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Articles from 2001 In December


The Face of Change

One of the inherent beauties of self-storage is its intrinsic simplicity. I have often advocated blending new technology with good real estate to make the best possible, or "best in class," self-storage project, but it isn't always easy to balance the two. The physical part of the self-storage business is changing right before our very eyes. New products are released regularly that affect the way we conduct business--now and in the future.

The rise and fall of the dot-com industry was made possible by technology. While some were heroes--and others victims--of the lightning-speed roller-coaster ride, the debacle left some terrific technology. We should combine some of those efforts with steady developments in the self-storage industry to move forward into the next era.

A History of Self-Storage Technology Use

You may have heard speakers, lenders and industry leaders talk about first- generation, second-generation and current state-of-the-art properties. Following are explanations of these facilities and the extent to which each uses technolgy.

First-Generation Facilities
Constructed between 1970 and 2001 in some rural markets, these facilities typically include fewer than 400 spaces (totaling less than 45,000 square feet) and offices of fewer than 150 square feet. Often built in industrial-park settings, they generally have manual gates and chain-link fences, but no on-site computer, video surveillance or door alarms. They are usually single-story with unpaved lots. They do not feature climate-control equipment and are often accompanied by a Yellow Pages ad that states they have the "lowest prices in town." These facilities typically have owner-operators referred to as the "moms and pops" of the industry. Cap rates for this product, unless the location is phenomenal, range from 10 percent to 12 percent. They are difficult to finance through any means other than a local bank, and very difficult to sell to a REIT or major player.

Second-Generation Facilities
Constructed between 1985 and 2001 in some markets, these facilities included technology on new construction--or added technology and upgrades to first-generation properties--making relatively small improvements. They may be better located than first-generation properties in that they are not always in industrial parks, but are frequently not in the best locations either. Some of these facilities landed terrific locations because zoning officials did not know, toward the middle of the era, what to do with the asset type and allowed them into some areas. The bulk of the Public Storage, U-Haul, Uncle Bob's, Storage USA and the U-Store-It portfolios fall into this category.

These facilities generally have paved lots, access-control gates and on-site computers with DOS-based software. A few have cameras for video surveillance, and some have perimeter beams. Offices typically range from 150 to 250 square feet with all-glass doors replacing residential-type doors and wrought-iron fences replacing chain-link. Most of these properties were developed in a fortress configuration and have more than 400 spaces. A few have added climate- controlled buildings. Many are targets for acquisition by any of the major players--if they are well-located. Typically, these properties carry cap rates in the 10 percent range, and owners can expect deductions for deferred maintenance at the time of sale. These properties are relatively easy to finance and easy to sell.

State-of-the-Art Facilities
Constructed between 1995 and 2001, these facilities often include multistory, climate-controlled buildings in combination with single-story ground-access space, and are in high-traffic, high-visibility locations. These are more often than not referred to as "stores" rather than "facilities" since their offices and retail-sales areas are approximately 600 square feet. These properties are typically built by Extra Space, Public Storage, Storage USA and many regional players. They often have great signage, and many, due to zoning regulations, do not even look like self-storage facilities.

Often these stores range from 60,000 to 85,000 square feet. They have access-control gates, video surveillance with taped backups, fully computerized offices and at least two computers on site. In addition, they may have motion-sensored lighting in hallways, zoned temperature and humidity control, automatic sliding doors at loading entrances and offices similar to an upscale retail store. Desks are typically built into the counter, and the business areas are well-lit and very professional. Most of the employees wear a uniform or adhere to a dress code. Cap rates for fully stabilized, well-located stores can fall as low as 9.25 percent. These stores are relatively easy to finance and easy to sell.

Second-generation facilities can easily be upgraded to state-of-the-art stores. While they can be expensive to upgrade, these properties can compete head-on with newly built state-of-the-art stores if their locations are good. The second-generation property is an ideal acquisition candidate, and owners can expect to be paid top dollar for such stores, particularly if they are full with room to expand.

Toys or Tools--You Make the Call
Technological improvements are a part of our lives--the microwave, fax machine and cell phone are a few. The Palm Pilot is one of those life-enhancing products I use every day. I am investigating how I can more fully integrate this technology into daily self-storage activity, such as inventory checks, vacancy control and delinquency follow-up. While the Palm Pilot may be thought of as a toy by some, it may become a regular part of conducting business. Let's discuss a few other innovations that can make our self-storage lives easier.

Paper, Paper, Paper
I am convinced we will never quite be a paperless society, and those in the self-storage industry should recognize advocating a paperless society is counterproductive. We want those nasty boxes of records piling up in the offices of potential clients! It translates into more self-storage business. But for ourselves, with the exception of auction accounts, the need to keep hard copies of move-out data is questionable, if not obsolete.

Hewlett-Packard and other companies make an all-in-one scanner/fax machine/ printer that could make move-out paperwork a thing of the past. The key is to make certain the machine has a sheet feeder and can reduce legal-size documents to fit on letter-size paper, as many of our lease agreements are legal-size. Imagine having your monthly move-outs stored on a CD. When you need to access a move-out, you simply print the paperwork as if it were a copy of the original document. Best of all, you can throw away all the hard copies. (Once again--I am not suggesting auction files or those regarding abandoned units be handled in this manner.)

Phones, Faxes and Long-Distance Calling

Let's talk about faxes. I am a loyal fan of the free service e-fax (www.efax.com), which converts faxes into e-mails and allows you to store them digitally in directories. Your faxes are available until you delete them and can be accessed from any computer with an Internet connection. As files, they can be forwarded to a central server and accessed by others. You can save all of your faxes on a CD. E-fax allows you to fax directly from your computer as well (there is a small monthly charge for this capability, but it is well worth it). For an additional $10 per month, you can even have a toll-free fax number.

While on the subject of toll-free calls, I'd like to mention the website www.dialpad.com, through which you can make national long-distance calls at no charge. The sound quality of phone calls made through this site is slightly lower than that of those made over traditional phone lines. For important client-related calls, I recommend using standard phone lines. But the cost advantage is indisputable. Through Dialpad, my long-distance rate to Europe is 4 cents per minute, and the quality is similar to that of domestic calls.

Regarding telephones themselves: The new 2.4 GHz phones have dramatically greater range and quality than the old 900 MHz cordless phones. Battery times are better, and the phones are smaller. The cost is very reasonable, and I personally like the V-Tech multihandset phones, which do not accommodate multilines at present, but are likely to in the near future.

As voicemail services are so reasonably priced, no office should be without one to take off-hour calls. For just a few dollars each month, you can have 24-hour backup on your phones. With caller ID, you can monitor traffic and missed calls, which is an important aspect of daily site management. I like a program called Win-Fax, which records dates, times, numbers and the duration of phone traffic. It lets me know when our offices are the busiest and from where our phone traffic is coming. It also provides a history of numbers so I can capture them for marketing or collection purposes.

Web Conveniences

As you can see, many of these innovations are Internet-based. If you believe the Internet is a fad or just a marketing gimmick, you probably had the same reservations about the fax machine--but there isn't a business around without a fax machine these days. The Internet's capabilities reach far beyond glorified advertising (although it does a fantastic job providing detailed information about a facility). Some of the best innovations in Internet marketing are sites that give customers the ability to rent spaces online, including unit selection and processing credit-card payments.

Security Systems

The digital age is upon us, and now that prices have begun to decline, digital technology is becoming more common in the self-storage industry. Take, for example, the ability to take photos and store data in digital format. I recently had the opportunity to see digital-camera technology in action at a self-storage tradeshow. During a seminar, one of this industry's popular security vendors plugged a laptop computer into a phone line, connected it to a projector and, within minutes, we were watching live camera activity of a facility hundreds of miles away. I do not know what it takes to impress you, but that was pretty amazing to me.

The seminar discussed the merits of digital recording. While it seems its costs are still greater than a VHS-tape system, the long-term benefits can override the expense. I like the idea of being able to store camera activity on a hard drive, then easily storing a backup copy off-site. I think here of a situation where several units were broken into at a facility. The next day, the perpetrators came back, broke into the office, stole the VCR and destroyed all the tapes. If the data had been digitally stored and backed up, there might be some interesting records of the activity.

Digital images are also an easy way to take and store identification photos of your tenants. What a great way to discourage thieves and avoid potential risks. I strongly advocate the use of photos to verify who has access to your facility. And what if you could try a starter system for less than $200? I saw one Internet promotion for $169 that included three microcameras and addressable power supplies, as well as a wireless video receiver, transceiver module, video-camera remote control, battery pack, motion detector, cables and more.

Wireless Door Alarms

I remember dealing with retrofits of hardwired door alarms, sometimes abandoning a project because of expense and lack of access to tenant spaces that precluded a smooth installation. Door-alarm technology is improving greatly, and the band signals have been changed and upgraded. Newer systems require fewer transponders, and false alarms have decreased. The price has started to inch downward, and the older systems will be obsolete in just a few years. But before you invest in wireless technology, make certain the equipment is compatible with your software and graphics display. Do not sacrifice good management controls in software just to accommodate individual door alarms. (For a list of self-storage security providers, including those offering digital-video technology and wireless door alarms, visit the online buyer's guide at www.insideselfstorage.com and click "Security and Access.")

Software: The Great DOS Loss

All of the major players that produce self-storage management software have introduced at least one version of a Windows-based program to replace earlier DOS versions. But many operators (including large operators like Public Storage) have not yet made the move to Windows. I can only imagine the expense and time such a conversion would require.

New enhancements to software packages vary widely from vendor to vendor. Below is a list of just some of the features available. (For an extensive list of software suppliers, see the sidebar accompanying this article. For more detailed information, stay tuned for the Inside Self-Storage annual software issue, May 2002.)

  • On-screen, interactive facility maps.
  • E-mail of letters and notices to customers.
  • Automatic verification of customer addresses.
  • Automatic sending of reports via e-mail to home office, owner, etc.
  • Attachment of digital photos to customer records.
  • Printing of letters/receipts in foreign languages.
  • Data backup via the Internet.
  • Automatic lease management.
  • Automatic bank drafts and electronic check deposits.
  • Remote access of databases and surveillance cameras via the Internet.

It appears the face of change is a friendly one. With new advances in everything from alarms to software, storage operators have more choices than ever. Technology enables them to become more efficient, realize greater sales and use more marketing tools--and maybe even save a few dollars in the process.

RK Kliebenstein is president of Coast-To-Coast Storage, with offices in Boca Raton, Fla., San Diego and the Washington, D.C. area. Coast-To-Coast is a self-storage consultancy business that assists developers and owners in operating more efficiently and profitably. For more information, call 561.367.9241.

Self-Storage Software Suppliers

For more detailed information, visit the online buyer's guide
at www.insideselfstorage.com and click "software."

AAID Security Solutions Inc.
Acorn Products/DCAL Computer Systems
American Computer Software LLC
Andrews Software Inc.
Centershift
DCD Services Inc.
Dilloware Inc.
DOMICO
Empower Software Technologies
Essential Business Systems Inc.
FileMan Records Management
Hi-Tech Smart Systems Inc.
Integrity Software Systems Inc.
MicroTask Inc.
Mystic Systems Technology Corp. (MSTC)
O'Neil Software Inc.
Payment Services Network Inc.
PTI Integrated Systems
Quayle Computer Concepts
QuikStor Security & Software
Sentinel Systems Corp.
Separate Systems Inc.
SMD Technologies Inc.
Space Control Systems Inc.
Syrasoft LLC
Umbrella Systems Inc.
Waterfall Enterprises LLC
Wizard Works Security Systems Inc.

Conduit Lending

In today's self-storage financing market, most of the long-term, fixed-rate financing (10 years or longer) is provided by the Wall Street "conduit" market. These loans are pooled together, packaged and sold to investors by Wall Street firms as commercial mortgage-backed securities. While these loans offer very attractive rates (around 6.75 percent to 8 percent, depending on loan size, loan-to-value and debt coverage), qualifying for this financing is often difficult, especially for properties with less than stabilized occupancy or just coming out of construction.

As a general rule, the conduit market underwrites loans to a maximum 75 percent loan-to-value (LTV) using the trailing 12 months of cash flow, not including alternate sources of income such as late fees, interest income and RV-storage income. A property in lease-up may have stabilized occupancy today (85 percent to 95 percent), but may not have had enough cash flow over the past 12 months to qualify for higher LTV requests.

The following are underwriting guidelines to follow when assessing whether your property may qualify for conduit financing:

  • Determine your effective gross income (EGI) by adding your gross scheduled income (GSI) with all other income sources (such as merchandise, vending, RV storage and auction income) and subtracting a 10 percent vacancy factor (used in most cases).

GSI + other income - 10 percent vacancy factor = EGI

  • From your EGI, deduct your operating expenses, including new real estate taxes if applicable. If outside management fees are not included in your operating expenses, deduct 5 percent of your EGI to cover this. Also deduct 15 cents per square foot for future-replacement reserves (replacement of roofs, exterior paint, etc.). This is your net operating income (NOI).

EGI - operating expenses - $0.15/square foot = NOI

  • Divide your NOI by your annual debt service (principle and interest based on desired loan amount and terms). This is your debt-coverage ratio (DCR). Generally, a 1.30 minimum DCR is required to qualify for conduit financing.

Downside Risk

While conduit loans offer very low fixed rates and are generally nonrecourse, they do carry several disadvantages for investors. These loans typically have stiff prepayment penalties tied to yield maintenance or defeasance, which can easily run six figures in the wrong interest-rate environment. They also generally impound for taxes, insurance and future-replacement reserves, and require a minimum of $3 million to $5 million in insurance-liability coverage.

The costs to obtain these loans will run between $10,000 to $30,000, depending on the lender and whether you choose the large ($2 million-plus) or small (typically $500,000 to $2 million) loan program. (This does not include the 1 percent loan- origination fee at closing.) Most conduit lenders charge an upfront, nonrefundable application fee of anywhere from $2,500 to $5,000 in addition to the third-party report deposit. The report will cover the appraisal, phase-one environmental site assessment and property condition, and typically runs about $15,000. Lenders also generally require an ALTA (American Land Title Association) survey, which can easily cost between $5,000 and $7,000. Under the large loan program, you will also usually incur lender's legal fees, which can fall between $7,000 and $10,000.

The above fees are usually less under the small loan program and are typically capped around $10,000 to $12,000, not including the ALTA survey. There are probably a dozen or more active conduit lenders, all having their own specific requirements. One lender may not have any legal fees and no need for a survey in some cases, but might be more conservative in loan dollars. Another lender may be more expensive, but will stretch the loan dollars. The key is to find the lender that most closely matches your investment strategy. Your mortgage bankers and brokers can be helpful in this area.

Is It Worth It?

All this being said, a 10-, 15- or 20-year term at fixed rates far below 8 percent can well be worth the upfront costs for long-term holders of property. Ten-year loans carry up to a 25-year amortization, while periods exceeding 10 years are generally self-amortizing (i.e., a 15-year fixed-rate loan will have a 15-year amortization). Many lenders limit the amortization on metal buildings to 20 years vs. 25. Most conduit lenders prefer stable, well-located properties in metropolitan or high-traffic areas and construction of concrete block, brick or wood frame. Two-story facilities are generally not preferred unless drive-up access is provided. It takes about 60 days to close a conduit loan.

While borrowers can go directly to many of the conduit lenders to originate a loan without the use of a mortgage banker or broker, the process can be a difficult one and is filled with lots of paperwork and red tape. It is highly recommended you understand the loan terms, closing requirements (insurance, title endorsements, etc.) and checklists of information. You should even try to get a sample copy of the conduit lender's loan documents before laying out the upfront cash to begin the process. An experienced banker/broker can guide you through the process and let you know what to expect.

Alternatives

For those looking for lower loan costs and easier prepayment schedules, many other programs are provided by banks, savings and loans, thrifts and even credit unions. There are a handful of national banks offering 10-year, fixed-rate financing at rates around 7.5 percent to 8 percent. These terms can include a full, 10-year or two consecutive five-year fixed-rate periods. Some also offer fully amortized 15-year fixed rates. There are also adjustable-rate programs available in the low 7 percent range. Most of these lenders have upfront fees around $1,000 to $2,500, plus appraisal and environmental fees. The legal fees, if any, are usually around $2,500. Generally, no surveys are required.

Other financing options may require some good, old-fashioned due diligence. For loan requests under $1 million, local and regional, small to mid-size, commercial and community banks may offer acceptable financing terms; but don't overlook savings and loans, thrifts and credit unions as an alternative to your current banking relationships. Yes, even credit unions are starting to offer commercial financing--and most with no prepayment penalties.

For example, in Southern California, we have at least three different credit unions offering commercial financing options. These options range from one program that offers a 6.5 percent fixed rate for two years, then rolls into an 8-year adjustable rate, to another that offers a 20-year fixed rate with a 30-year amortization at 8.375 percent. Both programs have no prepayment penalty.

Permanent loans of more than $1 million are best left for the conduit lenders, insurance companies and larger banks. Insurance-company lending is similar to conduit lending, but with easier underwriting criteria and less paperwork. However, insurance companies are much more conservative in loan dollars, preferring a 65 percent to 70 percent maximum LTV. In addition, properties must generally be well-occupied, newer, well-located and of nonmetal construction. They are selective and prefer shorter, self-amortizing loans. Finally, they typically offer upfront rate-lock features, whereas the conduit lenders prefer to offer rate locks after the loan commitment (two weeks prior to closing).

Be proactive in your financing search by starting early. Lenders are very busy in the current interest-rate environment and closing times are lengthening. Don't wait until 60 days prior to current loan maturity. Give yourself at least 90 days to search for and procure the loan program best suited to your needs.

David Smyle is a 12-year veteran of the banking industry and a mortgage banker in La Mesa, Calif. His company, Benchmark Financial, offers financing solutions for self-storage, apartment and commercial properties nationwide through its direct lending relationship with Bond Street Capital and other institutional financing sources. For more information, call 877.862.7916; email [email protected] ; visit www.benchmarkfin.com

Digital Recording

Security cameras. You've seen them or, more correctly, they've seen you. Security has always been an important issue. Since Sept. 11, video security has become more significant than ever.

Modern technology expands your options to resolve previously impossible situations. If your self-storage site spans nonadjacent property, advanced wireless cameras can bring remote signals to your office. If you own several facilities, you can simultaneously observe all of them using a single Internet connection. To add a marketing advantage, you can display select cameras on several strategically placed monitors in your office, letting tenants know their units are being watched.

A well-positioned video-surveillance system can answer the who, what, when and where of any crime. The mere presence of security cameras can be enough to deter a would-be criminal. But during a crime, your video system is only as useful as the image quality it can provide.

The traditional surveillance system reduces several camera images so they can be combined into the single input of a VCR. It is this shared signal that is actually recorded. The VCR stores this image using a slow-recording mode so it can store several days of video on a single tape. The tradeoff is image quality. Even the VCR tape loses quality as it is continuously re-used. The end result is video playback that is barely acceptable.

You can see an example of this by watching the evening news. The reporter will display a grainy picture depicting a recent store crime. The face of the criminal is masked in snow and the image is almost useless. Compare that image to the picture of the news reporter telling the story. His face is rich in color and detail. What makes the difference? Digital.

Digital recording yields high-quality images that will not deteriorate with time. It retains its video quality forever, and each image contains an invisible mark that assures it was not altered. Modern imaging software can interweave several successive images and create a new picture that provides details no one picture could ever provide. This is how the newest spy satellites are able to read a car's license plate from 100 miles above the earth.

Digital video technology has been developing rapidly. While it was quickly adopted in home camcorders, the small-business market has been slow to incorporate these advances. Most self-storage locations still rely on circa 1990 VCRs, believing their captured images will be good enough should a crime ever occur.

The newest systems let you search for a specific event in a matter of seconds, even when reviewing months of recordings. You can "ask" your video system to show you every time a specific door was opened. Just as easily, you can print or e-mail key images as needed.

Some security systems allow you to integrate your surveillance cameras into your accounting and access software. This allows your staff to watch the site's video cameras without ever taking their eyes off the management computer screen. Furthermore, your keypad cameras can automatically link a video snapshot to each record of keypad activity.

Integration allows you to have advanced video solutions that fit into every budget. For less than $1,000, you can add the ability to view what your video cameras are recording via the Internet. Imagine being able to watch and hear your management office or remote keypads at any time from any Internet-enabled computer.

You do not need to become a video expert to equip your storage site with advanced surveillance. In this post-Sept. 11 world, digital video surveillance may become the most important addition to any storage facility. There has never been a better time to learn what your choices are. As with any product, shop around and find the vendor best able to meet your needs.

Doug Carner is the vice president of marketing for QuikStor Security & Software, a Sherman Oaks, Calif.-based company specializing in security, software and management for the self-storage industry. For more information, call 800.321.1987; e-mail [email protected]; visit www.quikstor.com.

Implementing a Coupon System

I've written in past columns about the importance of each self-storage facility having a unique selling point, or USP--something it offers that customers can't get anywhere else. Having a USP allows you to differentiate your facility from others and compete on some basis other than price. The problem is most self- storage owners and managers associate a USP with items or practices that take significant time and money to implement, such as installing individual door alarms. In reality, a USP can be simple and inexpensive to create. One particulary effective USP is the "coupon system."

How It Works

Create a list of all of the retailers within a three-mile radius of your facility. This would include restaurants, dry-cleaners, quick-lube services, etc. You will approach each business to request coupons for its products or services that you can pass on to your customers.

Starting with those retailers closest to you, visit each one. When you walk in, ask to speak to the owner or manager--preferably the owner. Use this approach: "Hi, my name is Fred, and I own the self-storage facility down the block. I'd like to help you increase your business at no cost to you. Would you be interested?" If he says "no," just walk out. There is no reason to try and convince someone he can use more business. There will be plenty of others who will be enticed by your offer.

If the owner is interested, ask him if he has coupons you can use to direct people to his establishment. If he does, explain you would like to distribute those coupons to your customers. No savvy business owner will object. Also explain you'd like to mark each coupon with some kind of identifier so he can recognize your referrals. This could be a small red "x" in the lower left-hand corner or anything else you might want to use.

If the retailer doesn't have coupons (which, from my experience, will be less than half of those you approach), show him a sample, generic coupon you've created on your computer. Tell him you'll be glad to create a coupon for his business based on whatever discount he is willing to offer. Encourage him to give out something signficant so the response rate will be higher. The best offers involve a two-for-one deal, but a 20 percent or 30 percent discount is good, too. You can also suggest discounts of flat dollar amounts, such as $5 off a $30 purchase.

Make these recommendations, but let the retailer decide. Then, once you've created the merchant's coupon on your computer, bring a copy to him. Have him sign off on a sheet indicating his approval. You should also have him sign a simple release form that guarantees he will honor the coupons.

Your goal is to get as many coupons from as many merchants as possible. The higher the dollar value of each coupon the better; but it is more important to get a maximum number of merchants to give you something.

Let's assume you convince 30 retailers to cooperate. The value of each coupon will probably fall in the $5-$10 range, or possibly higher. The total value of the coupons is then a minimum of $150. With a little bit of time and effort, you have created a bonus that costs you next to nothing, yet has more than $100 in perceived value.

How to Use It

The coupon system allows you to offer prospects something of value. Now, when a potential tenant calls inquiring about a particular unit, you can say: "I'd be happy to give you the price on that unit size; but before I do, I'd like to tell you about a special we're running. If you stop by to take a look at our facility, we'll give you a book of coupons worth $150--even if you don't rent from us. And the coupons are from local merchants you probably use every day."

The goal of the coupon concept is to provide the USP that will entice callers to come in and visit your facility. We know if you can get them to visit, more than 90 percent of them will rent from you. In offering them coupons, you are giving them something with an incredibly high perceived value but very minimal cost to you. I know of one operator who collected 44 coupons from local merchants. Each coupon package cost him less than $1 to provide, but contained coupons equaling more than $700.

Take all of the coupons you've collected and put them together in a large envelope. Print the total package value in large numbers on the outside of the envelope. When people come in, hand them the coupons immediately. By doing this, you create an obligation for them to at least look at a unit. They "owe" it to you--you've given them something of value, and the tendency of human nature is to give something back.

Big Benefits

Managers are sometimes resistant to the coupon system. The main reason is it involves some outbound marketing efforts. Someone from the facility will have to go out into the community, approach the merchants and make the pitch. It's an endeavor, but there are additional benefits. First, you get to meet the merchants in your market area and let them know about your facility. There is nothing better than meeting people face to face to encourage referrals.

Another important benefit is once you implement this program, people to whom you've given the coupons will start to redeem them. Later, when you visit the participating merchants (which you should do every three or four weeks), they will be delighted to see you. You've helped them build their business. You may get some free perks out of gratitude; but, more important, these merchants may now be willing to let you put coupons or fliers for your facility on their counters.

There's more: At some point, your friendly merchant is at a cocktail party. Someone in a conversation mentions his need for storage. What do you think this merchant is going to say? Naturally, he's going to recommend you and your facility. Why shouldn't he? You've been sending him a steady stream of customers.

There is absolutely no downside to this system. Yes, it will take some time; but it is time well spent. You'll be able to offer something of value to your customers. If you don't have any other USPs, this can serve as a way to differentiate your facility from the competition. If you have another USP, use this one to augment it.

Earlier, I mentioned a self-storage operator who collected 44 coupons from local businesses. It took him about 40 hours to put his coupon system in place; but, as a result, the number of calls converted into visits at his facility rose from 40 percent to 50 percent. Those kinds of increases can make a huge impact on your bottom line.

Fred Gleeck is a self-storage profit-maximization consultant who helps owners/operators during all phases of the business, from feasibility studies to creating an ongoing marketing plan. Mr. Gleeck is the author of Secrets of Self Storage Marketing Success--Revealed! as well as the producer of the only professional training videos on self-storage marketing. To receive a copy of his Seven-Day Self-Storage Marketing Course and storage marketing tips, send an e-mail to [email protected]. For more information, call 800.FGLEECK; e-mail [email protected].

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."

Recession-Proof?

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."

The Midwest

In this installment of the Real Estate Roundup, we'll take a look at the investment climate of the American Midwest. Commenting on this region are Bruce Bahrmasel, The Preferred Realty Group, Chicago; Arnold Erickson, Commercial Realty Services, Des Moines, Iowa; Larry Goldman, Prudential Commercial Resource Realty, Kansas City, Mo.; and Harold Helm, RE/MAX 100, Louisville, Ky.

Since many of the large financing companies have left the market, who has filled the role of self- storage lender in you area?

Goldman: The local and regional banks are the primary lenders in this area. Most still like storage for its diversified, steady income stream and overall stability.

Helm: Local banks where buyers have existing relationships have been the main source of funds. However, I have had a recent inquiry from Midwest Bankers, which is a commercial finance company.

Has the shaky economic climate affected the amount of construction taking place?

Erickson: The economy has not affected the amount of construction taking place in the Des Moines area.

Goldman: The market is so strong--due to 1031-exchange money and strong returns--that new construction has not slowed down in the Kansas City area.

Helm: Current economic conditions have not reduced construction because our market in the Louisville area is pretty well saturated. It may have slowed things in smaller rural communities.

Who is actively buying in your markets?

Bahrmasel: People who are migrating from other real estate markets, such as apartment buildings and other investment properties. These buyers are seeking a more reasonable return on their money than their current real estate investments have provided them. Also, the wealth effect created by the current economy has contributed many buyers seeking investments less risky than the volatile stock market.

Goldman: Regional and local multisite owner/operators. Many storage investors have come from more management- intensive property types, such as multi- family and shopping centers. They trade into storage to reduce operational "headaches," i.e., tenant calls in the middle of the night, broken-down plumbing, etc.

What reasons are you getting from prospective sellers as to why they are getting out of the business?

Bahrmasel: Most sellers see this as a good time to sell due to a strong sellers' market. The other reasons are life events: marriage, divorce, retirement and death.

Goldman: Life events, such as relocations, retirement, etc. In other cases, some investors sell because of concerns about overbuilding and potential devaluing of their properties.

Helm: Retirement, divorce or partnership dissolution are the principal reasons for selling. Self-storage is still an excellent investment, and owners often wait until their market has peaked and becomes overbuilt before they decide to sell. Gauging when demand is good and the bloom is on the rose is hard for sellers. When a property has been good to them, they have a hard time considering selling.

Rate your market on a scale of one to 10, with one indicating a buyer's market, and 10 indicating a seller's market.

Helm: This market is still heavier with buyers rather than sellers. I would rank somewhere between four and six.

Bahrmasel: Eight.

Goldman: In areas with population-growth rates in excess of 2 percent, I'd give it an eight. In the few areas with stagnant or negative growth, I'd give it a six.

In this volatile market, what is the most important thing a seller can do to help sell his property?

Erickson: Sellers must be realistic and willing to sell their property at a fair market value, which, today, is very close to an 11 percent cap rate.

Goldman: Maintain strong documentation of revenues without ignoring late fees and retail sales. Build or leave room for expansion to at least 40,000 square feet. This allows the buyer the ability to dilute operating expenses, such as management and advertising costs. That size of facility opens up the universe of buyers and lenders considerably.

Helm: The most important elements a seller can add to help sell a property are good financial records, land for construction of additional units by the new purchaser, and a price that allows the purchaser to earn a return on his investment. Real pluses are the ability to accept trades of other real estate, or to provide seller financing.

Michael L. McCune has been actively involved in commerical real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.

Competitive Pri¢ing

Do you remember back to your college marketing class when your professor taught you about the five P's of marketing? They were product, position, placement, promotion and price. In the self-storage industry, I think we need to add one more P--people. The idea is, if you pay attention to all of them, you can be successful in the business world.

Our main product is self-service storage space, and there have been many articles and seminars on how to put service into the self-storage industry. You determine the position and placement of the product when you develop a new property. The features and benefits you build into a facility are a reflection of the market it serves; in this manner, you position your facility to conduct business in that area. Once you determine your layout and unit mix, you place your product "on the shelf," making clear what customer choices are. All these aspects have to be considered upfront in the development stage of your facility, or it will cost you money and value for the life of the property.

That leaves promotion, price and people. Of these, the primary determinants of success for most of us are the latter two. Let me say that again: On a day-to-day basis, the two biggest levers you have for moving your property toward success are pricing and people.

Price It Right

Chart 1

Convenience is still the No. 1 reason customers choose your store instead of U-Lok-U-Lose. If your people answer the phone and make it easier to rent with you than the next guy, you'll get more than your fair share of business. Nothing is better at communicating the value of your facility than your sales team answering the phone and helping people on the property. Nothing exemplifies the professionalism of your operation, makes customers feel secure and comfortable, keeps your retail aisles clean and well-stocked, markets your store, or creates value in the minds of customers better than the people who run it every day. Start with the right people and get them the training and tools they need to turn every opportunity into a sale.

Price is the No. 2 reason a customer will choose you instead of Storage-R-Us. It is the biggest lever you have to boost your profitability. Storage is a top-line industry. Expenses are relatively small and fixed whether you are empty or full. Occupancy is a good yard marker, but not the goal. Promotions, and the discounts and allowances most of us attach to them, have a much bigger price tag than most of us realize, and are usually not worth it. Get your pricing right and your occupancy and revenue will follow without the high cost of discounts.

Storage is an elastic commodity in a specific trade, and the success of your project is most influenced and mitigated by basic supply and demand. Simply put: If you don't charge anything, you will get full and stay that way--but you won't have any money. If you charge too much, you will never get anybody to move in, and you still won't have any money.

Pricing is a proactive process. It requires you to do more than wait for the guy down the street to raise or lower his price. For most of you, the first pricing question to consider is, "What are you waiting for?" Take a look at your average annual occupancy. You will produce the highest dollars per gross square foot at approximately 91 percent. Don't be fooled by seasonal conditions. Nearly every market has a slow time of the year. The annual averages tell the story. If your average annual occupancy is 90 percent or higher, in any particular size or type, you aren't charging enough.

What do I mean by any particular size or type? Some operators tell me the reason they haven't raised prices for the last three years is they haven't ever reached that 90 percent-plus average. Invariably, in taking a closer look at their stores, it has always been one or two sizes that have lagged behind and kept the overall occupancy down. You have specific products that need to be priced individually. Just because Giant Food Stores raises or lowers the price of potatoes doesn't mean it will adjust the price of mustard or cereal. If it has too much candy left over after Halloween, that won't stop it from raising the price on cranberries and whipped cream as Thanksgiving approaches.

Just because you see a weakness in the sale of 5-by-5s doesn't mean you have to wait to raise the price on your 10-by-10s or, worse yet, put your entire store on sale. You should not give away a month free on the 10-by-20s or wait to increase their price just because you have too many 5-by-10s. In fact, increasing the price of other size units around a problem size is just as effective at making it seem like a good deal as discounting the problem size.

Waiting for the guy down the street to do something often runs contrary to supply and demand. If the competitor has 100 10-by-20s and charges $199 to keep them full, what is your supply? If you have 100 of them, $199 might be right. But if you only have 25 of them, you can probably charge $239 and still keep yours full. You both have the same market demand, but he has more supply to fill. Conversely, you may have more of another size that requires you to come in under the competitor's price to stay full. Always consider price first! Before you discount or give allowances, make sure you are priced right.

The Cost of Discounts

In my last article ("Pricing Your Product," December 2000, Inside Self-Storage), and at the last two ISS tradeshows, I talked about basic and technical strategies for pricing the specific products in your property. Now want to talk about what usually happens when you don't make sure you are priced right.

Occupancy is the most overrated indicator of success in our industry. As I work with entrepreneurs and institutions alike, everyone can tell me everything about their occupancy--the exact unit or square-footage occupancy to the fractions of a percent, whether it's up, down or the same--but very little about what happens to their revenue. Occupancy is a leading economic indicator, but it doesn't guarantee anything in the bank. How much occupancy does it take to make your mortgage payment? What percentage occupancy will put your kid through college? How much occupancy do you want in your IRA? You need money for all those things.

Promotions--especially the free rent and discounts many of you employ--are the most frequent, counterproductive mistakes operators make. Promotions have their place--rent-up of a new facility being the most obvious. However, they are a tool you should not use until you know you are priced right and promoting the correct product.

Looking at occupancy without understanding your income is a truly frustrating exercise. Unless you are Public Storage, with 30 to 300 stores in a market, promotions are either marketing targeted at an audience with a specific incentive to buy, or community involvement that helps people in your trade area get acquainted with you. In the quest to promote their product, many operators offer free rent, thinking they are giving away something that doesn't cost them anything. In a worst-case scenario, many give discounts to all new customers without even promoting them. The promotions you use will all have some incremental value and cost. "Free rent," however, is not free to you. Look at Chart 2 (bottom) to see what happens to the revenue from 50 people who move in during any given month.

Chart 2

The Cost of Discounts
Is your $100 10-by-10 actually worth $100, or $82?

Month Renters Remaining Cost of Unit/Month Income Income w/ First Month Free
1 50 100 5,000  
2 40 100 4,000 4,000
3 33 100 3,300 3,300
4 28 100 2,800 2,800
5 24 100 2,400 2,400
6 19 100 1,900 1,900
7 14 100 1,400 1,400
8 10 100 1,000 1,000
9 8 100 800 800
10 6 100 600 600
11 6 100 600 600
12 5 100 500 500
13 5 100 500 500
14 4 100 400 400
15 4 100 400 400
16 4 100 400 400
17 3 100 300 300
18 3 100 300 300
19 3 100 300 300
20 3 100 300 300
21 2 100 200 200
22 2 100 200 200
23 2 100 200 200
24 2 100 200 200
  280   $28,000 $23,000

In giving the first month free to everyone who moved in, you reduced the total value of the 50 new tenants by 18 percent. Instead of the $100 per month you thought you were making on each of those 50 units, you were actually making $82. So, if you charged $100 per month and gave a month free to compete against the guy charging $95 per month, he is actually getting $13 per month more than you are, as well as attracting the long-term tenants. You would have to rent 10 more spaces as a result of your "special" to just break even. And that doesn't even count the cost of the advertising.

Do you know how many units you rented in this same month last year? What was going on with your pricing, promotions, discounts, available spaces, unit mix and competition? How many spaces did you expect to rent if you did nothing? If you haven't asked and answered these questions, you shouldn't be offering any discounts. All things being equal, if you rented more than 40 spaces last year without the discount, you probably lost money this year by renting 50 spaces with one.

Offering the second or third month free will reduce your loss, but what is the incremental value? A promoted discount still has to increase rental activity or you are losing money. Offering the first month free makes it easier for new customers to move in and has a much stronger impact on rental activity than second- and third-month offers. You still have to increase move-ins by 15 percent and 12 percent, respectively, just to break even. If you are not achieving that increased activity, you are effectively reducing your price, the value of your tenant base and the value of your property.

Promotion Principles

If you are considering using a discount to stimulate business, make sure it is truly increasing your bottom line. Apply the basics to make a successful promotional strategy:

  • Don't forget the fine print, i.e., "New customers only," "Select sizes only," "Subject to availability," "Offer expires x/x/xx."
  • Make sure your existing customers are not coming in and trading a coupon for their next month's rent. You are trying to attract new customers, not reduce the value of your existing ones.
  • Only offer concessions and discounts on the sizes and types that need the help, i.e., upstairs 5-by-10s or climate-controlled 10-by-15s. If one size fills up during the promotional period, it is no longer available for the discount.
  • Give the customer a sense of urgency and reduce your liability. Always put an expiration date on every promotion.
  • Have a plan. An incremental move-in benefit is your only benchmark of success. Monitor your move-ins and use the information to anticipate others. How many move-ins did you have during the same period last year? At what rental rate? What do you think will happen if you don't discount?
  • Don't honor a discount unless you advertised one. Otherwise, you're giving discounts to a lot of people who were coming to you anyway.
  • Track your results and learn something. This sounds basic, but many operators don't do this
  • Use a tracking and report format that can work with different promotions and give you comparable data.

So, when should we discount? Almost never. But it is acceptable in the following scenarios

  • During rent-up to establish market share. Owners of stable stores around a new facility should relax--the sooner the new guy fills up, the sooner they will be able to raise rates again. Losing 5 percent in occupancy is better than losing 10 percent in rates. If you must react, just cut your rates on the sizes that need help by a price point--2 percent to 5 percent to 10 percent. Most of your sizes will be OK without a reduction or discounting.
  • Only if you know you are priced right. You have to know where the market is before you can tweak your pricing.
  • When you have a plan for discounting and advertising, and know what to expect if you don't discount.
  • When you are ready to track the results and learn from your mistakes.
  • In self-storage management, using the five marketing P's will truly add to your bottom line: "Perfect People and Pricing Prior to Promotions."

Jeff Kinder is the president of Advantage Self Storage in Olney, Md., which specializes in contract management as well as investment, acquisitions and development services. He has worked in the self- storage industry since 1986, including 11 years with National Self Storage and Public Storage in operations management and marketing. In 1991, he moved to Toronto to serve as vice president, operations, for Canadian Mini-Warehouse Properties Ltd., heading up the Public Storage subsidiary. For more information, call 301.774.0243; e-mail [email protected].

  • Two-year income = $28,000
  • Two-year income
    w/ first month free = $23,000
  • Difference = 18%

Actual rent = $100 - 18% = $82

Source: Advantage Advisors LLC, 1999


  • Total revenue months = 280
  • Total revenue months (280) x monthly rent ($100) = $28,000 total revenue
  • Total revenue ($28,000) / number of move-ins (50) = $560 average rental income per move-in

Source: Advantage Advisors LLC, 1999


The Bottom Line

The operating expenses of a property consume 25 percent to 50 percent of its revenue. A 5 percent increase to revenue can have a 7 percent to 10 percent positive impact on the bottom line, while a 5 percent reduction of expenses will only add 2 percent to 3 percent to the bottom line. And if payroll, property taxes and Yellow Pages advertising are the property's biggest expenses, what can it cut that will really save that much money?

Increase revenue by 5% = NOI + 7.6%
+5% Revenue

Revenue $350,000 $367,500
Expenses $120,000 $120,000
NOI $230,000 $247,500 (7.61% increase to NOI)

Decrease expenses by 5% = NOI + 2.6%
-5% Expenses

Revenue $350,000 $350,000
Expenses $120,000 $114,000
NOI $230,000 $236,000 (2.61% increase to NOI)

Yes, controlling expenses is important. You need to have a hard-nosed business attitude to control costs--and have systems in place to help you monitor and understand them. But if making an increase in revenue gives you a 3:1 advantage over expense cuts, doesn't it make dollars and sense to focus on maximizing the top line?


Advertising and Promotion Analysis
Direct mail vs. the "Special" banner

Direct-Mail Special
Last year, ABC Storage had 50 renters during month X. This year during month X, the facility has 50 renters, plus four additional renters brought in by a direct-mail promotion offering one month of free rent. The monthly rent for each renter is $100. The average revenue contributed by each renter over the course of his lease is $560 (see Chart 2).

Promotion Benefit:
Average income per move-in ($560) x number of redemptions (4) = Total incremental value ($2,240)

Promotion Cost:
Cost of advertising ($1,500) + Cost of promotional discount (4 redemptions x $100 = $400)
= Total cost of campaign ($1,900)
Net Gain (Benefit - Cost) = $340

"Special" Banner
Now look at the same exact scenario, but using a banner outside the facility to advertise the free-rent special instead of direct mail.

Promotion Benefi:
Average income per move-in ($560) x number of redemptions (4) = Total incremental value ($2,240)

Promotion Cost:
Cost of Advertising ($150) + Cost of promotional discount (4 redemptions x $100 = $400)
= Total cost of campaign ($550)
Net Gain (Benefit - Cost) = $1,690

DHS Worldwide

One of the best things about the commercial records-management business is it is largely recession-proof. In fact, records management thrives in adverse economic times. It also complements the self-storage business, as self-storage operators already have warehouse space, staff and trucks at their disposal to service commercial records accounts.

Records-management is very profitable, with recurring revenue and existing clients that typically grow 5 percent to 10 percent each year. There is also a well-established market for selling a records-management business, which generally trades for eight to 12 times its income.

DHS Worldwide developed, supports and markets Total RecallTM Records Management Software, used by large and small commercial records centers all over the world. "The great thing about the records-management business is it actually gets better in bad economic times," says Diane J. Hyman, CEO. "When companies downsize and cut costs, they want to find economical ways to store their records. Typical office space rents for substantially more than off-site storage. Plus, companies that move records off site can reduce staffing costs associated with managing file rooms."

Doug Woodard, managing partner of Save-A-File Systems in Manassas Park, Va., agrees. "It is a big cost-savings issue. Some companies do not focus on off-site storage in good times when the money is coming in strong--they don't want to deal with it. But when the money slows down, they want to cut costs. Off-site storage is much more economical than on-site storage. It is an easy sales case to make.

"The other big growth we have seen in our business relates to disaster-recovery planning," Woodard continues. "Since Sept. 11, this part of our business is booming. We have seen a significant increase in the storage and management of magnetic media and other important records. Save-A-File uses Total Recall, and I am extremely satisfied with the product." The Woodard family owns and operates a commercial records center and two self-storage facilities in Virginia.

DHS released its first 32-bit Windows version in 1996. "We are always improving the software," says Sam Blair, vice president of programming services. "Our products are state-of-the-art. I love technology. New improvements in the field of computer science allow us to constantly improve all of our software products. Honestly, I spend 25 percent to 50 percent of my time keeping up with enhancements in technology, which I then pass on to my programmers."

Total Recall interfaces with a variety of portable barcode readers. "You can do almost everything with a portable scanner," says Laura Wrye, vice president of training and quality assurance. "This makes records management very efficient." The system also automates billing, she explains. "As you are performing services for each client, Total Recall records the activities. At the end of each month, the system automatically generates an invoice for each client. It is really that easy."

The program also features a web interface clients use to place orders online. Customers can order deliveries, pickups and supplies, add new items to inventory, and print reports online. "We believe very strongly in making advancements to our product," Hyman says. She also believes good technical support is imperative. "Perhaps one of the most important factors in providing a good software solution is providing excellent support. Not only do we provide comprehensive technical support, but we also provide business-knowledge support.

"Many of our customers are new in the business," she explains. "Not only do they need to learn the software, they need to learn the business. One of the major differences between self-storage and records management is the manner in which you market your services. We have worked with hundreds of records-management businesses. We have seen what works and what does not. We can direct you to the necessary resources that can ensure success."

Many of the DHS staff members have experience working with commercial records centers. Deb Milner, manager of technical support, was employed for five years by one of the largest commercial records-center chains in the world. "We do not just provide software support," she says. "We provide answers to questions that take into consideration the business side of the equation. Customers are constantly calling and asking me pricing and how-to questions. Often, customers call before they submit a bid to ask how to structure it."

Hyman summarizes: "In short, we are there when you need us. We want you to be successful. Your success translates to our success." For more information, call DHS Worldwide at 800.377.8406; visit www.dhsworldwide.com.

Home Is Where the Heart Is

Working as a manager in this industry, it is not uncommon for you to have on-site housing at the facility you manage. But adapting this home--which can come in all shapes and sizes--to your lifestyle can sometimes be quite a challenge. I am sure some of you can relate to having a one-bedroom apartment to accommodate you, your spouse and a child, or having to put two children in the same bedroom. It may be wonderful to have the benefit of housing, but it's frustrating when it doesn't meet your needs. When you take the job, you take on this new home and begin to adapt it to your family situation.

During the experience of living on three different self-storage sites over the past five years, my husband, Jim, and I have had to be creative in many instances. Our first managers' apartment was smaller than a mobile home and had to house the office as well as our belongings. Our next apartment had fantastic local and cultural assets--being near Cape Cod, Mass., and the ocean--and we had fun adopting a beach and nautical theme. But the challenge was the place had only a loft bedroom. We frequently had to find a reasonable motel close by to accommodate those who came to visit.

For a while, self-storage owners started to phase out resident managers to try to cut costs; but it was determined the security and peace of mind they provided company and customer was too valuable to relinquish. We are seeing the resident manager become an important asset once again, and developers are becoming more aware of what constitutes proper housing. That is great for the new builds being constructed, yet many of us still have to make due with the housing already available.

I have found it exciting to decorate homes with various disadvantages and would like to share some thoughts and ideas that may help with your interior-design challenges. Some homes may be easier to adapt than others. Don't give up, though--after all, it is your home.

  • Try to keep clutter down to create the illusion of space. Use sparse furnishings, if possible. Use decorative shelves placed high on walls to display all your favorite things.
  • Use light-colored paint and accent with darker wood furniture. Using dark paint will make rooms seem smaller. Use soft colors and attractive window treatments.
  • Find one good asset of your home and design around it. For example, treat yourself to a ventless fireplace and some brass fireplace hardware and use them as the centerpiece of your livingroom.
  • Create a theme, if possible, and follow it throughout all the rooms. You can also use colors or borders to tie all the rooms together, especially if you have an open floor plan.
  • Highlight the positive and hide the negative aspects of your living space with plants. Plants add beauty to any corner or window, and can hide problem areas. Spider plants work well, and they add color.
  • Use movable decorations to arrange or separate areas as needed. Decorative screens work great as separations or boundaries and can quickly create an atmosphere for entertaining.
  • Hide an extra dresser in a closet. This idea came in handy for our son's clothing when we were short a bedroom.
  • Use mirrored doors on closets or hang mirrors on the walls. This is a great way to make a room seem larger.
  • Adopt a nearby storage unit to use as your "extra" room. For example, since most manager apartments have small kitchens and limited cabinet space, use the unit to store your dry-goods pantry items. You can also use it to store seasonal apparel or any other items you use only occasionally. Two of our co-workers even carpeted a 10-by-10, climate-controlled unit next to their office and creatively turned it into a playroom for their son.

Our home is our haven, and whatever we can do to make it a comfortable place affording privacy and serenity is marvelous. This is where we find rejuvenation and motivation to face the next demanding day.

If you have other ideas you have found useful in adapting your on-site apartment, send an e-mail to [email protected].  Perhaps we can share these ideas in future articles. If you have a challenging living space and would like suggestions on finding solutions, feel free to include photos. Until then, be creative. Finally, I would like to thank David Fleming, the regular writer of this bimonthly column, for allowing me to contribute this article.

Donna Potter and her husband, Jim, currently manage Premier Self Storage in Lancaster, N.Y. They have previously managed facilities for U-Haul and Sovran Self Storage and have received recognition by their employers and the media for outstanding industry achievements.

Premier Self Storage is currently seeking full-time resident managers. For more information, contact David Fleming at [email protected].

Insurance Corner

In today's litigious society, recognizing and reducing liability exposures should be a prime concern for every self-storage owner. Courts are getting tough on business owners who allow hazardous conditions to exist, and the dollar amounts juries award to injured parties seem to grow larger every year. It is important to be proactive in reducing potential liability exposures and minimizing the legal and financial hassles of a lawsuit. You'll find some suggestions on how to get started below.

It is also important to secure business-liability insurance to adequately protect yourself. An aggregate limit of $1 million should be considered the minimum amount of coverage for even the smallest facility. (For maximum protection, look for a business-liability policy written on an occurrence basis with no aggregate limit.) Remember to always secure the services of an insurance agent or legal advisor you trust before making any changes to your current policy.

Be Proactive

Perhaps the single most important key to protecting your self-storage facility against liability lawsuits is awareness--of your responsibilities under the law, potential hazards at your facility, and your need to do everything a prudent person would do to prevent accidents. Court decisions can and do favor those who are proactive; and, in the case of a lawsuit, an ounce of prevention is definitely worth a pound of cure.

Reduce Potential Liabilities

One of the the best ways to limit your liability in advance is by identifying and minimizing potential risks. Take a walk around your facility and play a game of "What if..." Try to imagine what could possibly go wrong and what you can do to safeguard against those situations. For example, you may discover a glaring hazard, such as a large pothole outside one of your units, that needs to be blocked off and covered. Or you may chance on a less obvious risk, such as a worn or curled floormat, which was intended to prevent slips and falls but may actually cause them.

A potentially dangerous situation can be created in an instant by a careless employee in the normal course of his work--for example, leaving a wet floor unattended for a few moments while mopping up. Courts can and will hold management responsible for the actions of their employees in these situations. Once again, a proactive response is the key; in this case, it would involve advising tenants of risk by posting a "Caution! Slippery When Wet" sign in the area being cleaned.

There are several other important procedures for reducing liabilities and preventing lawsuits, including conducting accident-training sessions with your employees; holding regular quality- control measures of your facilities and equipment; and keeping documented records of preventive maintenance. Be sure to hire competent employees and regularly monitor their performance. If you are not at the facility on a daily basis, make a practice to drop by periodically without notice to spot unforeseen risks.

A Note on Preventing Door and Gate Accidents

Since accidents involving doors and gates account for a large majority of liability claims, it pays to be extra careful about preventing them. You can reduce your liability substantially when you take reasonable and prudent care to help prevent accidents. Begin by posting "Caution" signs to warn tenants about the possibility of accidents from doors and gates. Keep door and gate mechanisms lubricated and in good working condition. Install metal guards or shields around exposed gears, springs, etc., to prevent the possibility of tenant accidents.

What to Do When an Accident Occurs

No matter how carefully laid your plans may be, accidents can and do occur. If someone on your premises should suffer an injury, take immediate action by first calling an ambulance for the injured person, then documenting all known facts surrounding the accident to accurately reconstruct the events in case of a lawsuit. For safety's sake, be sure to get all of the following information in writing:

  • Name, address and phone number of injured party.
  • Date and time of the accident.
  • Name of employee(s) on duty and name(s) of any witnesses.
  • Details about what caused the accident--i.e., was it caused by the tenant or by a pre-existing hazardous condition?
  • Information about when the site was last cleaned and inspected for hazards.

It's also a good idea to take a picture or camcorder footage of the site where the accident occurred and try to get a written statement from the injured party if possible. If a trip to the hospital is necessary, call an ambulance--don't use a personal or company vehicle. You may expose yourself to a whole new set of liabilities that are much better avoided.

David Wilhite works for Universal Insurance Facilities Ltd., which offers a complete package of coverages specifically designed to meet the needs of the self-storage industry. For more information on Universal's coverages, or to get a quick, no-obligation quote, call 800.844.2101; fax 480.970.6240; e-mail [email protected]; visit www.vpico.com/universal.