Bay Storage in Olympia, Wash., sold for $3.8 million to an unnamed partnership.

The 40,560-square-foot self-storage facility, 510 Madrona Beach Road Northwest, has 11 single-story buildings. Eighty percent of the facilitys units are accessible via drive-up. The property includes 3.5 acres, and is in Mud Bay at the southern arms of the Puget Sound. The facility offers U-Haul truck rental, climate-controlled units, an onsite manager, and moving and packing supplies.

Christopher R. Secreto and Joel Deis, investment specialists in Seattle office of Marcus & Millichap Real Estate Investment Services, had the exclusive listing to market the property on behalf of the seller, a private investor, and also represented the buyer.

Marcus & Millichap specializes in commercial real estate investments. The company has more than 1,200 investment professionals in offices nationwide.

By Amy Campbell

New self-storage construction may have come to a standstill, but acquisitions are on fire. After a couple of years of barely-there activity in the self-storage real estate market, 2011 was a banner year for buying and selling properties.   

While there were some modest individual sales, the bulk of buying power belonged to the self-storage real estate investment trusts (REITs). Backed by strong financing, the REITs lit up the acquisition market in 2011.

Extra Space Storage Inc. acquired 55 properties in 17 states for approximately $289.6 million. Twenty-eight of the properties were purchased in the fourth quarter at a price of $189.9 million.

Strategic Storage Trust Inc., a publicly registered non-traded REIT, ended 2011 with an estimated $245 million in new acquisitions. The most recent included 12 properties in Georgia and Florida, totaling approximately 8,000 units and one million square feet for a total aggregate purchase price of approximately $80 million.

The other three publicly traded self-storage REITsSovran Self Storage Inc., Public Storage Inc. and CubeSmartalso had their share of acquisitions last year. In late fall, CubeSmart purchased the N.Y.-based Storage Deluxe portfolio, which includes 21 facilities and a site under development, for $560 million.

REITs werent the only ones making real estate waves. Another large acquisition belonged to CPA: 17 Globals purchase of nine A-American Self Storage facilities. The company, an affiliate of investment firm W. P. Carey & Co. LLC, paid $46 million for the properties, located in California, Illinois and Hawaii.

There are many factors contributing to the sudden influx of real estate activity. In the past 12 months, lending institutions have begun to release their tight grip on funds, enabling those with financial fortitude to move forward.  In addition, many self-storage operators held onto their properties during the slow real estate period between 2009-10, waiting for a more favorable market in which to sell. 2011 represented a market returning to normal. The next several years are likely going to look a lot like 2011, said Tim Martin, chief financial officer for CubeSmart.

With more than $1 trillion in commercial loans expected to come due in the next three to five years, operators are contemplating their long-term plans. Many owners will be looking to sell as their facility may be performing fine, but the refinancing scenario may require additional equity investment, Martin said. In addition, owners with a variety of capital sources will continue to acquire properties, he adds.

REITs Shine in Commercial Sector

Self-storage REITs posted a total return of 35.2 percent, the strongest gain of any REIT sector for the second consecutive year, according the National Association of Real Estate Investment Trusts (NAREIT). The results outpaced the 8 percent return for all REITs, as measured by the Dow Jones All REIT Equity Index.

There are a few factors that contributed to the sectors strong performance, said Diane Piegza, vice president of corporate communications for Sovran Self Storage, which operates under the Uncle Bobs Self Storage brand. Certainly, the lack of new construction benefits the existing supply as well as our ability to keep expenses in check. Self-storage operators expense challenges pale to those faced by higher-end property types.

Another key component for last years performance was the reduction of the use of concessions, Piegza said. Many operators moved away from the aggressive offers of 2009-10 and returned to more traditional discounts.  Not only that, but we are seeing the return of need-driven customers as compared to the more discretionary user of the mid 2000s. Put the two together and youll see positive results.

Regardless of the economic highs and lows, self-storage is and will always be a need-based product. Based on this, weve proven that, while not recession-proof, storage is to some extent recession-resistant, said Clint Halverson, vice president of corporate communication and investor relations for Extra Space Storage. People find that life events do not stop. These changes that people experience drive the need for storage. The events taking place may shift, but the demand for the product has remained consistent.

Many feared the decline in new-home construction over the past three years would result in fewer people moving and less storage demand.  Thats not the case, Martin said. What they may have missed is that as home ownership has declined, the population of renters has increased.  People who rent move more often and often use storage as an ongoing solution for their lifestyle.

Moving Forward

The overall sentiment is 2012 will be a good year for REITs, Piegza said. While Id like to think the self-storage sector will outperform the others, I expect well see some strong competition from the multi-family and lodging sectors as the economy strengthens.

Regardless, if self-storage continues as the top-performing REIT sector, all signs point to another active year for acquisitions. Certainly, the larger players have the capital and the appetite, but the quality and pricing of the properties on the market will play a key role in acquisitions, Piegza said.

Sovran, Extra Space and CubeSmart also claim new self-storage development is simply not feasible at this time as many markets are simply oversaturated. There is plenty of inventory out there, said Martin, who expects the consolidation to continue through ownership/acquisitions and third-party management.

And while reducing concessions will continue to be a challenge in the majority of markets, the REITs expect to see modest increases in rental rates this year. Occupancy and concessions should remain at more customary levels fluctuating with seasonality and demand, Piegza said. The majority of concessionsat the least in the short termwill remain in parts of Florida, Texas and the Gulf Coast.  Ultimately, operators who have a strong Internet presence, employ call centers, and draw on solid revenue management practices will reap the largest rewards.

Olde Naples Self Storage South, a locally owned facility and part of Florida's Storage Solutions self-storage management and consulting group, is acting as a distribution center for Baby Basics, a non-profit organization serving needy families in the Naples area. Distributions occur twice a month.

Founded seven years ago and run by Jean Ann Lynch, Baby Basics collects diaper donations and distributes them to needy parents. Currently, parents of 285 babies are enrolled in the program. Last year, 340 familes participated. To be in the program, families not only must meet poverty requirements but also must be employed and not receiving public assistance.

The self-storage facility on Goodlette-Frank Road joins churches, a YMCA and other non-profit organizations' buildings as distribution centers.

Self-storage operator StorageMart continued its quest to support charitable organizations and discover how much stuff really fits into a storage unit with the second installment of its creative YouTube series, the focus of which is How much bubble bath fits in a storage space?

In honor of National Bubble Bath Day, which was Jan. 8, StorageMart packed a storage space full of soap and other personal-care items, which were then donated to the Hope House, a womens shelter in Kansas City, Mo. In a previous video, the company filled a unit with more than 1,500 pounds of Thanksgiving dinner.

The most recent experiment revealed that a storage unit can hold any one of the following:

• Enough soap for more than 4,800 baths
• More than 10 miles of toilet paper
• 7,200 baby wipes
• 14,720 tissues
• At least 30 rubber duckies

StorageMart has big plans for the video series in 2012, continuing to find interesting ways to fill storage units and donate to local charities. The company is a full-service self-storage provider with more than 130 locations in the United States and Canada that offers moving and packing supplies in addition to storage. The company also funds the StorageMart ScholarSmarts program, which annually awards $10,000 in educational scholarships.

Under the Servicemembers Civil Relief Act, a self-storage operator has certain obligations to his military tenants. Interesting questions are being raised in light of the legalization of gay marriage in some states and the repeal of the "Don't ask, don't tell" policy. This article addresses the definition of a "dependent" under the SCRA, the legal recognition of gay marriages, the courts' view in SCRA-related cases, and what this all means to the self-storage industry.

No self-storage operator can dispute the importance of complying with the Servicemembers Civil Relief Act (SCRA). If you violate this act, you might not only wrongfully sell someones goods, you may be subject to civil and criminal penalties.

Its critical that you ask every prospective tenant if he or she is a member of the active or reserve military (including National Guard), and ask about dependents. If there is a spouse, you must ask if that person is also active or reserve military. If you plan to obtain a release of SCRA obligations, both military membersthe tenant and the spousemust sign it.

Heres a new brain-bender for you: What does spouse or dependent mean in light of legalized gay marriage in some states and the repeal of the "Dont ask, dont tell" policy? The servicemember, gay or straight, is covered by the SCRA and always has been. This article addresses the SCRA protections that may be extended to the same-sex spouse of a military member. There are three issues to discuss: the definition of "dependent," the recognition of gay marriage, and the repeal of "Don't ask, don't tell."

Defining a Dependent

Under the SCRA, the term "dependent" refers not only to a servicemember's spouse and children, but any individual for whom the servicemember provides more than one half of the individual support during the 180 days immediately proceeding the self-storage defaultthe time when you would ask a court to let you proceed with a lien sale. Based on that definition, its possible the spouse in a same-sex marriage could qualify as a dependent entitled to protection under the SCRA.

Recognizing Legal Gay Marriages

The Defense of Marriage Act (DOMA), a federal law signed by former President Bill Clinton in 1996, defined marriage as a legal union between one man and one woman. Under the law, no state (or other political subdivision within the United States) is required to recognize as a marriage a same-sex relationship that might be considered a legal marriage in another state.

This exclusion was intended to address problems with the Full Faith and Credit Clause in Article IV, Section 1 of the U.S. Constitution, which would otherwise require states to grant each other reciprocal obligations, including the responsibility to recognize each others Public Acts, Records, and Judicial Proceedings. DOMA specifically excludes same-sex marriages from acts other states would be required to recognize.
Further, under the DOMA, Section 3 defines marriage as a legal union between one man and one woman as husband and wife. In addition, the word spouse is defined as a person of the opposite sex who is a husband or wife. This section of the DOMA has the effect of denying federal benefits that would otherwise be extended to a married couple, which would include being a dependent under the SCRA.

Parts of the DOMA have been deemed unconstitutional by the Obama Administration. In February 2010, U.S. Attorney General Eric Holder announced the Department of Justice would enforce the DOMA but would not defend it in court. In February 2011, the Obama Administration announced its conclusion that a more heightened standard of scrutiny is necessary for sexuality-based classifications and, consequently, that Section 3 of the DOMA is unconstitutional.

Meanwhile, Congress is considering either repealing the DOMA or amending it in such a way as to recognize domestic partnerships (or civil unions), which would essentially be a marriage under a different name entitling the partners to receive federal benefits. However, its unclear whether this would amend the SCRAs definition of a spouse.

The U. S. Supreme Court has held in several cases that if equal protection of laws means anything, it must at the very least mean that a bare desire to harm a politically unpopular group cannot constitute a legitimate governmental interest. All of this appears to indicate the DOMA will either be repealed, revised or deemed unconstitutional in the future. That means there will no longer be an obstacle under federal law for a same-sex spouse to be a dependent under the SCRA.

Repealing 'Dont Ask, Dont Tell'

The third issue of concern to all self-storage operators is the repeal of the Dont ask, dont tell standard for the military. This policy prohibited military personnel from discriminating against or harassing closeted homosexual or bisexual service members or applicants while barring openly gay, lesbian or bisexual persons from military service.

As you may recall, the act prohibited any homosexual or bisexual person from disclosing his or her sexual orientation or speaking about any homosexual relationships, including marriages or other familial attributes, while serving in the U. S. Armed Forces. A Congressional bill to repeal the policy was enacted in December 2010.

On July 22, 2011, President Obama, the Secretary of Defense and the Chairman of the Joint Chiefs of Staff certified that a repeal would not harm military readiness, following a 60-day waiting period. "Don't ask, don't tell" was officially repealed. While technically the repeal did not expressly address the issues raised above regarding the DOMA or the definition of a dependent under the SCRA, I believe this change will eventually result in the inclusion of same-sex marriage in the SCRA definition of spouse.

Understanding the Courts View

At least some courts have started to review the application of the SCRA to a homosexual relationship. The 12th Appellate District Court of Appeals in Ohio, in Fifth Third Bank vs. Schoesslers Supply Room LLC, looked at the issue of whether the same-sex spouse of a military member was entitled to protection under the SCRA.

The Appeals Court held that, Although we must acknowledge that the definitions and provisions of the SCRA seem to support Fifth Thirds position, we must also acknowledge that the court must liberally construe the SCRA and its application. This liberal construction is to protect those who have been obligated to drop their own affairs and to take up the burdens of the nation. Moreover, care should be taken not to frustrate the SCRAs purpose, which is to suspend enforcement of civil liabilities of persons in the military service of the United States in order to enable such persons to devote their entire energy to the defense needs of the nation.

At least in states where gay marriage is legal, theres a better chance than not that, on challenge, a court would rule the gay spouse/domestic partner of a person serving in the military is covered by the protections afforded by the SCRA. If Congress acts or courts keep chipping away at the DOMA, holding it unconstitutional, most courts will hold that the SCRA protections apply to gay marriage.

However, currently, in states where gay marriage is not legal, its up to the state whether to grant Full Faith and Credit to another states action and recognize a civil union or gay marriage. Its also clear from the repeal of 'Don't ask, don't tell" that the military will eventually express its opinion that the protections of the SCRA must apply to civil unions, and a change in the definition of a dependent in the SCRA would occur.

Applicability to Self-Storage

Thats lot of legal technical talk; now lets apply it to self-storage. You already know you have to ask whether a tenant or a dependent (normally a spouse) is in the active or military reserves. Do you have to specifically ask about a same-sex spouse through a gay marriage or civil union? No. The SCRA merely requires you make inquiry about military service of the tenant and dependent.

While it would not make sense for the servicemember or spouse to lie, under the SCRA, youre allowed to rely on the answer provided to you by the tenant completing the self-storage rental agreement. That is, if the tenant doesnt want you to recognize his civil union, you do not have to. Thus, you would not need to be concerned if you were to put up for sale the unit of a tenant who is the same-sex civilian life partner of a military member.

Naturally, you still would not be able to sell the unit of any named tenant whos in active or reserve military, subject to a release under the SCRA. However, should a servicemember wish to list his domestic partner as a spouse or dependent, the best course of action, for now, is to afford that civil union spouse/dependent/partner the protections afforded any other heterosexual spouse under the SCRA.

If a tenant acknowledges being the gay partner of a person in the military and lists that civil union as a response to your question about spouses or dependents in military service, then even if you are in a state that doesnt officially recognize gay marriage, you should treat that spouse as protected by the SCRA. This means you should follow your standard procedure to get a waiver or court order to proceed to a lien sale or other collection activity, just as you would if you were dealing with a heterosexual couple.

A Contentious Subject

The topics addressed in this article are a bit controversial. Many people have strong feelings about what they deem to be a legal marriage. But self-storage operators need to know this information to avoid a potential violation of the SCRA that could cause them to suffer large fines or even jail time.

I discussed this article with several self-storage operators prior to writing it. Some said that if a potential tenant gave indication of having a gay spouse, they would simply ask that person to rent elsewhere to avoid having to accord that person SCRA protection. This is not advisable. In many states, homosexuals are protected against discrimination. If your state is one of them, you could end up embroiled in an expensive and potentially embarrassing piece of litigation. The best solution is to continue to rent as you always have and require an SCRA waiver from every military tenant or dependent.

If a tenant discloses that he has a same-sex partner to whom he believes the SCRA applies and he wants to invoke coverage, obtain an SCRA waiver. The waiver is complicated. Make sure you discuss all important aspectsproper use, form and executionwith your attorney before using it. The servicemember and the dependent can waive their rights under the SCRA, although many are advised not to do so. As a self-storage operator, you can require this waiver as long as you require it for every military tenant uniformly. Obtaining the waiver means not having to address the issues of gay marriage if, down the road, you have to enforce your lien rights against the military member or spouse.

The intent of this article is simply to provide you with legal information and help you avoid a mistake that buys you unnecessary litigation. I hope you welcome all good-paying tenants, regardless of military service or sexual orientation.

Authors note: This article is dedicated to the memory of Chris McGrath, the self-storage industry guru on the SCRA. I miss your advice, counsel, wit and witticism on SCRA matters every time I speak or write about it.

This column is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney.

Jeffrey J. Greenberger is a partner in the law firm of Katz, Greenberger & Norton LLP in Cincinnati, where he concentrates his practice in the areas of commercial real estate with a particular concentration in self-storage industry. He consults with self-storage owners and operators to design and implement legal procedures, policies and other operational issues in most states with a focus on litigation and liability reduction and avoidance. To reach him, call 513.721.5151; visit www.selfstoragelegal.com .

The Jenkins Organization, a self-storage management company, appointed John Manes as the companys chief operating officer. Manes will oversee all aspects of the companys operations, including field and office personnel, policy and procedure implementation, training procedures, marketing programs, Internet strategies, revenue management, payroll and bonus plans, and new facility openings.

Manes comes to Jenkins with a background in self-storage and retail sales. He served as a regional vice president for Sovran Self Storage, a publicly traded self-storage real estate investment trust. While at Sovran, Manes led a team of eight district managers and 120 stores covering eight states, representing 275 employees and $62 million in annual sales. He has experience in store-level operations, local marketing initiatives, revenue management, Web strategy and structuring policy and procedure. He also has 20 years of experience in retail sales including specialty retail, discount retail, department-store retail and deep-discount retail.

Based in Houston, The Jenkins Organization has a portfolio valued at more than $200 million.

The early-bird discount registration rates for the Inside Self-Storage World Expo in Las Vegas, the self-storage industrys largest conference and tradeshow, expire on Jan. 13. With the discount, attendees will save $300 on the Premium Package, $150 on the Education Package, $20 on the Expo-Hall Package, and up to 35 percent on each of the shows four add-on intensive workshops. The ISS Expo will take place at the Paris Hotel & Resort, March 14-16.

The Education Package includes access to 36 seminars, the exhibit hall and five networking events. Add-on workshops cover the critical areas of self-storage online marketing, legal issues, day-to-day facility management and executive-level facility operation. The shows exhibit hall will feature more than 100 of the self-storage industrys top suppliers representing a highly diverse range of products and services.

Created for self-storage industry owners, managers, developers, investors and suppliers, the ISS Expo comprises three days of education, exhibits, and networking opportunities. The event focuses on strategies for generating revenue and perfecting business branding in a demanding economic environment. Details and online registration are available at www.insideselfstorageworldexpo.com.

The last few months of 2011 were markedly different than the first six months of the year, especially for the real estate business and self-storage properties. Liquidity in the real estate debt market slowed in the third and fourth quarters, led by the commercial mortgage-backed securities market mid-year. In general, bankers lived up to their scrooge reputation by dragging their feet on making new loans.

Cautious optimism is certainly present in todays market, albeit mostly from facility owners who have seen their rental activity and occupancy uptick over the last 12 to 18 months. Self-storage values have rebounded from the bottom in 2009, but have also fallen off ever so slightly over the last three to six months.
Lets remember the real estate market plays a bigger role in determining your facilitys value than the operation of your property. Nows the time for self-storage owners and investors to take a look at how the market is behaving as a whole, understand what pressures are present in the market, and position their investments to meet their objectives.

Competitive Pricing

The availability of self-storage properties appears to still be due primarily to owner life events, with few self-storage owners deciding to sell in order to capitalize on the improved market, current U.S. capital-gains tax structure and the loosening of the debt markets.

The Moodys/REAL Commercial Property Price Index (CPPI) measured a 1.4 percent decrease in September after four consecutive months of price increases, and the index remains near its two-year average price level. The latest update to the CPPI was published in November 2011 and was computed through September 2011, so one can assume a 30- to 60-day lag in data provided by the accompanying chart.

Source: www.rcanalytics.com/derivatives_index.aspx

While we continue to see robust transaction volume for larger self-storage properties and portfolios, its possible these large transactions may pause in 2012 as pricing has become very competitive, making it difficult for institutional investors to meet their internal yield requirements. This will assist in increasing the transaction volume for quality one-off self-storage properties in good first- and second-tier markets, especially with interest rates staying low through the end of 2012, as buyers will be looking for increased yield.

A Reason for Optimism

With the looming presidential election this year, we will soon learn how the candidates are proposing to keep our economy on track. The power struggle and lack of decision-making by our government will lead to a temporarily prosperous time for buyers and sellers alike. It will allow buyers to continue to capitalize on low interest rates, while sellers will be able to capitalize on the current capital-gains tax structure along with a variety of other opportunistic political policies.

We must all remember, though, that one stroke of the pen can change everything. This, along with the unsettling vibes were getting from several industrialized countries in Europe and Asia, should concern us all, as the potential effects on the U.S. investment climate are severe.

Self-storage has outperformed almost all other real estate asset classes over the last three years, and when there are high returns, there are always new investors looking for yield. With real estate investor sentiment remaining strong, weve found, ironically, that the uncertainty in the market may actually be increasing the demand for real estate investments.

Wall Street gave investors a wild ride in the second half of 2011, and most investors are finding real estate provides favorable returns relative to other investment classes. When you have a business (self-storage) that performs this well in a very difficult economic market, theres good reason for some optimism in spite of the turbulent market. However, keep up the hard work as the ability to keep your current tenants and attract new ones is what has made the self-storage industry the shining star in the real estate business.

Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail [email protected].