Steve Fromer had a run in with detectives early in his self-storage career. It was less than a year after he opened his City Self Storage of Van Nuys in 2001. A couple of detectives came to him asking about a flashy red kit car that was stored at the property. Fromer, 54, told the detectives that a guy had dropped it off a few months earlier, paying for six months storage in full. “The guy just came in and pulled out a wad of cash,” he said. “If you think about it, self storage is a great place to drop off something you don’t want people to find.” The whole event passed quickly, with the detectives taking the car and Fromer never hearing any more about it. While these stories are a constant in self storage lore, they’re far from the norm. For the most part, Fromer’s facility at 7346 Sepulveda Blvd. caters to single-family homeowners who need extra storage and small businesses that may keep some inventory in a storage unit. Think retailers or maid services. City Self Storage has about 775 units comprising 74,000 square feet of rentable space on about 1.6 acres. Fromer bought the land in 1999 and developed the storage center over the following few years. He declined to state acquisition and construction costs, but merely stated that the investment was “several millions of dollars.” Indeed, storage centers have been considered a good investment for years, as cheap industrial land combined with the lowest overhead anywhere in commercial real estate makes good economic sense. A storage center can get by with one full-time employee. But the business is mature and faces considerable challenges in terms of growth. One of those hurdles is the opportunity for new investment. Institutional players such as Glendale’s Public Storage Inc., the largest real estate investment trust in the industry, has ready access to cheap capital and has made a successful business for decades of acquiring independents. That pocketbook makes it difficult for a single operator to grow through acquisition. Still, Public Storage has only about 5 percent of national market share. Todd Lukasik, a senior analyst covering Public Storage for Morningstar Inc. in Chicago, said that share may be greater in top markets, which the REIT focuses on, but the industry as whole remains extremely fragmented. (See page 16 for article on Public Storage.) “A huge swath of this industry is in private hands,” Lukasik said. “Public Storage is always looking at opportunities to expand, but you sort of have to wait till owners are ready to sell.” What’s more, in the more urban areas of the greater Valley and Los Angeles, it’s tough to find enough vacant land for new ground-up development. As such, some developers pick up cheap land in outlying cities such as Palmdale or Lancaster. But that’s not as simple as it sounds. “There are just not enough people out there. There’s no market,” said Stephen Grossman, senior vice president specializing in the storage business at the Irvine office of NAI Capital Inc. “You need to have the dynamics of a retail business. So you need people and they need to have money to spend.” Storage operators Fromer boasts occupancy in the low 90 percent range, with prices ranging from $65 a month for a 25-square-foot unit to $360 a month for his largest unit, which measures 280 square feet. For the industry’s most popular size, the 10 by 10, or 100 square feet, Fromer charges about $140. And as is typical, there are all kinds of deals to attract new business, including a free first month if you pay for the second ahead of time, or 25 percent off the first four months. “As long as you have your center in the right place, you’re home free,” Fromer said. “We have a golden nugget here.” But rates are directly tied to demographics and land costs, making location a major factor for profitability. After all, people tend to seek storage near their homes. That’s exactly what got Dave Morelli into the business. Morelli, 59, owns Crescenta Valley Mini Storage at 4441 Cloud Ave. in La Crescenta. The center enjoys the advantage of being in an upscale area and has limited competition nearby, which allows Morelli to set higher prices. He charges about $1.70 a square foot. He developed the 600-unit center in 1989 after working with the city for four years on entitlements. He’s got about 68,000 square feet of rentable storage space that he said is routinely 90 to 95 percent leased up. That pricing is typical in the industry, as the rent an operator can charge is a direct reflection of the neighborhood, which of course also dictates land cost. “Locations where there are plenty of land and lower barriers to entry have the demand rise and fall much more with the economy. More desirable areas produce higher rates and more steady income,” said Stephen Mirabito, chairman of the California Self Storage Association and president of Mirabito, Mooney & Associates Self-Storage Consultants and StoragePRO Management in Walnut Creek, which manages about 40 storage properties on the West Coast. And those superior market demographics are fueling Morelli’s next move. He is soon hoping to begin work on a new self-storage center in Glendale, through his targeted approach. “Instead of going out and building dozens of these things, we look until we find the right space that we know is going to be a home run,” he said. Morelli has already found one. He is in escrow on a 54,000-square-foot industrial warehouse at 6527 San Fernando Road, which he intends to convert into a two- or three-story storage center. The deal on the warehouse isn’t done, so Morelli hasn’t fully developed his plan for the conversion. But he said the biggest challenge with a conversion is the cost – the Glendale property is listed for nearly $8 million, though he wouldn’t disclose what he has agreed to pay. “It’s a big investment, but it’s all about demographics. Once these things are built, they become like a big accounts receivable,” Morelli said. “You just have to have the cash to build them and to carry them until they’re leased up.” Mirabito said conversions are one option in built-out areas like the San Fernando Valley, but that developers have to be picky. “In the proper locations with the proper visibilities, a conversion is a viable alternative,” he said. “But a location that is purely industrial without a residential base would be a problem.” Then there is the fact that cities tend not to be fans of the developments since they offer little financial benefit. The only taxable revenue that a storage facility offers are retail goods, such as the sale of the packing boxes, and that is a very small sum. Rent is not taxable. “There’s generally a built-in bias from communities. They don’t provide much in tax and don’t create a lot of jobs,” said Walter Brauer, senior associate with the National Self Storage Group at real estate brokerage Marcus & Millichap Inc. But Tim Foy, assistant director of planning in Glendale, said the city isn’t against self-storage centers, but that it may be more hesitant to them in certain areas. “I think there are places where we would want to concentrate on more active uses, such as downtown or more commercial areas,” he said. “The public probably overestimates the degree to which cities direct where land use goes. We may try to steer them, but we wouldn’t fight them.” Operational trends Though the day-to-day operations of running a storage center haven’t changed much, technological advancements have forced a modernization in marketing. Pedro Florida, 39, chief operating officer of Self Storage Management Co., headquartered out of Los Angeles International Airport, said when the company built its first facility in the early 1970s, print advertising and drive-by business were the key. Now, like in many industries, it’s all about Google. “It’s still the same unit with the same roll-up door. Maybe the latch has changed to be bolt-in, but that’s very minor,” he said. “You’ve got to compete for those clicks. Digital marketing has completely revolutionized the business.” The company has 15 storage properties, comprising about 850,000 square feet of rentable space, including Valley locations in Van Nuys and Panorama City. In Van Nuys, the company operates the massive Sherman Oaks Van Nuys Mini Storage at 15500 Erwin St., which has about 1,500 storage units comprising 147,000 square feet, in addition to 66 office/industrial condos totaling about 87,000 square feet. The five-story property was built in the mid-1980s. In Panorama City, the company operates an 870-unit, 68,000-square-foot facility at 9635 Van Nuys Blvd., which Florida said was purchased from a storage company that went out of business in the late 1970s. The company has a 92 percent occupancy rate for its portfolio. Bruaer said there are two major trends in the industry that developers must consider for projects to pencil out. First, they must maximize vertical space, as Morelli intends to in Glendale. But Brauer also said the future could be what he called “hybrid” projects, like what Florida operates in Sherman Oaks with a mix of storage and office space. Driving it all are high land prices or parcels in unusual configurations, requiring a more creative approach to building storage. “You’re going to have to have a product that has some other use combined with storage. That may make it easier to get community and zoning approval. You’re not going to get a lot of single-use projects constructed in the market,” he said. “Maybe retail with storage above it or even small apartments in downtown with basement storage.” In the greater Valley, most of the properties were built more than 15 years ago, making the industry mature. And in the case of CV Mini Storage in La Crescenta – 25 years ago. Grossman from NAI said a project like that would stand no chance today. “Cities love storage as long as it’s some weird lot that they can’t do anything with. Storage is a last resort,” he said. “But if you’re on a great retail street, they’d rather collect that sales tax. They’ll continue to make it harder if not impossible.” But Brauer said that given the market’s maturity there has been some movement, as retirees and other partners break up partnerships to cash out. Just don’t expect to get a deal on any property on the market. “It’s a seller’s market right now. For people trying to enter the market, it’s highly competitive. And the established storage business owners are reluctant to pay these numbers because they’re concerned the margin wouldn’t be there,” he said. Investment opportunities? And investors who are thinking about perhaps buying into an industry-focused publicly traded REIT may want to think twice. There is concern about long-term upside, according to Lukasik from Morningstar. “It appears that the industry is operating at levels of internal growth and occupancy rates that are at or near prior highs,” he said. “If they’re operating at peak, does this signal that they’re peaked? From an investing perspective, we’re skeptical.” What’s more, with facilities operating at such strong occupancy, revenue growth is difficult. Rents can be pushed up on occasion, but different centers have different philosophies. Morelli in La Crescenta said his prices are already at a premium, as the demographics of La Crescenta have allowed him to be bold. Florida is more aggressive. “Just like any other business, the importance of money coming in through the door doesn’t change,” he said. “This summer, we’ve increased our rates 3 to 4 percent every month.” But Fromer, from City Self Storage in Van Nuys, said he doesn’t bump up rates too often, and when he does, it’s no more than a “few points.” “Cash flow in this business is very consistent, but you have to stay competitive with the other centers nearby,” he said. “There are lots of times where rents stay flat.” Eddie Marquez lives in a unit above the office at City Self Storage. He’s the center manager and one of three full-time employees – a number actually considered high for a small center. He said there’s always movement at the facility, but that in his more than 10 years on the job, most things are the same. He spends his time checking with customers on rent, planning the occasional auction and kibitzing with managers of the other facilities nearby. “All the managers talk and try to compare prices,” he said, describing a game where managers may feed the other misinformation. “They may want to increase rents and check where we are. But I know a lot of them could be lying, which is so weird. These days, the prices are online anyway.”
