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Toward a Tenant-Driven Business Model

November 1, 2007

9 Min Read
Toward a Tenant-Driven Business Model

In general, self-storage has been a relatively low-risk, profitable niche in the real estate market for an extended period of time. But the emphasis has been on selling space as a commodity and maximizing profit for the property developer and operator.

Although the past few years have been great for storage REITS and the industry in general, in most markets, development costs have jumped, government restrictions and development requirements have increased, and competition has grown. To justify new investment, its becoming increasingly necessary to provide compelling reasons for tenants to rent from a specific facility and pay the rental rates required.

Complicating the matter is that the competition isnt just another conventional facility down the road offering similar features and service. New entrants have devised various innovations to gain a competitive edge and expand storage into new market niches. In addition, entrants from the moving industry see self-storage as an adjunct service to their business and an opportunity to leverage their existing market position. Finally, a wave of consolidation has resulted in everlarger storage chains with lower overhead and more marketing muscle operating in prime locations.

The Way of Hotels/Motels

The evolution of self-storage appears to be following the path of the hotel/motel industry over the past couple of decades. During the 60s and 70s, major chains were developed following the Holiday Inn model of standardized prefabricated facilities in high-visibility locations. A Holiday Inn franchise was highly coveted, providing an attractive return on investment to the developers in most cases. This model worked well, until travelers grew weary of look-alike rooms and features and desired facilities catering to their preferences.

In the 80s, the hotel industry stumbled a few times, with overbuilding blamed. At the same time, innovative new chains and brands were being developed. Some offered stylish décor and exceptional service. Others offered low-cost lodging for budget-minded guests. Extended-stay options for guests on long trips and all-suite hotels for people with a need for more room were introduced, along with other lodging variations. Some of the new concepts survived, some didnt pass muster with the public.

Today, major hotel chains feature brands designed around the specific travel purposes of their guests. Hilton Hotels now consists of nine different brands, each one targeted at a specific segment of the travel market. Marriott is another example, with brands ranging from JW Marriott at the high end of the market to Fairfield Inn for guests on the other end of the travel-budget spectrum. Each brand uses a distinctive architectural or design style that supports how the brand wants to be perceived by the public.

In fact, Marriott has further developed branded niches within segments. Besides the flagship Residence Inn for extended stays, Marriotts TownePlace Suites brand offers a more residential community atmosphere for guests staying for weeks at a time.

Just how far can such market segmentation go? Well, Marriott even offers temporary housing for executives, providing apartments customized and fully furnished virtually anywhere in the United States. Even the fabled Holiday Inn has now become one brand among several, each targeted to a specific market segment within the InterContinental Hotel Group.

Storage Learns to Adapt

Until the last few years, the self-storage industry was reminiscent of the original Holiday Inn business model. Based on a mass market model of standardized storage units, it has usually been a solid and desirable real estate investment. But now self-storage has entered a period of consolidation and innovation. Our research indicates that tenants have developed a preference for facilities that address their lifestyles and business needs.

Indeed, the current range of experimentation to gain a competitive edge in the industry is wide. Some facilities are testing auxiliary services, ranging from eBay services and espresso bars to discounted truck rentals for move-ins.

Other entrants are introducing new business and operational models. PODS and others have approached mobile storage with variations on a model that is a cross between moving and storage. One business concept involves a customer mailing away items to be stored and retrieved. Another operational model involves storage containers that are stored in high-rise structures and conveyed mechanically to the tenant.

Some operators argue that mobile storage is a different business than self-storage. This is a reasonable position from the viewpoint of the operator, but tenants are unconcerned whether it is a moving or a storage business. They simply want a convenient way to store their belongings during moves.

Keeping it simple and economical worked in the past. Now the trend is toward developers investing more money to build facilities targeting tenants with specific storage purposes in mind and the features they want.

Innovation isnt limited to operations either. Structurally, storage buildings are giving way to architectural enhancements that add a sense of visual interest as well as utilitarian function. This trend is likely to stick. Architecture will be used increasingly in self-storage (especially in larger markets) to differentiate facilities and reflect the market segment being served.

Gazing Ahead

Heres a provocative peek at the future of self-storage, using some possible examples of tenant-driven market segmentation:

Imagine driving down the interstate in five to 10 years. Instead of seeing maybe a few self-storage facilities along a stretch, each with long rows of low-profile buildings and rolling doors on all sides, you see a greater number of facilitiesbut unlike what youre accustomed to seeing in todays industry. They will reflect different lifestyle and commercial needs and emphasize tenant convenience, with a selection of units, features and services tailored to a particular market segment.

The first facility serves an affluent, upscale market. Its street-side façade is two stories high with interesting architectural elements, complete with ornate doors and windows. The entrance looks like what could be the foyer and atrium of a villa. Lush plants, comfortable conversation nooks and free refreshmentsincluding three flavors of Starbucks coffeeawait you as you walk toward the rental desk, which resembles a concierge station. A selection of climate-controlled storage for items like wine, guns and archival materials (such as light- and temperature-sensitive documents) is available, along with standard storage units.

The corridor walls are a cheery light yellow above a wainscoting of light wood-grain panel. Security is sophisticated enough to satisfy even Hollywood celebrities. Hallways are short, running the width of the buildings instead of the length, to keep the distance a tenant must walk to his unit to fewer than 10 steps. Rents are high; but for discriminating tenants in upscale markets, its simply a good value.

The second facility features single-story buildings with drive-up access to units but focuses on commercial accounts. Storage units tend to have higher eave heights and wider bays for easy access to goods. Doors are motorized. Units have lights on motion sensors. The entry gate features a two-tier keypad so drivers in trucks dont have to get out of their vehicles to enter their access code.

The office area features a separate conference room and work area with a wireless Internet connection. A free refreshment area is also available. Business tenants, many conducting business via a laptop and cell phone, find the conference room useful to interview prospective job candidates or hold an impromptu sales meeting.

The third facility is a smaller remote site with no office or on-site staff. Rentals are handled by a telecommunications-based rental-processing system. Such remote sites allow an operator to penetrate neighborhoods where larger lots or facilities are not available or feasible. In essence, they are the self-storage version of convenience stores. Targeted primarily at the residential and home-business market, the added convenience is attractive to such tenants.

This particular facility also caters to seniors, a niche within the residential market based on a local demographic study. Consequently, most of the units are ADA (Americans with Disabilities Act) compliant and feature swing doors that dont require stooping and lifting to operate. Larger units have motorized doors that open and close at the touch of a button. Theres no step at the front of the storage unit, and a supply of folding chairs is available nearby so seniors can sit while sorting through their items.

Further on down the highway, in a densely populated area of the city, is a major intersection with a daily traffic count exceeding 50,000 vehicles. There sits a multi-story self-storage building with four levels, constructed with design elements to convey the idea of a pleasant, open interior that is safe and secure. (Due to the high value and limited size of the lot, a single- or two-story structure was not viable.) 

The office area resembles a hotel lobby. A covered loading area allows tenants to move goods out of the weather and into the climate-controlled building. The offerings at this urban storage center have been carefully calibrated to provide a one-stop storage solution to the market within a 1-mile radius.

A mobile-storage operation offering delivery, pickup and transfer of storage containers has its facility on the outer edge of the city. Its operation allows it to offer door-to-door convenience for more affluent customers, as well as to parts of the city where zoning restrictions wont allow self-storage facilities to be built.

Then theres the self-service moving-and-storage combo facility, like U-Haul, offering both types of services to the do-it-yourself market. But a niche has developed here as well, whereby full-service moving companies have added self-storage for customers who want someone else to do the heavy lifting.

Full-service facilities with an office and on-site staff have learned to compete with the new niche-targeted facilities in part by using demographic studies focused on their surrounding 3-mile radius. Based on the data from those studies, they have upgraded their offices, invested in services such as FedEx, and redesigned the buildings to incorporate contemporary architectural elements. In some cases, the full-service operations have added remote sites and mobile storage to increase their market presence.

As we complete our drive, we spot some of the older-style facilities. Yes, theyre still around, especially in rural and suburban markets. But increasingly, such facilities will be at the economy end of the market unless they are in prime, high-traffic locations in densely populated areas.

Not Far Fetched

The above prognostication is not wildly speculative or academic. Store-N-Save Self Storage Ltd. of Canada has been analyzing and testing market segmentation concepts, and the above scenario reflects the market responses observed. Of course, there will be more market segments and developments in the industry that have not yet been considered. After all, the industry is transitioning through a consolidation and innovation phase.

An important point to consider when developing a new project at this time is to differentiate the facility, based on a clearly defined market strategy, with a tenant-driven design incorporating architectural, operational and branding elements. 

Larry Jenkins is the president and CEO of Store-N-Save Self Storage Ltd., which applies a high-tech, high-value approach to its 12 facilities in Ontario, Canada. Holding an MBA, Mr. Jenkins is also a Certified Internet Business Strategist, a member of the Wisconsin Innovation Network and a former adjunct faculty member at Cardinal Stritch University. He holds a United States patent on one product and has a patent pending in Canada. He can be reached at 608.327.4172 or [email protected]

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