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At Barely 30, Self Storage Comes of Age
By Tim Dietz, Self Storage Association
An industry barely three decades old has become one of the most popular kids on the block. But what lies ahead?
Plenty of Americans have found self storage a useful way to “declutter” their lives — about 27 million households or about 9%, and more than a few businesses, according to a study about self storage demand by the Self Storage Association (SSA) released last year.
The self storage industry had annual revenues of more than $15 billion last year. In contrast, the U.S. motion picture industry had annual revenues of $10 billion.
Of all the Real Estate Investment Trusts (REITS) in 2005, self storage posted the largest returns of any real estate sector — 23% — beating malls by 4%, multifamily residences by nearly 10% and hotels by 13%.
Construction of self storage facilities does not show any sign of flattening either, although many in the industry will quietly tell you that some areas have an “over-inventory” or are over-saturated.
During the past 15 years, the self storage industry has witnessed 5%-8% growth annually, and currently boasts 45,365 primary facilities and 9,585 secondary storage businesses. (The SSA classified limited storage operations opened by service stations, auctioneers and other like-minded businesses as “secondary” storage businesses.)
The breadth of the industry certainly indicates that self storage is no longer flying under the radar. Initially operated by a few farsighted entrepreneurs, now just about everyone — from Prudential Securities to boxer Oscar De La Hoya — wants a piece of storage’s remarkable returns.
Prudential’s entrée into the action was the largest deal in the self storage industry’s history — $2.3 billion for the acquisition of the Storage USA portfolio from General Electric in partnership with Utah’s Extra Space Storage. De La Hoya entered the ring with Golden Boy Self Storage, which will be opening facilities in Southern California.
Very Humble Beginnings
Richard Tanner, executive vice president at Extra Space Storage, which was founded in Utah in 1977, said the industry in the early years was tied together with chained link fences. “It really grew out of a need and an opportunity,” said Tanner. “Sometimes you’d pull up to a place and see units cordoned off by chicken wire. There wasn’t much to it.”
The chicken wire has given way to steel and concrete structures, and to security systems that would make the CIA proud. And, today, the industry is an eclectic mix of large REITs, mid-size partnerships and small “mom and pop” facilities.
But as the industry has become more sophisticated, it has also struggled to find — and define — itself. For instance, should the industry be classified as warehousing or retail? The classification impacts legal, regulatory and tax issues, as well as companies’ bottom lines, and the Self Storage Association has been fighting a growing proliferation of states that consider the rental of storage property as a taxable retail service — something that the multifamily and commercial sectors are not burdened with.
The Self Storage Food Chain
Acquisition has become a large part of the industry. The sheer size of portfolios and money at play in the industry today is titanic, largely because development takes time and can be costly. In March 2005, Public Storage CEO Ronald Havner, Jr. advised investors,
“The easy money on the development side is gone,” said Havner. “You have to allow six-to-eight months for zoning, six-to-10 months for building and two-to-four years to fill it up. In the short-term, I see the repackaging pipeline more than I see the development pipeline.”
Among REITs last year, U-Store-It completed a $212 million National Self Storage acquisition, Extra Space Storage joined with Prudential to acquire Storage USA and Public Storage acquired Shurgard.
Small- and mid-sized operators were also active, with properties changing hands frequently. As REITs added hundreds, partners and others added dozens. The institutional funding made the opportunities too great for many small existing operators who, appreciatively, cashed in and sent their facilities up the food chain.
But all this activity leaves storage professionals wondering if they can continue to tempt fate and buck the commercial and housing real estate trends in 2006 as they did in 2005. “It is reasonable to assume that the percentage of institutional ownership of storage facilities nationwide will continue to increase; however, this percentage increase in ownership will be predominantly in the investment grade facilities,” said Jim Davies of Buchanan Storage Capital.
The notion of investment grade facilities, and the recognition of their reciprocal value to institutional players, may well be the difference between the muddled styles of property and strategies of yesteryear and the contemporary models.
Investment grade facilities can be defined loosely by such criteria as 50,000 rentable square feet (minimally), a location on a major thoroughfare with direct access to traffic, concrete block or tilt-up construction, and certain population benchmarks. Non-investment grade facilities will likely continue in the comfortable, fragmented model that was the hallmark of the industry until the last decade or so.
H. James Knuppe of RAS Management Co. in Castro Valley, Calif. and an original industry founder, is working with NAHB’s National Commercial Builders Council on its niche manual, “Mini Storage Revisited.” The handbook is expected to be reissued later this year.
Tim Dietz is the vice president of communications and government relations for the Self Storage Association. For more information, e-mail Dietz, or visit the association’s Web site at www.selfstorage.org.
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