat our own performances, we will be sound.”

Durel also encourages smaller operators to make connections in their neighborhoods by hosting events, joining local business chambers or other service groups. “Right now is the perfect time to take advantage of the change in the market and focus on becoming or, in our case, continuing to be known in our area as the storage that’s involved,” she says.

Above all, Beal cautions independent and mid-sized operators to avoid having a knee-jerk reaction. “With that said, we’re going to take the time to review every part of our operation and customer journey to make sure they’re razor-sharp,” he adds, suggesting operators also seek ways to enhance or introduce new products and services to remain competitive.

Simply put, self-storage operators need to stay on their A-game, Redl-Hardisty advises. “Continue to keep your properties in top-notch condition and focus on sales training. It’s hard to compete with the personal touch of a local manager who knows their property and competition inside and out. You may have to meet or beat some pricing, but it’s important to get the customer in your site!”

No matter the market conditions and what’s causing disruptions, solid business fundamentals are the path to sustained success. “Smaller operators don’t have the resources to compete head-to-head. Stick to doing the basics very well and provide your customers an amazing experience,” Lewis says. “Smaller operators can be more nimble than large, publicly traded organizations. Use that to your advantage to provide a great experience and try new things such as the new tech coming out. Just don’t lose focus on the basics that work. A safe, clean facility where it’s easy to do business is where customers will choose.”