The Changing Face of Self Storage

by Aaron Swerdlin, CB Richard Ellis

Growing up, I thought my Dad was the coolest Dad around because he could make personal telephone calls from his car (he is a HAM radio operator and used what is called an auto-patch). Of course I still think my dad is the coolest dad, but now for reasons other than the electronic gizmos in his automobile.

How times have changed though! Nowadays, making a phone call from the car is hardly unique. In fact, a cell phone is considered a necessity. In less than 20 years, we’ve seen an industry grow from a novelty to something only the rich can afford to something that is so common that our Congress is debating national laws that will restrict its use [in cars] because of the dangers the widespread use causes on the road.

How does this have anything to do with self-storage? Americans are relatively quick to incorporate new phenomena into our culture. You may never hear the phrase, ‘hot dogs, apple pie, and self storage,’ but we’re getting there. When markets like Phoenix and Dallas dilate the available self-storage square feet by 40% in five years it can mean only one thing—a greater percentage of the population is using self-storage. We know this because we know the population of Dallas hasn’t grown 40% in the last five years yet most of the new space is occupied.

Are we, as an industry, the next cell phone? I wish. The latest statistic I could find on cell phone usage was almost 35% of the entire population owns a cell phone. Wouldn’t our industry benefit from a customer base of 105,000,000 tenants in the United States?! Unfortunately, I don’t think that’s going to happen. However, our customer base grows every day.

It wasn’t even 10 years ago that people still were using self-storage as a method of land banking. Now, with the prices being paid for raw land to increase the high-visibility of self-storage locations, self-storage is the end use for prime real estate all over the country. It’s become a much more socially acceptable component of our communities. And this metamorphosis of the industry has come about through evolution. The other day I was visiting the site you see above—MoPac Self-Storage in Austin. It was a sunny afternoon, and I observed a man pull up, open his unit, and begin rummaging through a box of shoes, seeking the pair he would need. He had hiking boots, golf shoes, and many other pairs in the box. The property was clean and well landscaped. A calm, relaxed atmosphere prevailed. It occurred to me that this fellow was right at home—he considered his 10' x 10' unit an extension of his own property. I realized then that for most tenants, making a trip to the storage unit was not a dread-filled task, but a pleasant diversion. To me, that represents a new perspective on self-storage in our culture.

They’re Going to Stay
As operators we know that if a new tenant expects to stay three months, they’ll be there for 10. And if they expect to rent a unit for a year, they’re likely to be there two years. Let’s face it, for $75.00 I’d rather leave my personal items in storage one more month than spend my Saturday moving things to my garage…or even worse, the trash can! But more than that, we have to realize that almost half of our tenants never have rented storage previously. So we have to remember we’re educating one out of every two customers about what self-storage is exactly. And if they have a pleasant experience they’ll be back. Or even better, they’ll just stay. Because they find out (but probably won’t admit) what we already know…we are a sentimental nation. We don’t like to throw away anything. And as long as it’s out of site and not taking up room in the family garage, it’s "taken care of." No one thinks about the fact that at $150 per month much of what is being stored could be repurchased once all the money spent in rent is added up. But the one thing that can’t be re-purchased is the sentimental value of what is being stored. And that is the real value we add.

OK, let’s take a slightly less cynical approach. Economically, these are good times. Even with all the talk of a recession and of the high-tech slow down, we’re all better off today vs. 10 years ago. I read just yesterday that despite everything that is going on in the world, housing starts exceeded expectations for the second and third quarters. And with interest rates as low as 6% on a 15-year mortgage, it’s both a buyer’s market and a seller’s market. Lower interest rates are good for borrowers. But they tend to inflate the prices of houses because the dollar goes so much further. So we can afford "more house" today because interest rates are low. But most sellers know this so they inflate the price of their home. In a lot of areas, especially inner city and near-town locations, home prices have priced many potential buyers out of the market. This is an economic fundamental for urban sprawl. In Houston, a homebuyer gets approximately 25% more square feet for their home-buying dollar if they’re outside the Beltway (the outer-loop toll road in Houston). Which, interestingly enough, supports why the inner-loop of Houston is where one will find the highest rental rates and the highest occupancy level for storage. It’s the same area where all types of space are at a premium. At $250 per square foot for housing (vs. less than $100 per square foot outside the Beltway), one would rather pay $150 a month for 100 square feet of storage at the neighborhood self-storage facility than move to a bigger home. And now that sophisticated developers are creating customer-friendly facilities on main street locations, the community is very accepting of our business. And they show their acceptance and support by using the product.

The Commercial Tenant
The third customer dynamic is the commercial tenant. This is the most difficult customer to forecast, as it’s so difficult to identify a common denominator by which we gauge their rental behavior. It’s generally accepted that commercial tenants stay longer. But how do we identify what makes a site attractive to commercial tenants? Most of the improvements being made to the self-storage industry are residential in nature (e.g. retail locations, well-lit hallways, retail configurations and products in the onsite office). My personal observations have been that commercial tenants are taking advantage of the lower rents at older facilities because they don’t need the added amenities that are driving up the rent at the newer facilities.

It was only a couple years ago that we tried to define the depth of our markets in terms of three square feet of storage per person. I’ve seen markets in which there are 11 square feet of storage per person and every facility was in excess of 85% occupancy. Certainly there still are markets in which three square feet per person is an accurate measurement of depth. However, three square feet per person is no longer the industry standard by which we judge our markets. We’ve become sophisticated enough as an industry to realize that there are dynamics that drive each market beyond just square feet per person. More importantly, we understand that each sub-market within each market has different key indicators that project success.

Self-storage isn’t yet a necessity as is the cell phone, but we’ve come a long way. Wall Street lends money on self-storage. Wall Street investors own companies whose sole purpose is to buy, sell, build and operate self-storage. Today, even the industry’s largest operator advertises on television during prime time. And we will continue our ascent within the pop culture. Maybe we’re closer than we think to being included with fax machines, cell phones, email address and casual Fridays when delineating that list of necessities that define our modern culture. Maybe, one's place in society soon will be defined not by one's knowledge of California Cabs but by where one chooses to store and what kind of lock they have on the door.  

Aaron A. Swerdlin manages the CB Richard Ellis, Inc. Self Storage Advisory Services Group. Mr. Swerdlin is the former Vice President and Director of Acquisitions for Storage Trust, a self-storage REIT acquired by Public Storage in March of 1999. Mr. Swerdlin can be contacted by calling the Houston office of CBRE at 713-840-6500.