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January 17, 2008

5 Min Read
Thoughts From the Road: Are We Heading for a Cliff?

During the past six months, I’ve talked with countless owners who’ve seen occupancy rates drop to the lowest levels in years. “Are we at the end of the Great Self-Storage Run?” they ask. “Is the end in sight? Will we ever recover?” My answers have been an unwavering, “No ... no ... yes.”

While I admit to being optimistic, I don’t think my positive outlook of our industry’s future is unrealistic, but owners’ expectations must be brought in line with reality. Many of us have enjoyed above 90 percent occupancies with 4 percent to 7 percent annual increases for years. My guess is those days are over.

A realistic budgetary forecast of 80 percent to 85 percent will be more achievable. A 2 percent to 4 percent increase would be wonderful, but consider anything over that a gift from the storage gods. Some owners/operators may discover that, once discount patterns are considered, the average rental rate per square foot is less than expected. So don’t ignore the giveaways.

Are there markets that are overbuilt? Of course! Are there some facilities that should never have been built? Absolutely. Have some buyers created artificial expectations of real cap rates? You bet. I have started to see signs that with tightening mortgage underwriting and more realistic closing prices on some transitions, most excesses will leave the market replaced by more normal levels.

The bottom line is we invested in a business that has paid us an amazing return over the past several decades. The fact that those returns may now have been downgraded to great or substantial is certainly no reason to become Chicken Little.

The biggest problem many owners will be facing in the next five to seven years is estate planning. Maximizing the aftertax net financial gain on this business for children, grandchildren or an estate trust can be daunting. With millions of dollars in tax-deferred processes from refinancing and the creative accounting some owners have employed over the years, sorting out future tax liabilities and using all the twists and turns of the current tax code will keep many people up nights for years to come. The recent congressional action on “carried interest” is just a harbinger of what could be ahead for small-business people.

I still consider self-storage one of the best entrepreneurial ventures. Don’t forget more than half of the households in the country have never used self-storage before—according to the Self Storage Association's 2007 Demand Study. My advice: Don’t panic, and keep marketing.

Spring Cleanup

With many of us still scraping ice from car windshields, it’s hard to concentrate on the spring season just around the corner, but now is the time to plan your Spring Clean-Up Campaign. When can new flowers be planted outside the office? When can the sweeper company clean the salt and sand from the drive aisles? Get the paint and supplies ready so touchups can be done on good-weather days.

All these send positive signals to existing customers as well as the prospects driving by your facility each day, and especially to walk-ins seeking a storage solution to their problems. It’s a great time to repaint the office and re-merchandise moving and storage products. Remember, there’s never a good excuse for dust on a box or display. Simply reorganizing displays can give your sales area a fresh appearance.

It’s also a good time to make sure every vacant unit is surveyed, because “vacant” doesn’t always mean “ready to rent.” This is the time to fix roll-up doors that stick—not when you’re demonstrating ease of use to a prospective customer. The days of getting away with saying, “I’ll have that door fixed before you move in” are over. Your rental units should to be ready for sale and move-in the minute you open the door. Plan now for spring to take maximum advantage of each day.

How About Your Rental Agreement and Procedures?

Spring cleanup shouldn’t be limited to buildings and landscaping. Every rental agreement should be reviewed annually and updated as necessary. Working on countless facility audits for clients over the years, I am always surprised to discover that most rental agreements haven’t been updated to integrate all the latest changes based on court cases and legislation since the facility first opened.

Numerous issues have been litigated, resulting in recommendations for more accurate language. You might need to add mediation and arbitration clauses or mold exclusions. Consult a self-storage attorney and have him comb through your rental agreements. You can also visit www.selfstoragelegal.com, created by industry attorney Jeffrey Greenberger, for an array of legal topics focused on storage.

The same is true for letters, forms and procedures. When was the last time you took an objective look at the communications your managers are using each day? Should reminder letters to delinquent tenants be revised to present a more positive message? Are your rules and regulations up-to-date with issues of smoking on the property or speed limits?

You’ll need more than just taking the broom out this spring. Get your magnifying glass and take a close look at all the things that represent you legally to customers. I guarantee this will give you additional peace of mind for the rest of the year. 

Jim Chiswell is the owner of Chiswell & Associates LLC. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. He has served for a number of years as a member of the Inside Self-Storage Editorial Advisory Board. He can be reached at 434.589.4446; visit www.selfstorageconsulting.com

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