We’ve heard a lot in the press about being “too big to fail.” As you know, the government stepped in last year to save some of the financial giants. Without that action, our entire financial system would have been in jeopardy. Most small businesses will not be afforded the same luxury, leaving their owners to fend for themselves and in jeopardy of losing their livelihoods.
There is little doubt that the smaller self-storage operator is under more pressure to survive than ever before. It’s true that a self-storage owner—big or small—needs to be smarter to maximize income in this down market. However, it’s possible the small operator is in a unique position to actually take advantage of its size and achieve success―that, in fact, smaller self-storage operators may just be “too small to fail.”
Your facility just might be the right size. Consider that a majority of self-storage properties are between 30,000 and 60,000 square feet and have values in the $1- to $3-million range. In comparison to larger storage properties and other commercial real estate assets, that’s pretty small. In self-storage, when facilities are larger than 75,000 square feet, it becomes more difficult to maintain occupancy.
Resistant and Resilient
As far as real estate goes, few investments are better than self-storage. Is our industry recession-proof? Financial-markets-meltdown-proof? Unemployment-proof? Overbuilding-proof? No, no, no, and of course not. Self-storage is, however, resistant and resilient. As the market changes, the demand drivers for self-storage also change. According to several reports that track commercial real estate, self-storage has the lowest default rate of all properties.
On average, there has been less rental-revenue pressure on self-storage relative to other property types. If this is hard to believe, consider what’s happening to retail and office properties where tenants routinely approach owners and management companies to renegotiate leases. In most cases, these revised terms will last five years or even longer.
In comparison, the month-to-month leasing prevalent in storage may be a saving grace. As the market recovers, storage owners will be able to respond by adjusting rental rates upward accordingly. Self-storage also has a diverse tenant base, limiting exposure to single tenants and virtually no cost with re-tenanting.
Small self-storage operators have a unique sense of entrepreneurial pride, treating their business like their baby. After finding the site, designing the facility, enduring the pain to get the necessary approvals, getting financed and leasing up the property, there’s clearly a vested interest.
Many small to mid-size operators are very involved with the daily operation and activity at their facilities. Staying involved allows them to control expenses, stay on top of maintenance, manage personnel issues, personally interact with tenants, and maintain a firm grasp on rental demand and pricing. Today’s market requires the flexibility to offer tenants the customized deals necessary to maximize occupancy and revenue. Let’s not forget the personal relationship that might matter to the customer most during his time of hardship or need.
The role of a smaller operator/owner goes beyond property management and must also include asset management. Often overlooked, this component can provide a tangible competitive advantage.
A critical part of managing the asset is keeping the financial partners, including the lender, informed about operating performance, even when this is not specifically required. If you’re experiencing problems, it’s advisable to speak with your lender as early as possible. Odd as it may seem, this is another area in which being smaller can often be to your advantage. So many lenders are currently dealing with much larger non-performing credits with worse scenarios and loss implications than you’ll ever present to them. Keep this in mind, and try to work this to your advantage.
When the capital markets make dramatic shifts, all owners are affected. Over the past 18 months, three of the four self-storage real estate real investment trusts (excluding Public Storage) needed to test their ability to raise capital in a distressed capital-market environment. With much effort, all three succeeded, effectively reinforcing the notion that larger well-operated institutions are capable of assessing capital easier than smaller operators. However, lessons learned by these giants in our sector is capital is not easy to secure; and to do it, one needs to be diligent, creative, resourceful and realistic.
However, if a lender is still actively lending, it may be easier for it to put smaller loans on the books than larger ones. Additionally, lending limits are based on a bank’s capital structure, which, in many cases, has been reduced in this economy. Smaller borrowers can theoretically access a larger base of lenders. In this regard, I highly suggest you seek the advice of a professional mortgage broker to expand the base of capital sources and market your deal, given that competition for loan dollars is more competitive than any time in recent history.
The self-storage industry is still highly fragmented with a large preponderance of smaller operators; nonetheless it’s an industry that will be well poised to survive this economic cycle. Take aim at your strengths as a smaller operator to run your business better and manage your financial position, and you just may find that you’re too small to fail.
Neal Gussis is a principal with The BSC Group, a Chicago-based commercial real estate financing advisory firm, where he supports self-storage owners nationwide. He can be reached at 847.922.3750; e-mail [email protected].