The Correction Process Has Begun
Two years ago, at an annual symposium conference in Houston, I was asked my opinion on where the self-storage industry was. I replied, “The fences have been moved in to little league distance, and everyone is hitting home runs”. Every owner operator looks like a major league player, or Aaron Judge at the homerun derby. The success that we’ve had over the last several years has been incredible for our industry. Year over year over year, occupancy, revenue, and NOI were off the charts. Every market looked like the homerun derby had come to town. As this happened, investors saddled their horses and rode to self-storage. This is where you want to place money and invest.
A quote attributed to Warren Buffet says, “When the tide goes out we will see who is swimming naked.” Predictions of when this happens are as plentiful as pens at the fall trade show. Of course, double-digit NOI, is unsustainable. At some point, rates will reach their peak by market and begin to decelerate back to normal. Where are we today? The fences have moved back to major league distances. Based on industry reports, experts, and to all the smartest people in the room, it appears that the fences are not only moved back to major league distances; the fence posts are being set in concrete. This change will help some operators, but there will be pain for others. Did you see this coming? Of course you did. Because we saw it coming, we put systems in place to protect ourselves from the correction that is in process. Did you?
Back To “Normal”
The sky, however, is not falling. The industry is strong. While occupancies are trending down, from highs of 94 to 98 percent, they are leveling off at 90 to 94 percent, depending on the market, and in specific cash cow size codes. The concern isn’t the drop in occupancy; those units that represent a small percentage of your gross potential are not statistically significant. However, your cash cow size codes and off-line units matter. Properties that are decelerating in occupancy are still showing increases in revenue because we understand that it is not the move in discount, it is the life cycle of a tenant. Slashing rates is not the answer. A disciplined approach to the second half of 2017 and 2018 will ensure your success regardless of where the fences are located.
While deal flow YTD does not reflect recent years of billion-dollar acquisitions, or 200 million-plus, the fact that there have not been large acquisitions YTD at this time, should not be a concern. Knowing the potential value of a Bryce Harper or Mike Trout Rookie card, would you sell now? Buyers and sellers are in the process of adjusting expectations. Unless you are planning to buy or sell, this is just a data point, and there is no sense of urgency. Get back to your fundamentals.
OK, you have listened to the second quarter earnings calls. You have read the latest industry reports and forecasts. Dip in the market? Buy, hold, or sell? News flash: The sky is still not falling. Every day 5,000 people turn 65. Look it up; there is an aging report. People are downsizing. Accumulators will continue to value their possessions. Millennial’s have entered the workforce; they are working and earning. If you spend time talking to them, you will be impressed by their passion. Every generation has had slackers, some of them are even our friends. At some point, they will rent. They are not a short-term concern.
Based on the fact that the fences are moving back to big league distances, what adjustments are you making for the second half of 2017? Provided that you did not anticipate 2017 YTD, what should you be doing? Let’s keep this simple and focus on some of the basics this month to set the table for the remainder of 2017 and 2018.
First, remember to breathe. Stop holding your breath wondering if it is going to get worse, if development is a problem, or it might be millennials. Those are not reasons; those are excuses. Take a look at a report from Q1 of 2009 from the SSA, the article was about the effect of unemployment on occupancy. All you have to do is look back at 82 percent to 85 percent occupancy to know that we are better today than yesterday. The windshield is bigger than the rear view mirror. Check your mirrors, adjust them for the remainder of 2017, stop driving your business based on what is behind you, and look forward. Our success as an industry is not based on the status quo; it based on innovation, embracing change, and identifying opportunities to drive NOI.
Start here: When is the last time you parked across the street from one of you locations and just looked at the curb appeal of your property? When was the last time you drove by at night to see or not see your property based on the lights that were out? There’s nothing better than a sign that says “S_LF _TOR_G_”, to convey the message to your customer that we are slow to maintain our branding! News flash: 62 percent of our customers are women; they are not storing stuff from their garage. To quote one of those YL’s (Young Leaders) “That’s my closet”. Provided that your location is not well lit and clean, you won’t have to worry about her as your customer; she went to your competition.
How about the last time you visited your property on a weekend or had it mystery shopped? I have spent the last few months in markets, greeted by managers who did not stand up, poodles at the door, and managers who never asked for my name, email, or phone number. These properties were mom and pops, regional operators, and national REITs. Are your managers focused on standing up and introducing themselves? Are they trained to get the customer’s name and contact information? If you want the front door to swing and the customer to rent a space, your curb appeal and a well-trained manager should be your no. one priority.
Next, website and internet aside, you need to break down your property into two separate sections: inside the four walls and outside the four walls.
Inside the four walls is your office. The quality of your manager is something that you need to ensure. If you are not familiar with your software, you need to make this a priority. If you don’t understand how your software works, you probably will not think it odd that your manager plans on a ski trip to the Alps this winter. There is nothing wrong with not being an expert; however, it is inexcusable to not understand the basic functionality and potential of whatever software is in place or if it meets your needs. Next month, we will get into greater detail inside the four walls. However, right now, outside the four walls is revenue that needs attention to detail.
Hopefully, by now, your plan is to assess your curb appeal and prioritized to ensure that signage works and that the property is lit and clean. This includes all common areas, elevators, stairwells, and vacant spaces. This is a pretty simple business; we rent space and collect the money. Your unit inventory report or whatever it may be called is the key. It is the windshield. Off-line units, company units, personal units, friends’ units, and your unit, need to be corrected. If you think that a unit off line is not a problem, or that your friend’s personal units at half price is OK, think again. These need to be corrected, and the only way to ensure that units are on line is the report and walking the property. Cardio is good; embrace the walk.
Your existing tenants are your revenue. Provided your software has some type of rent rate variance report, you need to review it, rank it by dollar or variance percent to determine what tenants are still on a discount from 2015, paying under the posted rate or getting the friend of the manager/owner rate. While the REITs have revenue software teams larger than your company, algorithms, and scale, you are not competing against their entire team; think three to six miles. That’s your competition. Be nimble, review your inventory, and identify tenants that need their discount or rent corrected. Identify the tenants that are due for an increase. Identify the cash cow size codes and drill into the rates that these tenants are paying. This is where you are going to make a difference in your revenue.
The success of each individual property or properties that you manage or own ultimately will determine if you will be a buyer or a seller in this industry. Unless your plan is to utilize a third-party management company that will take care of inventory, manage your expenses, and provide you with time to pursue other interests, you need to reengage. Put your plan together. Patton said, “A good plan violently executed now is better than a perfect plan executed next week.” Your plan doesn’t need to be violent; its storage. However, it does need to be executed now.
Norman Shore has more than 20 years of operational experience in self-storage. He the director of self-storage for Kayne Anderson Real Estate Advisors (KAREA).