by admin

Michael Mele

Everyone is interested in self storage these days. At a time when most product types in commercial real estate are facing hard times, many are taking a look at this so-called “recession proof” investment. But like all product types, the self storage industry is feeling the pain of this economy as well.

Self storage — or mini warehousing, as it was first called — was created in the late 1960s by land speculators who wanted to find a use for the parcels they bought that were not quite ready for development. As a way to help pay taxes and make the land self sufficient until development caught up to the area, they erected cheap steel industrial buildings mainly geared toward small businesses. The idea caught on, and the industry grew steadily through the 1970s. By 1979, there were 3,500 mini warehouses nationwide.

The high flying 80s led to tremendous expansion in the industry. The buildings were becoming better, the facilities were getting larger and the properties were no longer relegated the edges of town or in industrial areas. Self storage facilities were now being built in major commercial and retail areas. Although most operators seemed profitable, the jury was still out on whether or not this was a viable long term business.

The end of the 1980s brought a commercial real estate crash, and the early 1990s brought a recession. Although the crash did take its toll on owners who got in over their heads, the recession of the early 90s brought on an interesting phenomenon. The downsizing that occurred during the recession actually helped fill the excess capacity that was built in the late 80s. While everyone else suffered, self storage owners prospered.

In 2000, with real estate on the verge of a big boom, self storage became very interesting to developers. Building costs were 35 percent less than traditional retail, office or multifamily, but rents per square foot were the same. With equity and debt becoming ever more available, the race was on, and we saw the emergence of multi-story facilities and RV storage. Every developer out there thought they could add a self storage facility to their project.

It wasn’t just developers who had an eye on self storage. When GE Capital purchased Storage USA in 2002, the industry finally had what it always wanted: credibility. Wall Street money followed, and suddenly everyone wanted a self storage property in their real estate portfolio. Cap rates began to fall as buyers out numbered sellers. Although the industry saw some consolidation, it remained very fragmented. To this day, the four main self storage REITs and other major institutions own less than 15 percent of all self storage facilities.

When the current recession started in 2008, consumer spending slowed. One of the first things to go was the storage unit. Owners desperate to increase occupancy lowered rates and offered more concessions. While the added business from downsizing and foreclosure did help, it was not enough to make up for what was lost by the slowing housing market and less consumer spending. This leaves us with a current market that is over built and with many operators struggling to survive. Like every other industry, we will have our fair share of properties headed back to the banks. The good news is that new construction has all but stopped, and some markets are already starting to trend up.

The future is still bright for the self storage industry, but the days of “build it and they will come” are over. We are heading into an age where top operators will survive and prosper, and those who can’t will fail. Today’s most successful companies treat their business in the same way as The Home Depot, McDonald’s and Target; they choose the best sites, use technology to increase their bottom line and make customer service their mainstay. It’s hard to believe this is the same business that started with a couple of steel buildings on the side of road.

— Michael Mele is senior director of Marcus & Millichap's National Storage Group.

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