The Rising Star of Self-Storage
Statistics via Self Storage Association
Image via SpareFoot.com
Storage Wars may have put the self-storage industry in the spotlight, but the self-storage industry has been a rising star long before that. In the past 15 years, the self-storage industry has exploded in growth and continues to be a niche industry with solid returns for investors.
The numbers say it all:
- The US share of the global self-storage market is 86%, 50,100 of 58,000 storage units worldwide.
- The REIT return from self-storage units in 2011 was 35.22%, the highest of all REIT’s.
- The quantity of US storage space doubled in the last decade from 1 billion to 2.2 billion square feet. That’s an area 3 times the size of Manhattan.
- 1 in 10 Americans owned a storage unit in 2011, a 65% increase in 15 years.
- Total revenues from the self-storage industry were approximately $22 billion in 2010.
What is the driving force behind this growth? It is likely a combination of several cultural factors. Unlike previous generations that typically stayed put, Americans are increasingly mobile, moving an average of 11 times during their lives. Also, as an increasing amount of people are becoming Ebay and Amazon entrepreneurs, they need extra space to store their inventory. Another factor may be the phasing out of the attic. Fewer homes than ever are being built with an attic, creating a need for external self-storage.
Despite the economic downturn, the self-storage business continues to thrive. The real reason behind the industry’s endurance may be deceptively simple. According to Clemente Teng, Vice-President of investor relations for Public Storage, “People always think, ‘I’ll just house it for a couple of months and then get it all out, but the problem is once you get all your stuff in, the last thing you want to do is spend a Saturday cleaning it out.’”
Holly Rhoades is the editorial director for Fort Worth-based VRB Analytics. She is a regular blogger for Dallas-based Garrett’s Moving and Storage. The company has been providing both local and nationwide moving and storage services for 20+ years and maintains an A+ BBB Rating.
The 7 R’s of Green Office Furniture
Daisy McCarty is the long-time blogger for San Diego-based Cubicles Office Environments. Her writing covers topics such as office furniture trends and tips, workplace ergonomics, product reviews, and industry news.
We’re all familiar with the 3 R’s of the environmental movement (reduce, reuse, and recycle). But did you know that there are actually 7 different R’s you can use to evaluate and manage your office furniture inventory? Here’s a brief look at each one.
The office furniture you buy plays a substantial role in the amount of space you need to lease. While employees do require a minimum amount of square footage to feel comfortable, they don’t need oversized desks or workstations to get the job done anymore. Today’s flat screen monitors and the trend toward “paperless” offices means you can get away with much more streamlined worksurfaces and fewer bulky filing cabinets than in the past. The less space you lease, the less energy you’ll consume for things like lighting and air conditioning.
The easiest way to ensure your office furniture doesn’t end up in a landfill is to simply hold onto it. The cost of storing your furniture during a move, renovation, or other transitional time is far less than the expense and time involved in getting rid of everything and buying new. If the items are still in good condition, consider leasing a storage unit until you are ready to redeploy your furniture.
When your office furniture has reached the end of its lifespan, contact the manufacturer for tips on how to recycle it. Some major office furniture companies are designing their chairs and workstations for rapid disassembly so that the parts can be sorted for easy recycling by category (aluminum, plastic, steel, etc). Your local dealer may be able to help you find a suitable place to actually ship your old furniture for recycling.
You can give high end cubicles and other office furniture a new lease on life by having it refurbished. Take this opportunity to replace fabric and restore any damaged trim or other components. When the job is done right, your office furniture will look brand new and can easily last another decade or more. Some refurbishing companies will even give you a nice long warranty.
This is the most important step if you are ready to buy new office furniture. The choices for “green” or “eco-responsible” furniture are more numerous than ever. Look for BIFMA, Cradle-to-Cradle, and GREENGUARD certification if you want assurances that:
· Raw materials were sourced sustainably
· Energy consumption during production was managed appropriately
· Waste was minimized
· Non-toxic substances were used
Say “No!” to cheap office furniture that won’t last. There’s nothing eco-friendly about having to dump an office chair after a year because the seat padding has gone flat. Instead, commit to purchasing well-made items that will provide years of useful service. Choose modular furniture that can be expanded upon or reconfigured as needed. Remember, it’s always greener to buy an item that won’t become obsolete.
When it’s time to offload your old office furniture, see if you can get some money for it. The chances that your used items will be refurbished or retouched and sold again go way up if you sell them. You’re doing the planet a favor by selling your office furniture to a reputable dealer in your area. They can find a local buyer to give each piece a new home.
Storage Auctions: Realities for Managers
Even Anderson Cooper is paying attention to Storage Wars these days. But the reality of storage auctions may mean something different to individual managers at their facilities.
John Cruz, manager of Chelton Self Storage in Colorado Springs, Colo., has held about nine or 10 auctions since around 2009. He believes that auctions have become more popular recently. “People get excited by what they might find. Perhaps they’re persuaded by the TV shows….Then they buy at lower rates, it just depends on how much they bid on it,” he says.
Chelton has had two recent auctions. One in March had about 50 attendees who bid an average of $50-100, while one in May had over 80 attendees bidding an average of $200-300. Cruz says that the increase in attendee and bid numbers is because “in previous auctions people started realizing the fact that the items were worth the bid—money well spent.”
Cruz finds that some auctions are beneficial for his business, while some are not. He says, “I really don’t make much money out of auctions - it’s to try to cover our expense. 90 percent of the time I don’t cover my losses. One unit may have cost me $600 and the person bids at $400, so my revenue has still suffered a loss.”
On a Self-Storage Talk thread, other storage managers commented on the pros and cons of having auctions.
Senior SST member A-Team says, “An unpaid unit does not make any money. The sooner the delinquent tenant can be moved out, the sooner a paying tenant can move in.”
SST member TimburrWulf says, “Personally, I do not like auctions. I’d rather the past due customers paid or moved out. TimburrWulf’s facility does auctions once a month and only on units that are “far past due,” she says.
A Credit Slips article and comment forum raise questions about how Federal and State lien laws function when tenant belongings are sold at auction. Several managers commented on the SST thread about this issue and how it specifically pertains to their business.
TimburrWulf says: “I don’t feel [auctions] are unfair to [delinquents]. As a manager, we still have the ability to work out something with the tenant…so they can keep their items (i.e.: settlement agreement where they pay three-quarters of what’s owed and get to use the truck to move-out). What is not fair is holding onto a delinquent tenant and let them continue to be late and accrue month upon month of fees and past due rent.”
Joe Krezdorn, manager of Dak Self-Storage in Leesport, Pa., says, “We have a sale every three to four months or longer depending on delinquency. I feel I am more than fair as I go above and beyond the letter of the law. I try to work out a payment schedule with them. Sometimes it works out, sometimes not.…Since 1998, maybe two [tenants] have called after sale….I tell them [when] you go to your attorney take a copy of your lease. Never hear from them. Pennsylvania law seems bulletproof.”
Cruz also says that he’s had few incidences of tenants returning to reclaim auctioned belongings: “Out of 1000 units we’ve auctioned in five years, I would say maybe two people have come back and I extend an explanation….I think I’m pretty fair [to delinquents]. If I was to shove and say, ‘If you don’t give me payment within 30 days, we’re going to auction your items’…it’s just not a business scheme for me. I prefer to work with our customers and try as much as I can to have them keep their personal belongings. But, there’s always a line we have to draw. We let them know what their status is as far as their units being in lien and the proceedings. We send them a letter by certified mail. 90 percent of the time working with the customers we get our money back.”
Tenant Pay Electronically
Responses on two Self-Storage Talk threads seem to indicate an overall rising trend for manager use of websites and electronic options for storage payments.
SST moderator MamaDuke says, “[Web payments] allow another convenience for my customers. They don’t have to spend gas money to come in and see me or even a stamp to mail their payment in. They can sit in their PJ’s at 3:00 a.m. and pay their storage bill online. I don’t know why anyone wouldn’t offer online payments.” SST junior member Valueom adds, “You are also freeing up your manager to focus on obtaining new rentals.”
MamaDuke and Lisa T, senior member, offer automatic monthly credit card payment at their facilities, in addition to several in-person payment options.
Junior member SSIreader says, “Now [tenants] have no excuse to be late and for me to waive a late fee.” Member Flyfisher of Rosehill Storage adds that, “It also makes it easier on us when calling for collections as we can offer this payment option as a quick resolution.”
Joe Krezdorn, manager of Dak Self Storage in Leesport, Pa., says, “Almost one-third of my monthly payments are online payments. I also think delinquent tenants would rather pay that way to avoid face to face. That’s alright with me. At least I get paid.”
Junior member PalmettoMoon, who also takes website payments, recommends making “sure your website is optimized for mobiles! We have lots of people starting to pay from mobile devices.”
Other SST members added ideas about using iPads for reservations and payment. John B., senior member, says, “iPads/tablets would only be compelling if I wanted to complete a rental while I was standing in the unit with the prospective tenant. I have to have a PC in the office to make my tenant management software talk to my gate software….The only other use I could see for a tablet system right now would be for a remote-managed facility where you are not doing face-to-face rentals and the manager/owner is mobile.” Priscilla, junior member says, “I use an iPad. I live on site so if I get a phone call…and I am not at the desk, i.e. in my apartment, I will take payments with it.”
Jerry Teeter, manager of Store My Classic in La Vista, Neb., represents a different approach than the SST thread comments. He says, “We provide a niche-type of storage only for vehicles, it’s not like your typical storage units. We don’t have a national or regional customer base. Generally, [customers] come into the facility to inspect it and make sure it’s what they want and obviously they have to bring their car in so we typically just do the payment at that point. We don’t take payments online.”
However, Teeter says there are other options as well: “We do a contract with a customer and run their credit card every month or automatically debit the card.” He says that auto debit is “definitely” the easiest way of receiving payment.
Do Kiosks Improve Your Self Storage Business?
Kiosks Receive Mixed Reviews - What Do You Think?
I recently read a press release from Phoenix-based OpenTech Alliance, Inc that stated that a kiosk rented 47 units in one month. That would be an impressive number for a manned facility, so I’m even more impressed that a kiosk reached such a high number. From speaking with several professionals in the field, it seems to me that there are as many people against the use of kiosks as there are for it. I want to hear your experience with kiosks at your storage facilities. If you aren’t using kiosks, I’d like to hear why not. This survey will stay up until Wednesday 8/24/11, and I’ll summarize the results later next week. (Update: As there have been only a few responses to date, I’ll be leaving this survey up for one additional week before summarizing and sending out the results.)
Self Storage Mortgage Rates Continue Their Decline
Image by manarh via Flickr
Update by: Joseph Cacciapaglia
Mini Storage Loan Rates Fall Further
It looks like I was wrong. After mentioning the falling loan rates last week, I told several people that I couldn’t image rates going any lower. However, since that post, rates have fallen another quarter point. This time the decline has come from a drop in the swap rates, rather than a decline in lenders’ spreads. So it’s not that lenders are getting even more aggressive, this time the lower rates are just a function of the macro economy. Either way, I’m willing to admit that I was wrong, but now I really can’t image rates going any lower. Today we can offer rates as low as 4.5% for 5 years at 70% LTV for fully stabilized self storage properties.
Rates Fall Further for Self Storage Mortgages
Image by The Library of Congress via Flickr
Update by: Joseph Cacciapaglia
Balance Sheet Lenders Continue to Compete for Mini Storage Loans
I just wanted to provide a brief update regarding balance sheet lending and self storage. While CMBS spreads and rates increase, many portfolio lenders have continued to lower their rates on self storage loans. For premium deals, rates are now as low as 4.75% for a 5 year deal with a 25 year amortization. I also want to make a clarification, because I don’t think my previous post was clear about the types of deals that these lenders are competing for. These rates aren’t available for value-add or construction deals, and they’re not available to refinance under-performing facilities. They are available for fully stabilized properties in major markets with good borrowers. If you are purchasing or refinancing this type of self storage facility, balance sheet lenders should be on your short list of options.
Balance Sheet Lenders Get Aggressive On Self Storage Loans
Image via Wikipedia
Market update by: Joseph Cacciapaglia
More Loan Options for Mini-Storage Owners
With lots all the attention that SBA loans and Conduit programs have been getting, it’s easy for self storage owners to forget that these aren’t the only options they have for financing their storage facilities. It seems that commercial banks and other balance sheet lenders have been feeling ignored lately, and have decided that they’re not going to take it anymore. Several of these lenders have recently made changes to their programs to win back some of the self storage loan business that they’ve lost to SBA lenders and Conduits.
While SBA programs are still the only game in town for high leverage loans, balance sheet lenders have decided to compete strongly with extremely low fixed rates. Just this week several of these national lenders have dropped their rates to just over 5% for 5 year fixed terms. These loans typically come with up to 70% LTV and 25 year amortizations. This should definitely cause some concern for their Conduit competitors, as should the flexible prepayment options that many banks are offering.
These new balance sheet programs are available in most major markets throughout the US, and can be used for both purchase and refinance. Typical loan sizes that are available with these programs range from $500K to $5MM, but the best pricing is typically on the $1MM+ loans. Most of these lenders are looking for a 1.30x DSCR, but with the low rate and long amortizations, this is a pretty low hurdle for most borrowers. Self storage owners should definitely add a few balance sheet lenders to their list next time they’re looking for financing.
Preparing Your Self Storage Property for a Refinance
Image by bryanpearson via Flickr
Written by: Joseph Cacciapaglia
What Self Storage Lenders Like to See
Self storage owners often ask me what, if anything, they should do to prepare their property for a refinance. I usually get this question 2-3 months before the owner is interested in refinancing, but unfortunately most of my suggestions work best when implemented 12-18 months prior to the refinance. Most lenders today are looking at a trailing 12 month financial statement when underwriting new loans, so changes made just prior to the refinance have less impact than those made earlier.
The borrower’s goal should be to maximize the property’s NOI for the 12 month period prior to the refinance. At first glance you would think that this is always the borrower’s goal, but often borrowers have reasons to minimize their NOI for tax or other reasons. Alternatively, borrowers might siphon off some of their profit from the property through artificially high wages or other profit centers related to their global business. While this may make sense in certain circumstances, it always creates problems when attempting a refinance.
Maximizing Your Self Storage Facility’s NOI
Over several years of looking at self storage financials, I’ve seen many ways where borrowers have hurt their ability to refinance because they hadn’t maximized their NOI. Here are a few common examples, and some ways to avoid them:
Inflated Wages - It is very common for borrowers with large portfolios to pay corporate level wages out of their better performing properties, rather than dispersing profits to the corporate entity and paying wages at that level. Often this practice started when the borrower had just one or two properties, but ended up continuing because nobody realized it was a problem. When a lender looks at the P&L’s for the property, it appears that there is a very large payroll burden, and the property is not operating well. Backing the inflated payroll out of the property level financials becomes a point of contention with many lenders, and can potentially reduce the proceeds that the borrower is able to receive.
Charitable Unit Rentals - Many borrowers have ‘donated’ units to local non-profits. This is admirable, but not the best way to go about doing business. When looking at the rent roll, these units are usually either listed at $0 rent or as down or vacant. This hurts the property’s occupancy and NOI. One suggestion that I received recently to deal with this problem, is to have the borrower rent the unit to the non-profit at the fair market rental rate, and then have the borrower pay the rent as a donation each month. The net effect on the borrower’s cash flow is zero, but the NOI at the property level remains intact.
Inflated Maintenance/Management Expenses - Many borrowers have a complex web of entities related to their self storage portfolio. Often these entities include both a maintenance and management company which have their own separate staff and overhead. I’ve often see borrowers carry these additional entities with their better properties, while many of the expenses should have been allocated elsewhere. This is another situation where it is difficult for a lender to back out some of the expenses to see the true NOI of the property.
Poor Collection Practices - Some borrowers find the process of collections and evictions distasteful, and therefore, will put off these activities until absolutely necessary. I’ve spoken with some borrowers who only have one auction a year, even though a large percent of their units go unpaid each month. Many borrowers believe that this isn’t hurting them unless their occupancy is very high. They rationalize that if they evicted these tenants, the unit would just be vacant anyway. However, this practice creates artificially high collection losses at certain points in time, and also creates large swings in occupancy levels as well. Many lenders will perform a trend analysis, so these swings make a facility look much weaker than it may actually be. Staying on top of collections and evictions will eliminate this issue. Not to mention that it’s just good business.
Not Capitalizing Expenses - Often borrowers will complete large capital projects that should be depreciated over time, but are included in their R&M expense line item. Lenders don’t want to guess which expenses were capital items and which were really for repairs and maintenance. It is very difficult for a lender to back out capital expenditures if the borrower has included them above the line in their P&L’s. It’s important for borrowers to properly classify these expenses in their general course of business.
Not Recognizing Prepaid Expenses - This is slightly less common than the issue of capital expenditures, but it is very similar. Occasionally borrowers will prepay their insurance, lease, or marketing expenses to receive a discount. Often these prepaid expenses are reported in a single period instead of being allocated over the periods in which they are used. This increases expenses in some years, and reduces it in others. Borrowers should report these expenses when the benefit is received, not necessarily when they made their payments.
Reporting all of your income and property tracking expenses over time is extremely important when preparing your facility for a refinance. If you are thinking about refinancing your self storage facility, and would like other suggestions regarding your P&L’s, please drop a comment.
Please keep in mind that I’m not a CPA or tax attorney. I’m not telling you how you should report and pay your taxes.
Self Storage Portfolio Financing
Image via Wikipedia
Article by: Joseph Cacciapaglia
Mini Storage Lenders Look at Portfolios Differently
As your self storage portfolio grows, it may be beneficial to start financing your holdings on the portfolio level. Doing so saves time by taking care of all of your properties at once, but it will also often provide you with better terms as well. This is true because many of the larger banks, life companies, and conduits have minimum loan amounts that preclude the vast majority of single property self storage loans. These same lenders often have the lowest cost of capital, and therefore provide the best rates to their borrowers. By grouping your properties, you will be able to meet these lenders’ minimum loan amount, and therefore have access to their better programs. If you are at a point where you are considering financing your portfolio, there are a number issues that you’ll want to consider.
Characteristics of a Mini Warehouse Portfolio
Just lumping all of your properties together does not necessarily create a portfolio that an institutional lender will be interested in. There are several characteristics that they will want to examine:
- Do all of your properties fall within the lender’s ‘footprint’? Many lenders have defined markets that they are and aren’t willing to enter. Some lenders may ask you to remove some of your properties if they don’t fall into their specific markets.
- Are your properties geographically diverse? If all of your properties are clustered too closely, the lender may view your portfolio to have too much exposure to a single market. Diversification reduces this exposure, and therefore makes your property portfolio more attractive.
- Are some of your properties in growth markets while others are in more mature or declining markets? This issue can be looked at both ways. Some lenders would like to see a focused business plan where you are specifically targeting certain types of markets. Others like to see that you have a diverse mix of growth and mature markets. I think all would agree that including declining markets will make your portfolio less attractive.
- Are all of your properties stabilized? Often borrowers bring portfolios to me hoping that their stabilized properties will help them finance their assets that have not yet completed lease-up. This is possible, but should only be done after careful consideration. Adding these properties will allow you to get them refinanced, but it will also most likely increase the cost of capital on your entire portfolio. It’s important to look at the total cost of adding these properties, not just the relative cost of capital for that one property.
- Are some of your properties completely built out, while others have additional phases planned? It may be beneficial to leave out properties that you plan to expand in the near future. You may not get the same flexibility when financing your portfolio that you would get financing these properties on their own.
- Are all of your properties similar in size? Many institutional lenders like to see assets of a certain size. If you have some properties that are 20,000 square feet and others that are 200,000, they may not fit in the same portfolio. Some lenders are more worried about this than others, so this may or may not create a problem.
- Do all of the properties have similar unit sizes? If the mix at some of your properties is skewed to the large side because of a high percentage of business clients, this may be more or less attractive than your properties with smaller average unit sizes. This is not an issue for most lenders, but some will like to see that your units mix caters to a specific type of customer.
- Are all of your properties performing well? You may be supporting some of your ‘dogs’ with your better performing properties, but that doesn’t necessarily mean that you want to finance them together. This is another situation where you want to look at the total cost of capital when including poor performers.
- Have some of your properties been improving while others are flat or declining?
- Do all of your buildings have the same physical characteristics? Some lenders will prefer certain styles or configurations. If you have too much diversity in construction type, some of the properties may not be attractive to your lender.
- Are any of your properties conversions? Some lenders are fine with conversions, but they scare many others. Knowing whether or not your lender will accept these types of properties is important on the front end of the process.
- How are your properties managed? If you are managing your local properties, but have hired a 3rd party management company for your properties in other states, this may be an issue. Some lenders like to see that you are closely monitoring all of your properties, while others may prefer to have a ‘name brand’ manager run all of your properties. Having a mix is not ideal for most lenders.
- Are your properties staffed similarly? If you have some properties with resident managers, some with on-site managers, and some with a skeleton staff and kiosks, you might run into problems. Most lenders will want to see that you have a cohesive business model.
There are certainly additional factors to consider, but this list should be a good start. Understanding how your lender looks at your portfolio is crucial when trying to get the best rate and terms for your self storage portfolio financing. If you are interested in exploring portfolio level financing for your self storage properties, please feel free to contact me today.