About 10 years ago, I ran into a self-storage acquaintance who owned a fairly large facility. After a nice chat, I suggested we exchange email addresses so we could stay in touch. He sheepishly admitted to not having an email address and being relatively unfamiliar with the Internet. I remember thinking, “It’s the 21st century. How can someone not have an email address?”
I hope he has adapted to technology since then, because frankly, if you’re not embracing change, you’ll be left behind… and quickly. It’s not so different in the commercial real estate world. Whether self-storage, office, industrial, retail, or other property types, conditions change quickly and frequently, so you have to stay abreast of developments.
Take self-storage REITs, for example. In 2013, they purchased more than $2 billion of properties. A majority of these purchases were portfolios amassed from some of our industry’s larger operators. Part of the underlying theme of this aggressive buying behavior is that REITs believe their business models allow them to better manage properties and meet consumer expectations, which will ultimately prove to increase profits above existing levels. They also have the advantage of being able to access low-cost funds through secured and unsecured fixed/variable rate financing, public offerings, preferred stock, and credit lines. Undoubtedly, REIT activity is creating new market dynamics throughout the storage industry.
As a property owner, the two areas that most affect your competitive abilities are 1) continually changing supply and demand markets, and 2) the increasing sophistication levels of how self-storage operators, particularly mid and large size owners, manage their facilities. In this installment of Lessons Learned, we’ll examine the law of supply and demand and how those who don’t embrace change risk being left behind.
Part of the underlying theme of this aggressive buying behavior is that REITs believe their business models
allow them to better manage properties and meet consumer expectations, which will ultimately
prove to increase profits above existing levels.
Supply-Side Economics
Let’s start by examining a few numbers. From 2003 to 2009, the number of self- storage facilities increased 32 percent to 48,721, and their total size as measured by square footage increased 95 percent to nearly 2.6 billion rentable square feet. However, since 2009, we have seen relatively few new storage facilities come online.
That trend is starting to change as more banks entertain self-storage construction financing requests. During the last storage development wave in the mid- 2000s, plentiful bank construction loans supported a property construction boom. Everyone was building, from the REITs to first-time mom-and-pop operators, and in locations from “Main and Main” in major metro markets to rural locations between wheat fields.
The next construction wave will be different. Lenders are now much more selective in their sponsorship/ownership lending criteria. In major metro markets, competition to find the next viable development or conversion site has intensified. Only the most qualified borrowers, and those with sufficient capital and expertise, will be able to acquire quality infill locations. Thus, with few exceptions, self-storage’s next development phase will be built by experienced developers and operators.
As a result, the next generation of storage properties will be built to outperform current competition. They will be constructed with every modern bell, whistle and technology introduced to our industry in recent years. In addition to top-class physical attributes, you can also expect leading-edge management practices. So the question arises: Are you ready for this type of facility to open near you? Hence the need to embrace change… and quickly.
Understanding The Demand Curve
Given the diverse uses for self- storage space, market experts have spent decades trying to determine our industry’s demand factors. The Self-storage Association has published an entire book breaking down self-storage demand. In my opinion, this publication should be required reading for any operator because the better you understand what drives storage demand, the more likely you are to capitalize on market developments.
We know with 100 percent certainty that although diverse in nature, self- storage demand will continue to evolve. To better illustrate demand evolution, let’s look at a few other commercial real estate sectors experiencing pronounced changes, starting with industrial space.
Industrial Getting Taller
The most consistent feature of industrial real estate is location, location, location. To succeed, an industrial property must be well located near expressways, accessible roads, airports, waterways, or rail. Beyond location the floor and ceiling, known as clear height, is a huge factor as well. First generation industrial clear heights were 12 to 24 feet. That was soon followed by industry standards of 30 to 32 feet. Now, there is a shift to increase heights to 32 to 36 feet. Similar to self-storage, industrial space is becoming more efficient with its cubic footprint. Interestingly, indus- trial users are changing as well, with a market shift from manufacturers to third-party logistics companies. While they still have a place in the market, those first generation industrial buildings with lower clear heights have lost considerable value based on lower demand driven by evolving industry standards.
Retail Getting Smaller
Shifting to the retail sector, can you say, “Amazon?” Online retailing has been a major factor in causing the world’s largest retailer, WalMart, to change strategy from solely building 180,000 to 200,000 square foot superstores to now adding smaller urban locations of 60,000 square feet or less. Countless other retailers are downsizing store sizes as well, including Office Depot, Target, Kohl’s, and JC Penney.
According to Core Net Global, the average office space
size per employee is now 176 square feet.
According to consumer research firm, Customer Growth Partners: “Consumers are looking for a quicker, easier shopping experience.” I interpret this to mean, “If I can’t order an item online and have it delivered right away, then I want to visit a store and quickly buy it.”
Applying this sense of consumer impa- tience to the storage market, shouldn’t your customers expect an efficient and hassle-free experience during every step of their interaction with your facility—from first inquiry, to signing the rental agree- ment, to having easy and reliable access to a clean and secure unit? Top opera- tors promote total logistic solutions for customers. This market dynamic change will impact consumer expectations for all storage facilities before long.
Are you ready to embrace that kind of change … and quickly?
Office Work Spaces Shrinking
A final comparative example is office space demand. According to Core Net Global, the average office space size per employee is now 176 square feet. In 2010, it was 225 square feet and it’s anticipated to decrease to 151 square feet in three years. Today, 24 percent of all office space provides less than 100 square feet per employee, and predictions are that by 2017, this number will be 40 percent. Office owners and developers will need to embrace this change and figure out how to create denser floor layouts, superior Internet and wiring plans, environmental amenities and creative parking options in order to compete for new tenants.
Undoubtedly, this changing office landscape provides storage industry opportunities. As office footprints shrink, the need for offsite storage will increase. Furthermore, the trend of service industry professionals working from home offices bodes well for self-storage. What are you doing to adapt your properties to evolving office market demand?
Lending Implications
All of these supply and demand changes—not just in our industry, but other commercial property sectors as well affect financing options for self-storage owners. Many local and regional banks today provide attractive fixed and variable rate alternatives. For the first time since the recession, we are consistently seeing more banks expanding beyond serving current customers to starting new banking relationships. Commercial mortgage backed securities (CMBS) lenders are plentiful again, creating strong competition among lenders and more aggressive pricing. More CMBS lenders are now willing to com- pete for loans of less than $5 million and self-storage has become a preferred asset class. Given that lending markets are continually in a state of flux with evolving interest rates and terms, it more important to stay informed on financing options for your business.
Commercial mortgage backed securities (CMBS) lenders are plentiful again,
creating strong competition among lenders and more aggressive pricing.
At this winter’s industry conventions, there was an optimistic sense of change in the air with a strong feeling that we are now operating in near-perfect conditions. The lesson I learned from the educational sessions and my meetings with dozens of owner/operators: Embracing change in every aspect of your business is today’s key to not just thriving, but to simply sur viving. Every day that you don’t embrace change, you cede ground on signing new tenants. Every day that you don’t embrace change, you lose out on maximizing each customer’s rental revenue potential. And with respect to competitors, every day that you don’t embrace change, you lose relative market share and property value