Texas Mini News, November/December 2003

by James Bratton, MST Constructors, Inc.

"Just find land where two freeways intersect and build across from McDonalds," said the new mini storage developer in 1974. Years ago, the mini- storage industry started as a clever way of warehousing high-exposure property. The buildings were made of inexpensive block with built-up roofs and drywall partitions. Security was normally limited to chain link fences and outside lighting at the driveways. The tenants were naive about their expectations and rights. At that time, bankers and financial institutions were unsure how to evaluate storage buildings—the concept was too new. City building and zoning departments were ignorant as to how to classify these "mini warehouses." Back then, the demographics rule-of-thumb was that each person in a market area would support one square foot of storage. There were a lot of uncertainties in the early days, but one thing was certain: we had a tiger by the tail.

The mini-storage industry evolved in the eighties to present a new image of self-service storage. The trend was to remove the bad connotations of "ugly garage doors" and help mask the mistakes of the seventies with a new and improved self-service storage product. In the 80s, the normal self-storage facility was approximately 45,000 square feet of single story outside access buildings owned and operated by "mom and pop." These company-owned facilities were normally managed by retirees, along with their spouses.

By then, security had been improved with higher fencing, more lighting and cameras. The camera systems of the 80s were real cameras that were regularly stolen, and fake cameras with little red lights. At this time, the construction process was in flux. Building types varied from conventional masonry buildings to modified pre-engineered structures. During the late 70s, storage buildings were modified to include hybrid masonry and metal. Interestingly, this process may have originated due to a merging of resources from the gas station canopy industry and the need for a less expensive building. The use of standing seam roofs with metal framing became the norm for the large storage companies. Metal interior walls created a more secure and structurally sound building.

Education, Information
During the 80s, storage organizations such as the Self Storage Association and the Texas Mini Storage Association provided much-needed education to owners, managers and developers. This education was vital to both running the business and to provide the necessary data and information to building departments and financial institutions. As a result of this process, procuring loans and permits became far easier.

While the tenants of the eighties became more demanding and selective, the storage managers also became more selective. The rock bands and car repair tenants were "weeded out." Tenant demand was linked to multi-family demographics.

Enter the REITs
As the 90s began, the storage industry had two significant directions. The large storage developers and real estate investment trust (REIT) developers increased their market share through acquisitions and aggressive building programs. The size of the prototypical facility grew from about 45,000 to 65,000 square feet. These two movements added additional square footage to market areas. The pressure to increase self-storage usage was obvious, and the industry moved to establish a greater commercial tenant use.

And so, storage buildings changed from the single-story-outside-access to a mix of single story and multi-story. The multi-stories emerged as developers were challenged by increased urban land and building costs. Observers noted that the demographics of the market area began to drive the decision of whether to build self storage, and what kind of storage to build. For example, a high percentage of multi-family projects must exist in the urban market area, and in dense urban markets such as Manhattan, Boston, San Francisco and L.A. consumer tenants must be conditioned to use elevator access in their everyday activities. Of course, higher demand drives higher rents. These higher rents will normally support the higher cost of land and construction. And with the increase in rents comes the tenants’ higher expectations regarding security and services.

Cool It!
One important upgrade for storage tenants was the climate controlled space option. For a nominal rent increase, a storage customer could store his goods and products in a cooled or heated area. Climate controlled areas do not tout the same 72-degree requirement as office space; freezing, melting and mildew can be eliminated. The addition of ductwork throughout improved the storage experience for the storage customer.

Computers Take Control
Security systems improved with the increased use of computers. Operation and security systems were integrated to provide a tiered level of protection for the storage customer. Security now includes controlled access, individual door alarms and videotaped surveillance.

Self-Storage Facility Types
Over time, three distinctly different storage products developed:

Type A- Urban multi-story, high-density:
High security, climate controlled with multiple loading areas and a high level of commercial users.

Type B- Suburban mixed-use buildings:
Some climate-controlled buildings. Single story outside access with controlled access to property and buildings. Security cameras throughout, and possible individual door alarms.

Type C- Rural and emerging areas:
Single-story buildings and fenced perimeter and controlled gate access. These projects are built with the premise of "build it and they will come." Phased construction is recommended.

This differentiation in products has driven development across the nation. Sophistication in development was evident as the industry celebrated its 25th birthday in 1999*. Towards the end of the 90s, the level of development of storage buildings had reached a fever pitch. REIT participation and large franchise corporate developers led the pack in increasing the size of self-service storage projects. Large projects in dense areas were designed to recover the higher cost of land and construction. Projects were built with 150,000 square feet. The average large type A project was 80,000 square feet with 60,000 square feet net rentable. As shopping center developers migrated to storage, projects became mixed-use. For example, projects were built in large cities with retail space, office space and storage. The higher rents from retail and office helped financial performance.

Outside Factors
City zoning and development boards began to have an effect on the architectural elements of storage.

A properly designed storage facility must consider the following criteria:

1. Demand Index
There must exist a demand for the product. A professional market study is required to establish the demand index and type of products. This study will be influential in determining the size of the facility and mix.

2. Zoning
The project must be properly zoned to allow the proper type of storage and mixed development. If the project is not zoned properly, a long and expensive variance process may become a stumbling block. The "Conditions of Approval" will have an effect on the cost and appearance of the facility. It is prudent for the developer to obtain approval from local homeowner associations and agencies before closing on land. We now see cities becoming more involved with storage development projects. An example of such involvement was a project in Santa Cruz, California that required that the storage facility be designed to match the historical district’s architecture; public showers were even added for bicycle riders!

3. Economic Performance
Last but certainly not least, the facility must make money. Lease-up and ancillary products play a role in the project fulfilling the owner’s expectations. A project designed and built towards the end of the nineties would have many different challenges than its predecessors. One common requirement was a profitable yield. Financial institutions provided useable information for properly planned projects. The length of planning time increased as did the price of due diligence. The largest danger now is the possible saturation of a market area that would extend the lease-up period or create a high vacancy rate. It is painful to watch two well-planned facilities compete, dueling to an economic death in a saturated area.

At the end of the millennium, the real estate market began to shudder from a faltering economy, and the impact of the economic downturn sent a wave of new players to storage development. Self-storage trade shows enjoyed record attendance from refugees of office and retail development.

What’s Next?
The future for the storage industry is innovation: designing projects that more closely meet the storage customers’ needs and appetites. I believe that storage facilities must create need and provide a varied range of products. Currently, many storage facilities provide RV/boat storage and wine storage. Integrating internal retail sales with storage should push the ancillary income line from 4% to 10%. This requires larger showrooms. Owners and developers should consider allocating space for retail areas such as wine collectors’ items to supplement wine storage, RV and boat accessories to support RV/ boat storage, and business products to assist commercial tenants. A good example is a recent storage facility in Austin that was designed with a commercial dock, conference room, business center, and high speed Internet connections.

High traffic areas could incorporate a coffee shop or flower shop. Mini–office projects help provide traffic to the site, and provide positive exposure. Express mail and packing services are also unique profit centers. Of course, mini–offices normally require more parking, as do retail occupancies.

Future Shock: Total Automation
The use of future high-tech transaction kiosks may reduce the need for on-site managers. A prospective tenant will swipe his driver’s license and debit or credit card to choose a vacant storage room from the site plan display monitor. Use the touch screen to select the desired unit and the lease will be printed. The tenant will authorize payment and execute the lease at the transaction kiosk. The lease will be e-mailed to the operator’s home office. Upon execution of lease and debit of funds, the tenant will be given the security codes that allow access to the designated unit. Digital cameras will allow remote monitoring from the operator’s home office. Overall, the reduction of the overhead cost will allow borderline projects to be developed profitably.

Innovative integration of design, security, signs and fencing, fire protection, and mechanical systems will spearhead future development. Energy-saving techniques will be used as another method of overhead reduction. The storage operator who ignores the rising cost of energy will be literally left out in the cold. Higher energy costs, plus the increase in use of elevators, lighting, signage, and climate control will affect the bottom line for storage facilities. You should expect most states to demand compliance with energy reduction codes. Once again, the computer integration of security, energy management systems, zoned mechanical systems, fire alarms, and low energy usage products will be considered mandatory. The selection of energy providers will be a process of electronic market evaluation and selection of the most competitive provider on the energy grid.

Following the Baby Boomer Bubble
Demographic trends will continue to reflect the baby boomers’ appetites and habits. Retirement and its accompanying toys will create opportunities for storage. The already mobile generation will continue to travel in recreational vehicles. Boat ownership is on the rise, and housing size is decreasing with higher restrictions. Urban planners are incorporating convenience storage as an integral part of community master plans. The younger generations have grown up using storage as an extension of the home, and this trend will continue. I predict that owners of small, single family homes and tenants in urban lofts will gather at the storage facility to pick up their equipment for their weekend hobbies, and that commercial users will utilize self-storage as an alternative to warehousing inventories. The use of self storage coordinated with Internet ordering will allow factory representatives to increase their market areas without expensive long term distribution centers. Orders received could electronically lease distribution space throughout a network of storage facilities by web integration.

The future is bright for the properly planned and designed storage facility. But developers should beware - there is no "slam dunk" anymore. What began as a clever byproduct of real estate development has matured into a viable service industry with its own experts and vendors. Prudent owners and developers will enlist the services of these experienced professionals to guide them through the maze of regulations and specialized real estate. We no longer have a tiger by the tail; we are firmly on its back and ready for an exciting ride. We just have to ride smart.

Currently James Bratton is president and owner of MST Constructors, Inc. - Corporate Constructors of the Southwest. MST (Multi Story Team) is a design/build commercial contractor specializing in building programs and multi-site development projects. The 11th largest commercial general contractor in the Austin area, MST developed and built over one million square feet of storage space in the last year alone.

MST Constructors, Inc.
13492 Research Blvd., Suite 120-262
Austin, TX 78750-2254
(512) 312-2088
Toll-free: (800) 982-3949
Fax: (866) 699-3886