January 1, 2002

15 Min Read
State Of The Industry Report 2002

Jim Chiswell was with a client during the early morning hours of Sept. 11 when he heard about a plane crashing into the World Trade Center. "From the second floor of this building in New Jersey, we watched the second plane hit, not knowing what it was," says Chiswell, of Chiswell and Associates in Lake Monticello, Va. "And I thought about my granddaughter. Her America and her world changed forever."

What that America will be is still unfolding. When I began working on this story in late October, the political and economical climate in America was muddled. As New Yorkers continued to pick up the pieces, military strikes on Afghanistan targets were ongoing. Americans were desperately trying to cope with a post-Sept. 11 world--not really knowing what the future would bring.

Every January, Inside Self Storage asks industry experts to make predictions about upcoming years. But prophesizing 2002 seems daunting, if not entirely impossible. Like every industry in America, self-storage is feeling the affects of the terrorist attacks. During the month of September and into early October, there was a slowdown in new rentals, developers fielded fewer phone calls, and financial institutions tightened already restrictive loan requirements. However, the people interviewed for this story agree America's economy was in trouble long before Sept. 11. They also concur self-storage will survive.

"Storage is one of the hierarchies of needs for people," says Michael Parham, CEO and owner of National Development Services Inc. in Bulverde, Texas. "I've been in good markets and I've been in markets that have started to soften. The reasons for the demand change may change, but the demand is still there."


The past year--and the year to come--will debunk the myth that self-storage is recession-proof, say industry veterans. "The industry tries to portray the image that it's recession-proof, but I've never seen evidence that self-storage is less hit by recession than other industries," says Maurice Pogoda of Farmington Hills, Mich.-based The Pogoda Cos.

How self-storage owners, developers and financiers are being affected by the nation's slow economy varies. New construction has dipped, and many companies have seen a slowdown in new rentals. "We've experienced a fairly significant decrease in activity, at least in our part of the country, vs. what we experienced for many years," Pogoda says.

Yet some companies have had increased rental activity despite the economy's downturn. Devon Self Storage CEO Ken Nitzberg reports 2001 as the company's best year so far. "Most important, we had very strong, sustainable rent-rate increases across the board," Nitzberg says. "As the economy has gotten more difficult, it seems people are downsizing. And if they're downsizing, they have to put their stuff somewhere."

Another factor contributing to the industry's vulnerability during a recession is overbuilding. Many markets are flooded with facilities, making it difficult to predict how self-storage, as an industry, will be affected. During the country's last economic downturn in the early 1990s, there wasn't as much product on the street as there is today, says RK Kliebenstein, an industry consultant and owner of Coast-to-Coast Storage in Boca Raton, Fla.

There is at least one indicator that emerged from the last recession-- self-storage in urban areas faired better than that in rural sectors. "The rural stores probably lost occupancy and gave up rental rates. The city stores lost very little occupancy and didn't get rent increases," Kliebenstein says. "Now we really don't know what's going to happen. We can only use our best judgment--which means you have to be where there's economic activity, and that's in a city. That's where people lose jobs, find jobs, get married, get divorced, have babies and die. Those are the activities that cause people to use self-storage; so logic tells us we want to be where there's more people experiencing those events."

Mike Burnam, CEO of StorageMart in Columbia Mo., offers a somewhat more accurate term for the industry's resilience in times of economic hardship. "It's recession-resistant," he says. "Self-storage is a demand-driven product. Whatever drives demand drives the rentability of self-storage." While demands can vary--a new job, or more money, purchases or people downsizing--all of them create the need for self-storage. "Whether people are moving up or down in life, there is still a demand for self-storage and, for that reason, it is resistant," Burnam says.

Eric Snyder, vice president of California-based Buchanan Street Partners, agrees. "For the most part, self-storage will do OK in both a good market and a weak market. The demand factors for self-storage come from disruptions in everyday life. These kinds of disruptions are pretty good driving factors for self-storage."

A Year of Caution

Most predict the recession will be short and fairly mild. "We'll probably be out of it by the second quarter of 2002, certainly by the middle of the third quarter," says Harold Leslie, president and CEO of Leslie Industries in Tallahassee, Fla.

Dave Cook of Tacoma, Wash.-based Tech-Fast Metal Systems says the economy is already starting to turn around. "We are seeing positive signs out there of basic fundamental strengths that are in the economy: liquidity and the availability of cash is good. Interest rates are the lowest they've been in forever. And we're looking at indicators in terms of inquiries and leads that tell us things are keeping at a level pace with what we saw in 2001. We see that remaining strong in 2002 and even beyond."

A few industry veterans, however, say the economic slowdown will continue into the new year. "I see 2002 being a year of decreased occupancy, and I don't see a whole lot of building going on," Pogoda says. "A lot of construction was stopped dead in its tracks by what's happened recently."

Nitzberg foresees weaker rent increases and some fallout in occupancy across the country. "The facilities that are going to experience that are going to be the less-well-positioned, less-well-managed, less-secure, first-generation-type sites," he says. "Those types are going to start to suffer as the public simply becomes unwilling to take the risk of putting their possessions in there."

Overall, it will be a year of tighter evaluation, says Kliebenstein. "It's going to be a time that will separate the good operators from the not-as-good to a greater extent. Those who are sharpening their marketing and management will do better than those who are not," he says. "Consumers are becoming better educated, and they're going to seek higher levels of quality--both in management and location. Those who are well-placed are going to continue to be market-beaters. Older stores that have not kept abreast of technology, have not made improvements to their property, and have rested on their laurels for a period of time will see the effects of a tougher economy."

Finding Financing

One factor everyone agrees on is lending institutions will be a lot choosier this year. "They're already showing signs of that," says Mel Holsinger of Tucson, Ariz.-based Executive Self Storage. "In the last four or five years, there's been such a tremendous amount of new development. Lenders are wondering if they're overbuilding these markets and are concentrating on businesses that are doing well. The lending markets are going to pull back new development money."

And unfortunately, self-storage is lumped in with other real estate ventures such as hotels and retail, says Snyder. "As lenders decide it's risky to put loans out on real estate, that will include self-storage, so it will be much more difficult to get financing," he says. Developers, owners and managers looking for money will have to meet stricter criteria, including proof of experience and success in the self-storage industry. Banks will also be looking for clean credit and a good track record with renters.

"Overall, lenders seem to be more conservative with underwriting deals," says Neal Gussis, senior vice president for Beacon Realty Capital in Chicago. "With self-storage using month-to-month leases, lenders are more cautious and will probably look more closely at your ability to maintain your income on a monthly basis."

But there is financing--and very good financing--out there, Gussis says. "Financing for permanent loans will continue to be available from banks and conduits throughout 2002," he says. "The rates will continue to change. It's hard to predict given where we are today. People are going to go on as business as usual and most lenders are taking that approach, too."

Self-storage owners should take advantage of current low interest rates, Snyder says. "Interest rates are probably the lowest they've been in the last 10 years. You can get a fixed rate for around 7 percent to 7.25 percent. Floating-rate loans are even lower, in the 6.5 percent to 7 percent range. If you're interested in financing, you should do it. Rates may go a little bit lower, but they're probably more likely to go up than down over the next 12 months."

The industry will also continue to attract investors, Holsinger says. "A lot of investors are going to study self-storage as an investment vehicle over the stock market because of the market's volatility."

Running a Better Facility

Operators who choose to forge through the hard times may need to make adjustments in how they run their facilities--especially when it comes to security. Video surveillance, razor wire, security gates, alarms and personal codes have become the norm at self-storage facilities across the country. But industry veterans predict the events of Sept. 11 will cause operators to increase security measures. "As operators, we need to be very diligent in making sure we require positive identification and use more on-site surveillance. We need to be aware of who's moving, what they're moving, and how long they're there. We need to do a better job," Holsinger says.

Although there's no way to be sure every person who walks through the door will be a safe rental, there are steps owners and managers can take to prevent future problems. For example, managers should know how to spot fake identifications and make sure addresses on checks, identification and rental contracts match. "If a guy comes in and doesn't have any identification and wants to pay for it all in cash, I'd be a little suspect. Years ago, we'd probably take his money and go on," Holsinger says.

Too often, managers don't want to ask questions, Chiswell says. "We need to ask. We need to know who our customers are." It's also OK to tell a potential customer "no," says Parham. "That's going to deter a large majority of your problems. The other side is to have active management. You can eliminate a lot of potential problems just by having active management." However, Chiswell cautions managers to be careful not to discriminate. "There better be a consistent policy in terms of management's approach," he says.

While Nitzberg agrees there will be significant changes in security, he says it will only be with the better operators. "The mom-and-pop facilities don't have the money and don't think security is necessary, and they don't use it," he says. "That's going to be a big deal. That's what separates those who are successful from those who aren't--public perception of how well your facility is managed; and how well it's managed is often defined by how safe customers feel when they are there."

The Direction of Marketing

Since the Internet popped onto the horizon, everyone has scrambled to find ways to make money off the dot-com craziness. Self-storage operators immediately created websites with information on rental rates, features and storage sizes. Some facilities allow customers to make payments or reserve a unit via the web. Some give quotes to potential customers online. But it's only been in the last year or so that companies have found true success with Internet marketing.

"For us, the Internet is doing twice what I ever thought it would do," Holsinger says. Executive Self Storage revamped its website recently, adding new features, more information about the company's history and philosophy, locations and employment opportunities, and has links to Monster.com and Inside Self-Storage.

The Pogoda Cos. also saw an increase in Internet-related business in 2001. "We're starting to see more and more people turning to the Internet. It doesn't by any means replace what have been our normal modes of attracting business, such as the Yellow Pages. It's very much a supplement," Pogoda says.

Others are still waiting for the Internet to prove its worth. While Devon Self Storage receives several hits a day on its web page and the site has resulted in some rentals, Nitzberg says the Internet still hasn't proven its worth in this market. "We all have websites, and everybody's trying to figure out how to make payments on the Internet, rent units on the Internet. Everybody's spent a fortune," he says. "It's still a great, fun subject to talk about, and everybody is still really excited; but no one has seen any results that even come close to justifying the cost or the energy expended."

Geography plays a huge role in Internet-marketing success, says Kliebenstein. "If you're near a university, there's no reason not to spend money on Internet activity because students use it," he says. "If I were in a blue-collar area of a major city, I probably wouldn't be spending much money on Internet activity because those are not the people shopping online."

Just having Internet presence is not enough, either. A website should be easy to navigate and have solid information. Internet-marketing success also requires the ability to attract potential customers. "You need to look at companies that can put banners out there to get hits to your website," Kliebenstein says. "You need to drive traffic to the website, because few of us regional or individual owners can spend the kind of money necessary to generate banners that will create hits."

Crossing the Ocean

Another avenue self-storage developers will continue to pursue in 2002 is European expansion. Devon Self Storage is one of a handful of companies finding success in Europe. The California-based company currently has eight facilities in Germany, France and the Netherlands, with many more planned.

"We are very bullish on that, and intend to develop as many as we can find reasonable sites and financing for," Nitzberg says. The European market has proven to be fruitful because there are a number of potential customers and very few facilities. "It's like being able to go back to the U.S. market 25 years ago, knowing what you know today about the industry," Nitzberg adds.

One drawback is the majority of Europeans have yet to understand what self-storage is and how they can benefit from it. "It's a very American phenomenon," Nitzberg says. "There are only a couple of cities in Europe that have enough facilities for there to be any semblance of public awareness of what these things are."

Moreover, business in European countries is quite different. "You have to look at a number of factors when you go to another country--the cost of real estate, the culture, whether the people will accept this kind of service, if the population afford it--and then you have to look at what it will cost to be the pioneer," Nitzberg says.

Tech-Fast Metal Systems is also considering developments overseas. "Western economic influence is going to push itself that way. The consumer wants more products, more options, that will create some demand for it," Cook says. "Looking beyond our borders creates a completely new emerging market."

Surviving the Economic Storm

If there's a theme running through this year's forecast it is this: Operators who run tight ships in good locations should weather the economic storm. Operators scraping by with inadequate security, unstable finances and poor locations may find themselves slowly sinking in 2002. "This is a year of caution," Pogoda says. "People are going to have to get their houses in order and focus on operations--making sure their sites are spotless, managers are spiffy and they're doing all the marketing they can. All those things that make for a good site during good times are probably even more important in bad times when you're fighting for every customer."

Owners who want out should make their move. "If they're thinking about selling, they probably ought to sell now as opposed to thinking they can sell any time in the next two years, because it could get a lot worse," says Mike McCune, owner and president of Argus Real Estate Inc. in Denver. Owners who choose to weather the storm need to be certain they have the financing to carry them, especially if the economic and political climate continues. "You need to make sure you have the cash and adequate working capital in case you need to take some hits," McCune adds.

Aside from how the war on terrorism plays out, the self-storage industry will continue to grapple with the ripples from its horrific events. "It's going to be a very interesting year. Who knows where the country is going, where the economy is going?" Nitzberg asks. "The overall thing is everybody is kind of hunkering down a bit. When that happens, economic activity slows down. There will be less construction. There will be fewer new facilities. We've had a couple of really great years, but I think we're going to see a slowdown. Everybody is reluctant to take some economic risk right now."

Yet industry veterans remain positive about 2002. "There's no way to judge, yet, the impact on our industry. And we don't know how deep the recession will be," Chiswell says. "If you ask me, overall, 'Are you optimistic or pessimistic about the future of the our industry?' I'm not being a Polly Anna when I say I still believe it's a terrific industry. It's an industry that's going to get better."

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