A Completely Different Product
By John Good and Warner Russell
When asked about my profession by friends and people I randomly meet, I respond, “I work in the self-storage industry”. The next question is typically, “You mean like the little rows of garages where people keep their old furniture?” My response: “Not really. It’s actually much more sophisticated than that.”
Twenty-five years ago, the question above painted a very accurate picture. The “rows of garages” are what the industry now refers to as Generation 1 (or first-generation) facilities; the single-story buildings with relatively uniform unit sizes, roll-up doors, and no heating or air conditioning. These facilities were built throughout the early years of self-storage and are still built by some developers today. While easy and relatively inexpensive to build, Generation 1 facilities require large pieces of land that are often in suburban or even rural areas; in most cases, they don’t command premium rental rates or sale prices.
Generation 2 (or second-generation) facilities were effectively Generation 1 facilities with a few upgrades. They were less sprawling, with more of a “fortress-like” feel and controlled access through nice gates that opened with a unique code. These types of facilities increased customers’ feelings that both they and their stored items were more safe and secure at these facilities than at Generation 1 facilities. Also introduced in this generation were interior units. Instead of simply having thin buildings with multiple garage style units in rows, facilities now had a larger rectangular building with units on the outside and a corridor down the heart of the building that allowed people to access smaller, inside units. These buildings were typically placed in the center of the fortress-like facility.
Generation 3 brought heating and air conditioning as an option to self-storage users, with some facilities even having two-story buildings with walk-up or, in cases of the nicest facilities, elevator access to the second floor. These climate-controlled buildings were typically positioned at the front of the facility, providing a nicer and more approachable feel to the facility. Newly-designed front offices served as the access to the shiny new climate-controlled interior units, where a customer could rent a unit, buy boxes or locks, and interact with a professional staff. Gone were the tiny apartment offices of old. Heated and air-conditioned units allowed managers to charge premium rents for the first time in the history of the sector.
In the mid-2000s, Generation 4 facilities began popping up, transforming the sector from horizontal structures that spanned several acres to multi-story building that looked nicer, felt safer, and were able to be built on a minimal amount of land. Major REITs and larger regional operators realized that these buildings could command rental rates higher than the dusty old garages on the outskirts of town.
Now, as the current self-storage development cycle is cresting, new facilities are predominately what Dean Jernigan, chairman and CEO of Jernigan Capital, is calling “GenV Facilities”—a completely different product than the self-storage product of the 1970s, 80s, and 90s.
Latest And Greatest
GenV self-storage facilities are typically three- to four-story buildings, sometimes more, and they are almost always 100 percent climate controlled. The exterior looks more like a nice apartment building or office complex. Tilt-up concrete, brick, stucco, or other nicer building materials create curb appeal for the prospective GenV customer. The leasing office feels modern and comfortable, with some having small working areas for customers or waiting areas with a TV. WiFi access is a prevalent amenity. Loading areas are easy to access and in close proximity to elevators, allowing customers to access a top floor unit just as quickly as a ground floor unit. Some GenV facilities even have completely enclosed loading areas so the customer can drive a car all the way in to escape the elements. The hallways are well lighted, have music playing, and feel very safe. Given the attractive design and nicer materials used in construction, municipal zoning authorities and building departments are more likely to allow GenV facilities in closer proximity to customers than was the case with their older brethren.
The evolution from Generation One to GenV self-storage facilities is in many ways similar to the evolution of hotel brands like Hilton, Holiday Inn, and Marriott, which ultimately shifted from the standard 1960s style motel to the more modern and safe (yet still affordable) multi-story, fully-enclosed hotels that today are standard for the hotel industry. The traditional motel featured rooms that had to be accessed from the outside, often lacked an elevator, and had several buildings across larger pieces of land on the side of the interstate. Then, in the late 1980s, hotel developers realized that building taller hotels on smaller pieces of land provided safety and amenities that would attract more types of customers, including business travelers, and allowed a premium to be charged for rooms. Now, brands like Hampton Inn, Hilton Garden Inn, Holiday Inn Express, Doubletree, Marriott, and so many others dominate both interstate exits and urban cores. The days of the old Motor Lodge Motels are pretty much gone.
Self-storage has followed that exact path, just a few years behind. Outdoor access on sprawling lots has been traded for interior access in tall buildings. Extreme workouts of carrying heavy items up a flight of stairs in the 30-degree cold or 90-degree heat have been replaced with loading carts into elevators, allowing easy and safe access to a clean, cool (or heated) hallway, and well-lit unit. The nice new product can charge a premium the older facilities can’t. While there are still motels and Gen 1 storage facilities throughout the country, both are relative dinosaurs in terms of new development.
Movement to GenV facilities is due in large degree to the growing need for storage in the urban core of major MSAs. The destruction of the single-family home ownership dream brought about by the Great Recession, along with a desire to shorten commutes, combined with large scale multifamily housing development in recent years, have incentivized people to live in the center of the city. In the past, New York and Chicago were the two dominant cities where the majority of people lived in small apartments or condos throughout the densest parts of the city. Now, places like Denver, Houston, Atlanta, Dallas, Charlotte, and Nashville are experiencing large numbers of residents choosing to live in the heart of the city instead of the suburbs. As urban apartments and condos fill up with people who formerly lived in single-family housing or millennials who want the downtown experience, there is a growing demand for a convenient place to keep excess belongings.
In Atlanta, for example, when a millennial couple decides to rent a 750-square-foot, one-bedroom apartment in midtown, they don’t have much room for anything besides essential furniture and a small amount of space to keep a few days’ supply of clothes. If the husband has a kayak, an old bed, and some tools, and the wife has a large wardrobe of seasonal clothes and some family keepsakes, they will need external storage. Unlike in years past, it is now highly likely that this couple will find a new GenV facility within a 10-minute drive of their residence.
This is a big selling point for the future of self-storage customers. Millennials are the fastest growing user group of self-storage across the country. They are the ones who want to live in smaller spaces with less internal storage. They want to be in urban markets where they can live, work, and play without ever having to get in a car. It’s no surprise that they have no problem paying up for a cool loft apartment but sacrificing space. Their ability to pay more for a smaller living space also indicates their ability to pay for excess storage at a nice GenV facility. However, millennials don’t have the need for as much storage space. The 100- to 300-square-foot unit has been exchanged for the 25- to 50-square-foot unit. The extension of the garage is now the extension of the closet. Because the facilities are getting taller, not wider, smaller units are the norm in GenV facilities. Millennials are keeping their smaller belongings in their “closet”. That closet just happens to be a few blocks from their apartment as opposed to in the other room.
GenV storage facilities are being developed all across the United States. Many have come on line already, with many more expected in the coming years. There is little doubt that they are the new normal in the industry, which is a welcome change from the facilities of the past. No longer is self-storage the corner of the real estate that brings up an ugly preconceived notion in people. Now, in addition to being the strongest performing real estate sector in the country, we can be an attractive one too.
“After 30-plus years in the industry, I believe GenV facilities represent a transformational change in the sector from the first four generations of facilities,” says Jernigan. “The future of self-storage is vertical. Sleek buildings in nice urban areas that are clean, safe, modern, technologically advanced, and versatile so that they fit both residential and commercial customers have positioned the self-storage sector to capture a new category of customer who has historically been ignored by the sector. Given the fantastic new projects in which we have had the privilege to invest over the past two and a half years, and with what we are seeing being delivered by others, the future is here.”
John Good is president and COO for Jernigan Capital. Warner Russell is a director of business development for Jernigan Capital.