Competition Clash

Posted by msmessenger on Mar 1, 2017 12:00:00 AM

New Development Within The 10-Mile Radius

After many years of a robust transactional market, the self-storage industry has slowly taken a U-turn toward development. The changing perspective is due to a number of factors, from record low capitalization rates for existing properties to unmet customer demand to more capital flowing into the self-storage sector.

Whatever the reason, this market mutation might mean the end of the self-storage industry’s feel-good era. Select locations will become a lot more contentious for store owners, who in the recent past probably enjoyed very salubrious market circumstances.

“New development, and its impact on existing self-storage centers, is on the radar of most operators right now,” says Todd Amsdell, CEO and president of Cleveland-based Amsdell Companies. “If you aren’t seeing new development in your immediate market, you are hearing about new development in your MSA [metropolitan statistical area], and that’s starting to create concern as to how it all will affect what has been a very favorable operating environment.”

Amsdell adds, “The number crunchers are saying most markets can tolerate new facilities, but what operators are always worried about is how new development is going to affect them directly.”

And certain operators should be worried. While statistically new self-storage development has greatly lagged demand for almost a decade, builders don’t spread out construction evenly across the country; they tend to flood hot markets while other markets get empty lots.

On a big picture basis, for the amount of space the self-storage market needs to hit supply and demand equilibrium: If the industry added 1,000 new stores annually, and there was no population growth over the next six years, it might happen.

“If we say one out of every 10 people is currently renting a storage unit and we have added 30 million people to the population since 2008, then we need three million more storage units,” calculates Kenneth Nitzberg, chairman and CEO of Devon Self Storage Holdings LLC in Emeryville, Calif. “Since 2008, we have been adding about 200 facilities a year with an average of 500 units. That’s about 100,000 units annually over eight years, or 800,000 units, still a shortfall of 2.2 million units. The industry will have to add about 1,000 facilities a year to make up the difference, and it is not capable of doing that.”

Hot And Cold Markets
The general prediction for 2017 is that 600 to 900 properties will come on line in 2017, says Anne Ballard, president of Universal Storage Group in Atlanta. “They are mostly going to be built in the hot development markets, with some leaking into tertiary markets.”

Ballard’s company is building in Franklin, Tenn., which is just outside of Nashville, and in Raleigh, N.C.—two markets on everyone’s radar.

That’s the coming problem. Certain defined markets get very, very crowded. Denver was the hot spot in the country for about five years; now the market is approaching over-built.

Last year, Dean Jernigan, chairman and CEO of Memphis, Tenn.-based Jernigan Capital, Inc., was asked to speak at an industry conference in Dallas. Before the meeting, he did a study of the Dallas-Fort Worth metroplex. He learned there was about 55 million square feet of existing self-storage properties in the metroplex and, if he took into account what was planned, permitted, or whispered about, there were another 93 facilities going to be built in the area that were on average larger facilities than those already in operation. In his estimate, about 6.5 million square feet of new space was coming into the market—a 12 percent spurt of supply.

“What I said to the conferees was ‘get out of the DFW metroplex if you are thinking about building another storage facility. We don’t need anymore’,” Jernigan recalls. “I added, ‘I know you are all thinking we could probably squeeze one more self-storage store in there, and you are right, we could, but 20 of you are thinking that same thought. You can’t squeeze 20 more in there.’”

Therefore, Jernigan Capital placed Dallas on its “danger zone” in regard to new lending.

Universal Storage Group was advising a client on the south side of Atlanta. The store was off-street, under “incredible” management, and well-marketed. Within the 23 months that Universal Storage managed the property, occupancy was at full and everything was copacetic. Then, a new competitor started building less than a quarter mile away, in a better location and with a bigger store (over 100,000 square feet). Recently, a third store was announced, and it, too, would be constructed less than a mile away.

“We told our client it was the perfect time to sell,” says Ballard. “He could still get a high price playing off his good NOI [net operating income], and get out before everything came on line and the local market crashed.”

Things are not much different in the suburbs of Phoenix. Jeff Helgeson, a principal with 180 Self-Storage LLC in Phoenix, was consulting in the fast-growing suburban city of Chandler with a client who opened a store in 2015 that was passing 60 percent occupancy. Within three miles, two new stores are being built that will add more than 200,000 square feet of new space over the next six months.

“We are seeing competitive development in many of our markets,” says Amsdell. “The top 10 or 20 MSAs are getting most development, particularly Charlotte, Dallas, Denver, Miami, Southern California, Houston, and New York. The large markets are seeing an over-weighted amount of new supply, but there are some new projects sprinkled about second- and third-tier markets.”

Amsdell’s firm is building in Dallas, Pittsburgh, and South Florida.

Here’s one other thought on where new development is happening: Homeownership went from a high of 69.4 percent of the population down to 62 percent, and six million to seven million households moved from single-family to multifamily, many to in-city, mid-level apartment buildings. This is another place where self-storage has focused.

“Back to urban core versus on the edge of growth,” Jernigan observes.

“We have seen the studies where people say there’s more demand than supply,” says Helgeson, “but you can’t look at the whole MSA; you have to look at specific trade areas. For new development, we typically look at three- or five-mile trade areas depending upon the location. In most trade areas, we like to see less than seven square feet of storage per capita before considering additional supply. We are seeing some developers building in trade areas that are 10 to 15 square feet per capita. We feel that those markets are going to be overbuilt, straining management at existing facilities.”

Another problem is that a lot of developers with money are not doing sufficient due diligence. “The reality is people get into markets without understanding their trade area,” says Helgeson. “They do not realize that other properties in their trade area are being permitted and will more than likely come on line at the same time. Some get so far into their project, even with a better understanding of the market, they develop anyway.”

The irony of it all is success breeds complacency—and new money.

“It’s a time to worry about new supply, especially with the cost of money so low and the visibility the industry has gained as a top-performing real estate asset class,” says Jim Chiswell, principal of the consulting firm Chiswell & Associates LLC in Leesburg, Va. “Everybody it seems wants to get into the business. I’ve lost track of the calls I get saying ‘we’re so-and-so from Wall Street; we have a venture fund and we want to put $150 million into self-storage’. My response is good luck; you are bringing nothing to the party. The availability of money is not the issue.”

The biggest financial upside in self-storage investment is building from scratch, Chiswell adds. “Right now, buying an existing facility of institutional size means you are buying at a 5.5 percent or lower cap rate,” he says. “If you are buying a 75,000-net-square-foot facility with good rents, solid management, occupancy above 90 percent, and you are paying a premium price, over the next three or four years, do you really think you are going to turn that into a huge home run? It just isn’t going to happen.”

It’s because the market has been strong and existing facilities have done well that new investors are flocking to self-storage, says Diane Gibson, president of Phoenix-based Cox’s Armored Mini Storage Management Inc. “It always seems when you go through a cycle, have a few good years, then people want to build anew,” she says. “We started to see a lot of people building and heard about a lot of people building; new stores have opened in 2016, and much more will open in 2017. That’s why the forecasters are saying 2017 may not be a robust year for existing facilities, because we got these new facilities coming on line.”

As Helgeson notes, “We consult in numerous markets and 80 percent of the trade areas we visit are experiencing strong occupancies, but we are also seeing a ton of new supply being planned and developed.”

“You would hope people learned their lessons about saturating the market from the 2000s,” says Gibson. “I guess not.”


“Something’s comin’, I don’t know what it is, But it is gonna be great

… it’s only just out of reach

Down the block …”

My apologies to composers Leonard Bernstein and Stephen Sondheim, who wrote the song, Something’s Coming for the play West Side Story, but in the self-storage world, if something’s coming, it probably won’t be great for you if you own a facility “down the block” or even a few miles away.

Competition is competition, and it’s best to get pro-active early. The good thing is you will know it is coming because self-storage facilities are a long time in gestation.

“These things don’t happen overnight,” observes Todd Amsdell, CEO and president of Cleveland-based Amsdell Companies. “This is the time to look at your customer base, get the long-term customers signed up, get the commercial accounts, and put your marketing out there.”

“The best strategy is to get leased up before the new guy opens,” says Diane Gibson, president of Cox’s Armored Mini Storage Management Inc. “Once clients get inside your buildings, they most likely are not going to leave.”

If someone is coming in down the street with a new project, you want to make sure it is level playing field, adds Jim Chiswell, principal of the consulting firm Chiswell & Associates LLC in Leesburg, Va. “Just because it happens to be the county commissioner’s son, it doesn’t mean he gets to build at a lower standard than what you were forced to build.”

The likelihood is that if you have competition, the market was probably robust and the metrics are good. So, as an existing owner, you have to work your way through it. The best thing to do is go about business the way you have done in the past, but work a little harder at marketing and firming up current customer base.

“You may be forced to change your operating philosophy if a new self-storage development was ill-conceived and put too much self-storage in the market,” says Amsdell. “But seeing where market conditions are today, that is less likely.”

There is always the prospect that competition is not competition. “If someone puts a brand new shiny penny down the street, how is that going to contrast with you in terms of the new customers,” says Chiswell. “An awful lot of the new facilities being built today are large with maybe 100 percent temperature-controlled units. If you have no climate control, does that new facility really represent competition? The new entrant has a product that you don’t even sell. That’s one of the upsides if you have a traditional facility with drive-up convenience units. You might lose some future customers, but there is typically a large premium between a climate and standard units. In some markets, the people don’t have the income for the premium rents.”

Still, the best defense is consistency. “Hopefully, you do what you have been doing all along, which is providing good customer service, keeping your facility well maintained, making sure the office looks sharp with a friendly manager, and that the landscaping and lighting is taken care of,” says Chiswell.

“Some people will simply try dropping rates, but you compete by providing a positive environment,” Chiswell stresses. “People came to you and stay with you for a reason. If you have a good facility they are not going to move down the street unless you stop paying attention to all the things you have been doing building the business. The average length of stay of our customers nationally has continued to increase.”

Kenneth Nitzberg, chairman and CEO of Devon Self Storage Holdings LLC in Emeryville, Calif., has been in the self-storage management business a long time, and over the years he had developed a quick and easy survey for new customers. The one thing that continually surprises is the steadfastness of customers. In his survey, he asks customers how many facilities he/she visited before coming to the one he owns. Almost three-quarters of the respondents, say “zero”, which means they came to the facility because of another reason such as convenience or it sits on the client’s travel route–almost anything other than price.

Anne Ballard, president of Universal Storage Group in Atlanta, would agree. In surveys of new clients her company does at move in, price is generally not the main reason customers come to her company stores. In its last survey, Universal Storage reported 56 percent of the reasons cited for customers choosing its stores were location and convenience. Price was chosen as a reason only 9.9 percent of the time.

“A one-two punch of curb appeal and location plus a slightly lower price certainly makes a difference when a new competitor is building within a one-mile radius,” says Ballard.

Universal Storages’ four strategies for meeting new competition that is located within a three-mile radius are:

  • Lower asking rate, without changing current customer rate. Lower rates to get physical occupancy and then start raising rates.
  • Paint the building. Don’t give a customer an excuse to go somewhere else. Strong curb appeal will make a difference.
  • In areas where you can get new signage use a digital sign. That keeps people looking as there is always a changing face to it.
  • Manager training. Your managers better be on their toes, using best practices and not making foolish mistakes.

It’s important to know who the competition is, too. “If it is investors new to the business or managers with a couple of stores history dictates their pricing and the operator won’t be much of a concern, but a big REIT [real estate investment trust] can afford to come in with a lot lower pricing,” say Gibson. However, she adds, “It’s not a good strategy to try to undercut the new facility. It’s not good for them, and it’s not good for you.”

Amsdell agrees. “The thing that you don’t’ want to do is panic, start dropping rates, and changing your operating philosophy dramatically because of the new competition,” he says. “That is the number one mistake that you see. People go right to price, right to specials. They make things worse by over-reacting to the competition. Dropping prices by 50 percent means you need to raise them by 100 percent to get back to where you started.”

So, what should one do about pricing? Nitzberg’s counter-intuitive suggestion is this: Make the new facility come up to your pricing. “What they want to do is draft under your pricing so they don’t have to give their units away,” he says, “and they are going to have to charge a higher rate to justify the cost to enter the market.”

Steve Bergsman is an author, journalist, and columnist. His stories have appeared in over 100 newspapers, magazines, newsletters, and wire services around the globe; and his most recent book is “The Death of Johnny Ace.”