A Tale Of Two Strategies

Posted by msmessenger on Aug 1, 2016 12:00:00 AM

Self Versus Third-Party Management

Storage Pros Management, LLC, a Farmington Hills, Mich.-based self-storage company, owned more than 605 stores throughout the Northeast, Southeast, and Midwest. Its business model was to concentrate assets in a handful of markets, with the objective to be the dominant self-storage player in those particular markets. It was a successful strategy, but the demand for self-storage properties was so strong that the company decided to capitalize on marketplace opportunities, selling three-quarters of its portfolio at the end of last year.

With just 15 stores left in ownership, Storage Pros, a group of industry veterans, as the company’s name implies, decided the wiser decision was give up in-house management and instead hire third-party managers.

“We lost a lot of our scale and efficiency,” explains David Levenfeld, president and CEO of Storage Pros. “We examined the alternatives going forward and, from a market efficiency and economics of scale perspective, our standalone management platform was no longer the best choice.”

Storage Pros farmed out management duties to a much larger company, a publically-traded, self-storage real estate investment trust.

“We lost our scale and, on a macro basis, with everything shifting online and other tech trends such as revenue management, as property owners, we felt the decision to maximize our properties was best served by engaging third-party management,” says Levenfeld.

Traditionally, the wonderful thing about the self-storage industry was that it was so entrepreneurial. Anyone with a decent location could open a store and be successful. It might demand long hours, but self-storage was a fairly simple business to operate, and one could make a good living at it.

Although the industry is still dominated by these “mom-and-pop” operators, who might own just one or at most a basket of stores, the industry has been roiled by two long-term trends, aggregation, especially by a small group of publically-traded REITs, and vast leaps in technology, particularly the use of the Internet for marketing and operational programs.

These two trend lines are not mutually exclusive phenomena. In fact, the two have crossed paths.

The Need To Compete
Technology can save a business thousands in expenses, improve revenue, make marketing more effective, and incorporate new operating efficiencies. Take marketing, for example: As late as a decade ago, a visual presence that attracted the drive-by customer was still the number one marketing ploy. The Internet was probably third after publication advertising and lumped into the pot of “other”   marketing approaches. Today, the Internet is the first marketing choice, followed by drive-by and everything else is “other”.

“If you have a robust, online presence, you are going to outperform in terms of revenue maximization and customer acquisition,” says Levenfeld.

The trouble is building, maintaining, and constantly improving to keep up with online technology changes is costly. Big operators, which have aggregated large portfolios, can spread that cost over hundreds, if not thousands, of stores. For a small operator, the cost to do all that can be daunting.

“Our revenue management was partially systems driven, but with a large component of human involvement,” says Levenfeld. “The revenue management model for the company we engaged is more sophisticated and more effective. You can say the same thing about the resources it devotes to its online presence; there was no way we could match that.”

There is obviously a cost to employ a third-party manager. In the case of Storage Pros, it completely shut down its operations so overhead deep dived, making the fee payment a more attractive alternative.

According to Scott Beatty, the CFO of Memphis-based Absolute Storage Management, Inc., whose company manages 90 locations in the Southeast and is primarily a third-party manager, the fee, averaging about six percent, is based on gross revenues (excluding sales tax but includes any revenue collected for rental income, retail, truck rental, etc.).

“In a lot of cases we like to retain the current staff, but there are definitely exceptions,” Beatty says. “We’ll come in and take over the management team in place or hire individuals. We do all of the accounting, banking, rental processes, and marketing.”

Not all mid-size, self-storage companies feel outsourcing to third-party managers is the right solution. RJ Kelly & Company, a Burlington, Mass., commercial real estate investment, development, and management company has about 20 percent of its assets in self-storage. After recently selling off a number of properties, it’s portfolio of self-storage now stands at eight stores. It self-manages.

“We have always managed ourselves,” notes Brandon Kelly, CEO. “We have a vertically intergraded investment, development, and property management platform, and we manage all of our commercial assets, including self-storage. Within self-storage specifically, there are certain things unique to the asset class and there are certain things not unique to the asset class. We have the ability to self-manage even if it is just a smaller pool of assets because of the depth of our platform that is specific to running real estate.” 

Within RJ Kelly & Company there are many individuals who focus on storage and other asset classes. It also has a dedicated storage team, which, at this point in time, is just a handful of individuals focused on the specifics of that asset class. As the company acquires more assets it ramps up staff for a given asset class.

A company such as RJ Kelly can self-manage because it can cross-pollinate self-storage with its in-house property management, so, for example, it can easily handle such tasks as new construction, tenant improvement, asset management, general maintenance, snow removal, and landscaping.

It then employs third-party vendors to fill in on the technology side of self-storage.

“Over the past 20 years, a lot of the nuances specific to management of self-storage have changed,” says Kelly. “A lot of customers come from the Internet and there are third-party vendors, such as Bend, Ore.-based G5, that folks like us can use to be competitive with the big boys.”

Kelly adds, “We have more of a mindset where we give managers the ‘ownership’ of running a particular asset. The biggest operators tend not to empower the facility managers in the same manner. For us, we have the managers in the trenches and working the asset on all levels.

RJ Kelly & Company may use third-party vendors and software providers for such things as the Internet marketing and revenue optimization, but, at the end of the day, the company still feels there is no substitute for high-touch customer service and engagement in the communities that it serves.

“We believe that this can only be achieved with well trained, polished, and dedicated personnel who truly feel a sense of pride in their facilities,” says Kelly.

Time To Switch?
So which owners prefer self-management?

“Some of the potential clients we interact with, who don’t choose to go with us, are typically choosing to stay on their own because they are highly involved; they built their self-storage operations, have been managing it for a long time, and are just not ready to let go,” says Beatty. “They are connected to it; it’s their baby, and they want to be involved in every decision.”

On the other hand, Beatty adds, “For the most part, our clients work in real estate but not in self-storage. They have been turned on to self storage as an investment opportunity, but their primary business might be retail or apartments. They hire us because they want to take care of their primary businesses.”

This is still a location, location, location business in many respects and, because of that, you see a lot of mom-and-pop operators do really well, observes Todd Amsdell, CEO and president of Cleveland-based Amsdell Companies. “They have a great location, they run a very clean and neat operation, and they compete with anybody at most levels. The complexities increase at an increasing rate when the mom-and-pops own two or three locations, so they are challenged in that respect.”

“A lot of people who own one property in a great location and have a product that people want, then those people do just fine,” says Amsdell. “It also depends so much on your ability and your desire to work and use those abilities to manage your properties.”

The problem is, in many markets the competition has become severe, and mom-and-pop operations that have found success in the past now face higher level of competition as rivals now employ third-party managers.

“There are a surprising number of independent operators that come to us, saying ‘my competitor down the street hasn’t beaten us for the last 20 years but now they have employed a third-party manager, I need to join up with someone like you’,” notes Noah Springer, vice president of business development for Extra Space Storage, Inc., based in Salt Lake City, the second largest operator of self-storage in the country and the largest third-party manager.

“As the industry continues to consolidate, smaller operators are recognizing the upside of joining with large operators through third-party management,” says Springer. “With Extra Space, the smaller operator can be just as powerful as a larger operator. That gives them strength even though prior to joining a larger company they were at a disadvantage or on equal footing with the competition on the Internet. As soon as the competition joins a professional third-party management company and can take advantage of what the company offers, it is going to make it difficult for the other independent operators to compete.”

Like everything else in life, the higher the level of competition, the higher level of competency you are going to need to compete, Amsdell observes. “In many markets it has gotten to be very competitive and it is very difficult for the mom-and-pops to achieve that level of competency.”

Fees And Features
Although it is somewhat expensive to utilize third-party management, when it comes down to the actual fees it may not be that expensive on a comparative basis.

Amsdell admits his property management company, even at 70 properties, still does not cover its own expenses. “We lose a significant amount of money every year managing our own properties. Having run a portfolio of over 400 properties we understand the time and complexities it takes to manage these things well. Now, with 70 properties and the six percent management fees that we charge ourselves, we still don’t break even. Everyone has a different situation, but you have to really think about what it is that you want to get out of a property, how you are going to get there, and to make sure that all matches up.”

There is a cost balance that has to be considered between self-management and third-party management.

Essentially, it comes down to the fact that third-party management companies need to make up for their fees with additional revenues.

Springer is very forthright about this, saying, in effect, the third-party manager has to make your self-storage operation more money after the management fee or you shouldn’t be with them.

“If your property is so small that the fixed-cost structure of the third-party management company does not allow you to increase your cash flow then you need to go with a different management company,” Springer asserts. “We have a lot of people that come to us, saying, ‘I have a 100-unit store in Tuscaloosa.’ We could run it, but it would not be the best thing for that owner. Our minimum costs would overburden the store. That owner might want to go with a smaller management company that could run it at a lower cost.”

Springer cautions, any owner considering a third-party management company should get a proposal that includes the exact costs and comparisons to pro forma revenues to make sure the costs and revenues are in line with what the owners can pay. Any third-party management company should be able to provide this detail. He lists five items a third-party manager should bring to the table:

  1. Size and scale to reduce certain operating costs.
  • It should have an Internet platform that allows the new owner to obtain more rentals than before. (Online should offer inclusion on a digital real estate platform of a major company that puts your store higher up on webpages and Google searches.)
  • It should be able to operate your stores on equal level with all other stores under management regardless of what entity owns the other stores. Third-party managers need to operate all stores in a “color-blind” manner.
  • It should offer superior revenue management systems that are highly specialized and at REIT-level quality.
  • It should, preferably, offer an in-house call center. (First, it is important that the third-party call centers be able to refer back and forth to different stores; and, secondly, you don’t want your property being sold alongside a different third-party manager that might be competition.)

On the expense side, third-party management companies bring a better cost structure, including credit card processing, insurance, and other expense line notations. However, the biggest thing they do is put their systems into place, whether it be yield management or people and functions dedicated to drive down rates and brings customers to the website and ultimately to the property.

Another advantage of third-party management, says Amsdell, “is its day-to-day focus that maybe an owner can’t bring. Sophisticated operators understand the big, third-party management companies have dedicated people and do a good job. This doesn’t mean that all those things can’t be done by an individual owner. It just means they have to have the ability and time to do it.”

As noted, there are enough third-party vendor options to minimize the competitive advantage a major operator with scale brings to the table. “With vendor products, a smaller operator can compete successfully as self-managed entity,” says Kelly. “It is still a fragmented industry and there are enough third-party firms out there to make it compelling for folks to keep management in-house, especially if one has a complimentary platform to back up the property management side of the operation.”

It is difficult to make money in this business without scale and in more competitive markets that is something owners should be thinking about, says Amsdell. “In smaller markets, individuals do just fine.”

Others would agree.

“Even though you may not have CubeSmart choosing to be there in your market, you might still have another dominant player,” says Levenfeld. “If you are going to be in a major American city, there is going to be a dominant operator that is sophisticated and, my guess, it is going to outperform in terms of revenue maximization and customer acquisition. The world is migrating to a place where the standalone management model is only going to be most viable in smaller towns and tertiary markets.”

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