By Jim Chiswell

This month's column provides me with a very unique opportunity: a chance to talk about a major self-storage meeting coming to Buffalo, N.Y., next month. No, I'm not pulling your leg. Inside Self-Storage is bringing its spring expo to the downtown Hyatt Hotel during May 11th and 12th. Yes, the snow will be melted by then and, in fact, May is a wonderful time of year to be in Buffalo. Let me take a moment to give you an overview of the trade fair and urge everyone to consider adding this event to his spring travel schedule.

The team at Virgo Publishing has done a great job in putting together an outstanding roster of speakers. The trade fair will feature some of the industry's leading suppliers from across the United States, who will be available for one-on-one discussions during the show. I am especially pleased that the New York Self Storage Association (NYSSA) will be holding an open forum in conjunction with the expo on that Friday.

Ken Myszka, president of Sovran Self Storage, and David Rogers, the company's chief financial officer, will give a keynote presentation, with a look at our industry from their perspective as members of a public company. They will also share their vision for the direction of the industry both domestically and internationally.

The educational workshops will feature a full spectrum of topics for both the self-storage beginner and seasoned veteran. I will be presenting a development-track session, "From Feasibility to Grand Opening," and will be joined by many of the construction veterans I have worked with around the country. Mark Deion from Rhode Island will be speaking about "Using the Internet to Revolutionize Your Facility Marketing," and a panel of self-storage operators will join him in providing practical advice on what is working for them. Ken Piken, who served as general counsel for the NYSSA while I was president, will discuss "Where We've Been and Where We're Going" from a legal perspective. Ken has been instrumental in several key court cases involving self-storage that you are going to want to hear about first-hand.

The other sessions cover a wide range of issues, such as management and security, building conversions, innovative marketing strategies, financing, property-tax issues and facility insurance. In addition to the special open forum sponsored by NYSSA, sessions will be conducted with exclusive emphasis on Canadian self-storage topics. This will provide a chance to discuss areas of specific concern and interest to our fellow owners and operators from Canada, or to those interested in building in there.

Of course, the Buffalo expo won't be all work and no play--an evening cocktail reception is being planned and a number of other options will be available to all who attend. I look forward to welcoming everyone to my home town.

Welcome Back, Michael

Several years ago, Coopers and Lybrand acquired Michael Donohue's company, which specialized in dealing with real-estate taxes for the self-storage industry. Michael called me the other day to let me know that, after extensive negotiations, he had reacquired ownership of his company and is returning to the ranks of entrepreneurship. He has continued to do an outstanding job for his clients while a part of the Coopers and Lybrand team, but there is nothing quite like being able to call your own shots. I want to wish Michael continued success with Property Tax Advisors, because if he is successful, it means an owner's tax assessment has been reduced. Our entire industry benefits directly and indirectly from the work Michael has done in the past--and the work I know he will do in the future--with tax assessors across the country. If you are facing a property-tax problem, you can reach Michael at (703)518-4425.

Traffic-Study Results

Last year, I asked owners and managers to supply me with some basic information about their facilities and the number of vehicles per week/month that came through their gates. I have completed phase one of this traffic research and have already sent out a memo to everyone who participated.

The results are very much in line with what our industry has been telling planning and zoning boards around the country: Self-storage develops very minimal traffic for its total square footage. The results of the research data showed average cars per day, per 100 units, to be just 6.54 vehicles. For example, if your project is 60,000 square feet and has 550 units, you could expect to see 36 cars per day once your project has achieved a stabilized occupancy.

I realize this average figure may not reflect what you experience. I welcome additional input to this ongoing research project, on an anonymous basis. Please send me your total square footage, total units, percentage of unit occupancy and the total one-way vehicle count into your facility on either a weekly or monthly basis. The more facilities that participate in this research, the more significant the results become. I thank you in advance for the additional data.

Jim Chiswell is the president of Chiswell & Associates of Williamsville, N.Y. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. In addition to contributing regularly to Inside Self-Storage, Mr. Chiswell is a frequent speaker at Inside Self-Storage Expos. He can be reached via e-mail at [email protected]; phone (716) 634-2428; www.Jimdot.com.

By Tara Collins

Higher interest rates have slowed the progress of smaller self-storage financing transactions. However, most lenders say there's still plenty of cash to go around and creative deals to be made.

Acquisition and development money can come from several sources. Wall Street firms provide institutional dollars. Banks and credit companies provide traditional financing. Mortgage companies and brokers can round out financial options by offering nontraditional sources as well. Real-estate investment bankers can go to bat to solicit needed funds for development, acquisitions and mergers.

We spoke with several key players in the financing industry, asking them to share their views on the market, lending terms, interest rates, the state of the industry and more. Check out what the insiders have to say about the marketplace, preparedness and financing beyond 2000.

The Upheaval of 1999

Despite increases in Treasury bonds and interest rates, lenders are eager to lend. That's good news for owners and developers. The bad news is higher interest rates crunch the total dollar amount borrowers can receive while elevating cap rates and squashing the asking price a seller is garnering. "There has been a lot of talk by Greenspan and the Feds that they're going to raise rates, but Treasuries will react before rates are even raised," points out Eric Snyder, director at Irvine, Calif.-based FINOVA Realty Capital. "Recently, Treasuries have gone up at least 70 basis points (BP) in the last 60 days. As you see Treasuries go up 70 BP, a fixed-rate loan that was at 7 percent 12 months ago nowadays runs 8.75 percent to 9 percent."

David Smyle, president at La Mesa, Calif.-based Benchmark Financial, also blames Treasuries for higher interest rates. "The 10-year benchmark is hovering around 6.7 percent, up approximately 2 percent since 1999. Speculation is for rates to stabilize, but probably not to the levels we saw in 1998 and early 1999. There are a number of treasuries out there that lenders can pick and choose to quote from. The most common is the benchmark, or 'on the run,' Treasury. When a lender quotes a 10-year Treasury, it's important for the borrower to ask the lender to identify which Treasury he is using. They could be quoting another month's Treasury. Treasury auctions come out several times during the year: February, May and November. So, if you're quoting the 'on the run,' you are quoting the most recently issued, what price it is trading for today."

Rocketing Rates Impact Lending Practice

Rising rates ultimately affect debt-coverage ratio (DCR), loan-to-value (LTV), borrower willingness and investor perception. According to Michael McCune, president of Argus Self Storage Sales Network in Denver, "In addition to the Fed's moves, investors are beginning to think there may be some new inflation coming. To get the interest rate that would be applicable for a 25-year self-storage mortgage, you would add about 2.5 percent to the then current Treasury rate--or significantly more than 9 percent today. This add on, called a "spread" in the business, is to recognize that a self-storage loan is riskier than a government bond."

Shrinking spreads and rising rates make it harder for lenders to meet a borrower's request. The difficulty in underwriting is attributed to the standard 1.30 DCR. "This will require some lenders to go down to a 1.25 DCR to get the dollars out or provide earn-out scenarios allowing borrowers' to achieve their financing goals," explains Benchmark's Smyle. "We may also see 30-year amortizations on newer properties in an attempt to meet the DCR requirements.

"DCRs are a function of the loan amount requested, the interest rate being charged and the amortization. With a higher interest rate, your annual debt payment goes up and the DCR is a calculation of the project's net-operating income divided by the annual debt payment. So, the higher the debt payment, the lower the DCR is going to be. As the DCR becomes lower than 1.30, lenders start cutting the dollars down so they can meet that DCR."

As a result, Snyder sees FINOVA cutting back on its underwriting. "We're requiring borrowers to meet the 1.25 DCR and an 80 percent LTV. You'll find that most of the market is now moving the DCR from 1.25 up to 1.30 and the LTV's down from 80 percent to 75 percent. It's becoming more stringent in terms of the way we're underwriting them, and borrowers can't get the same amount of dollars that they're used to getting. In the past, we would take the last three to six months of income, annualize it to determine the project's total revenues, and then lend off of that. Now we're sticking to a trailing 12 months, even if the property is relatively new. Most borrowers who could get fixed-rate financing prior to stabilization now have to wait until their facility is completely stabilized for 12 months before they can even come to a permanent lender."

The Changing Face of Financing

Neal Gussis, senior vice president of Chicago-based First Security Commercial Mortgage, sees the demand for financing as filling a "need" vs. refinancing. "Most financing deals today are either for acquisitions, properties that are rolling out of construction financing, or properties that have loans maturing in the next year," he says.

Currently, self-storage spreads vary from 160 BP to 250 BP for loans over $1 million depending on loan size, and DCRs and LTVs resulting in overall rates in the 8.3 percent to 9.2 percent range for the typical 10-year term with 25-year amortization. "Gone are the days of the sub-8 percent fixed rates, although adjustables can be found in the high 7 percent to low 8 percent range," notes Gussis. "Loans under $1 million can expect to pay fixed rates above 9 percent."

Snyder at FINOVA feels the lending climate is favorable but not superb. "Most lenders will do self-storage; they aren't backing out, but are more cautious in their underwriting. What we used to do were 'earn outs,' where you would get one or two additional fundings after your initial funding. Most permanent lenders would fund the loan and then securitize it in the CMBS market. In the past, we held the loan and took the risk until we funded an earn out because the CMBS markets were relatively stable. But now, they have gone all over the board. Treasuries and spreads go up, CMBSs go up; the risk is too significant. Most lenders have said they'll only provide one funding."

As a result, Gussis sees sources becoming more diverse. "Many, but not all, of the national conduit lenders are less interested in deals less than $2 million. This industry has an enormous number of properties that fall under this category. The good news is many of the local banking institutions have shown desire to lend for these smaller loans. The industry is going through change and consolidation. Conduit lenders who have traditionally offered long-term fixed rates are facing additional pressures because now owners are also considering shorter term deals and/or variable-rate deals."

Variable-rate loans are the hot ticket for 2000. "We'll still provide a fixed rate, as well as a floating rate," notes Snyder. "But we're adapting to the new interest-rate environment. We have also looked at self-storage more cautiously as a product. For the most part, it's a recession-proof product. As lenders, we're not too concerned if the economy is strong. In good times, people are storing their toys and spending money. In down times, companies are downsizing, people are moving into smaller homes, so there is always a need for self-storage. Our biggest concern is overbuilding. The first thing our analysts do on a loan request is call the planning department of the respective city and ask if they have any new facilities planned to come on line or are currently expanding. Fifty percent of every deal has something coming online in their market."

What to Look for in a Financing Provider Industry Knowledge: According to Eric Snyder of FINOVA Realty Capital, "Find out what experience the lender has in self-storage. A lender without experience in self-storage may not give the borrower full credit for the facility's earning potential. As a typical example, many facilities operate with a collection of late charges on a monthly basis. A less experienced lender would not give the borrower credit for that income. Also, there are truck rentals and month-to-month leases that may give a borrower difficulties when trying to explain this to the lender. Lenders should know the business at hand." Flexibility: "If a developer has exhausted his search for construction financing from his local institutions, he may want the help of a local/regional firm experienced in placing commercial construction loans," says David Smyle of Benchmark Financial. "Using a brokerage firm usually costs the developer an extra 1 percent to 1.5 percent in construction-loan origination fees. But if the firm gets the job done, it will be worth it." Experience: Kevin Gannon at Robert Stanger & Co. says to never underestimate past performance. "Look for a company with a track record of performing on transactions similar to what you are trying to accomplish. Be it consolidating and creating a public company or obtaining financing at the entity level to consolidate your holdings and provide financing, you need someone who has done it before."

Thinking Big

Finding big money lies on a platform of assets, according to Kevin Gannon, managing director at Robert A. Stanger & Co. in Shrewsbury, N.J. "You need assets under management, and more is better; $50 million is a good base to start raising outside capital. No one really wants to talk to you unless they can spend $20 million to $30 million. If you only have $10 million in assets, you don't have enough management infrastructure to support a larger business. The cost of your management is burdensome. You need so many people on staff to manage three properties or 30. It's better to spread it out over a larger portfolio."

Brad Stoesser, analyst for Morgan Stanley Dean Witter's U.S. Real Estate Securities Fund (MSDW), says big money is out there. Stoesser's fund will allocate 4 percent to 5 percent of its portfolio to self-storage in 2000, roughly $77 million. "As a fund for institutional investors, we invest strictly in stocks. We deal primarily with the four public REITs (Public Storage, Shurgard, SUS, and Sovran). These REITs, with assets over $100 million, are getting higher yields and better returns off developments because the acquisition market is deemed to be apparently tight right now."

Looking for big money provides opportunities for firms like Robert A. Stanger to serve as matchmaker. "In the past year, we've raised capital for entities looking to expand their business," says Gannon. "Many of the self-storage REITs are trading at good discounts in excess of 15 percent. One reason this may have occurred is because the market was overheated and corrected itself. As a result, a bit of disappointment set in with investors. Alternative investments like tech stocks were skyrocketing. Hot capital rushed over there, leaving real estate a bit on the cool side."

Argus' McCune sees higher interest rates providing REIT investors with a thin silver lining. "There may be some potential benefit from all the recent gyrations in the stock market. While the impact of rising interest rates on asset values is fact, all of what follows may just be gross speculation, and we will just have to 'hide and watch' to see what really happens. With the pressure on the high-flying tech stocks, there may be some renewed interest in the high dividends paid by the REITs. This might allow the REITs to get back into the stock market and buy some additional units. However, even if this does happen, the interest rates will continue to impact the pricing of facilities."

Five Things to Avoid When Asking For Money 1. Don't lie. "Be honest and upfront," says Snyder. "Whatever the property's history, it will surface prior to loan closing. If we know about it upfront, we can work with the borrowers to remedy it." 2. Don't be forced into any deal you aren't comfortable with. "As with any business transaction, deal with people that you feel have the ability to support your transaction," says Gussis. "Feel comfortable that your lender contact is going to be able to support you and your transaction through the process." 3. Ask and answer questions. "Experienced mortgage professionals should be able to give you all the particulars of a loan program," notes Smyle. "They should be asking you questions to prompt your thought process about issues you may not realize are important. Your mortgage professional should represent you as your agent, and have no outside influences such as spiffs, servicing fees or prizes awarded based on volume with a lender. In reality, an experienced mortgage firm should narrow their search down to five or six best lenders after finding out your particular needs from the initial interview." 4. Be a Boy Scout. "Be prepared to present yourself in a well thought-out plan. Address the use and deployment of capital," says Gannon. "Demonstrate an exit strategy over a period of time. Ordinarily, this new money is going to want an exit strategy. That may be to form a public company if the market conditions permit. It may be a sale of the assets or a merger with an existing entity. You have to be prepared to discuss and cede that control to the new investor. If in four to five years, you don't have public market, you have to be prepared to sell the assets. If that's what it takes to get the new money a return on its investment, be prepared to cash out."

Sticking With Friends

Many companies are taking the initiative by aligning their allies, combining portfolios with unlikely asset classes. The new trick is balancing money opportunities through joint ventures and creative stock options, which produce stabilized incomes and black bottom lines.

Stanger's Gannon attributes these creative dealings to public market volatility. "I think what happened was that the returns weren't up to par last year. The capital continued to dribble out of REITs overall, and now they are trading at heavy attractive discounts from the buyer's perspective. The bad news is that event makes capital formation at the public level more difficult. So the UPREIT-type transactions and equity raises done previously can't be done any longer--they're just too dilutive. You wouldn't sell interest in your company at a 30 percent discount, but you would sell it if it were at a real fair value or higher price. So companies are forming joint ventures with institutions to do development projects. We're seeing more patient money doing off-balance sheet development activity."

And wheel and deal they are. "Some companies are doing interesting deals to get a higher yield on their development," notes MSDW's Stoesser. "Some of them are having funding issues as far as raising capital; they can't do it through the equity markets, so they are splitting it with a JV partner. For example, SUS just sold off several properties to Fidelity and retained a portion of that--25 percent or so. Now they can utilize that count roll for other things, to go buy a few properties or develop more.

"Similarly, Public Storage is issuing a pseudo-common stock. It's not common, but it's like an equity stock, just not preferred. Initially available only to shareholders, they are issuing these to raise more capital. At year-end, they gave shareholders the option to take distributions as stock at 65 cents per share or take it at cash at 62 to 63 cents a share."

The self-storage asset class was legitimized in the '90s. "Prior to that, it was considered an 'also-ran' asset class," adds Gannon. "Institutions didn't pay much attention to the industry. They waited to see how this business panned out. Then the Shurgards and U-Hauls of the world showed up; the industry started to consolidate. New players came on the scene like Storage USA, Storage Trust, Sovran. Now you have players out there that have legitimized the industry.

"Last year, we did the Devon transaction, which involved one of the Goldman Sachs affiliated Whitehall Funds, putting $100 million into Devon's new-development activities. People aren't generally rolling up their assets and forming a REIT. They are looking for institutional partners to provide financing in addition to bank financing."

Come For Dinner

"Bring good records," chides Snyder. "We'll look at cash flow three years back; we want to mark the trends. By keeping good records and explaining where the money goes (like capital improvements or non-property related expenses), borrowers can help us get to a higher NOI on the property which means a higher loan value."

Gussis suggests learning from the past. "But don't live in it. The future is yours. If you are seeking financing today, see if the economics of a financing transaction supports your short and long-term earning objectives. If your earning objectives are obtainable today, you should finance today. The driving force will be finding a lender that can match your financing desires. "

Smyle agrees with the idea of knowing what you're looking for. "Parameters such as recourse, prepayment penalty, term and loan costs are important to many borrowers. Is interest calculated on a 360 or 365 day basis? The 365-day basis can add nine to 10 BP to your effective interest rate when comparing against 360-day quotes. How long will you keep the property? Loan prepayment may subject you to stiff penalties upon payoff or may restrict your ability to finance additional construction to the property. Most lenders do not want to be in a second mortgage position. Meanwhile, borrowers may be willing to pay more costs or put up with full impounds to get the program of their choice.

Stoesser believes in developing market concentration. "In general, if people want to eventually get institutional investors, they need to continue to grow. Also, they need to focus, build up a base and develop market concentration, as opposed to having a store here, a store there. Market concentration brings higher returns. When one property fills up, you can defer customers to your other property that's three to five miles away."

Gannon believes you need to bring a plan to the table. "What are you going to do? Expand the existing facilities in your portfolio. Develop additional facilities. Option some land to develop. Acquire in-fill properties in the area where you already are established. If you're in Ohio and you have properties in Cincinnati and Cleveland, maybe there are outlying properties to acquire so your cost of management doesn't change. Having land for development in a good location is a good sign that you have a good place to put the capital."

What If...

For Gussis, success in obtaining financing comes down to two words: what if. "Ask 'What if?' in your business strategy," he suggests. "Each 'what if' has a relative weighting or probability. Pose both positive and negative forces that may affect you achieving your monetary objectives. Every person has a relative risk tolerance. After your analysis, if it makes sense today to finance, then you should proceed and start talking to lenders. Bottom line: In most instances, money is still available at reasonable terms and rates."

Benchmark's Smyle is also optimistic. "There is plenty of money to go around, but competition will be stiff. I believe we will see the marketplace for borrowers broaden with the addition of more banks, S&Ls, thrifts, and even credit unions in some parts of the country making inroads against the traditional conduit (Wall Street) lenders. These lenders will offer lower adjustable rates and shorter term fixed-rate products with prepayment flexibility and lower costs in order to compete. On top-quality, stabilized properties, insurance-company money may also be available at the lowest rates and more flexible terms."

On the other hand, McCune sees growth coming from education. "People are still learning to use our product. Only about 5 percent to 6 percent of the population has ever used self-storage. Thus, unlike apartments or offices, we don't need live bodies to populate our product--just more junk. If just one percent more of the population learns about and uses self-storage, our potential market grows by 20 percent. No other kind of real estate can make that claim. Having an investment community knowledgeable about the potential of our industry will raise our values and liquidity."

Tara Collins is a freelance writer working out of Red Bank, N.J.

Contacts Neal Gussis, Senior Vice President First Security Commercial Mortgage 150 S. Wacker, Chicago IL 60606 (312) 425-9366 Fax: (312) 425-9366 e-mail: [email protected] David Smyle, President Benchmark Financial 8080 La Mesa Blvd. #214 La Mesa, CA 91941 (619) 465-6200 Fax: (619) 465-1693 [email protected] Bradford Stoesser, Analyst Morgan Stanley Dean Witter U.S. Real Estate Securities Fund 1221 Avenue of the Americas 22nd Floor New York, NY 10022 (212) 762-7421 Fax: (212) 762-7536 [email protected] Kevin T. Gannon, Managing Director Robert A. Stanger & Co. Inc. 1129 Broad Street Shrewsbury, NJ 07702 (732) 389-3600 Fax: (732) 544-1170 FAX [email protected] Eric Snyder, Director FINOVA Realty Capital 19900 MacArthur Blvd., Suite 1100 Irvine, CA 92612 (949) 442-8000 Fax: (949) 622-3467 [email protected] Michael Kidd, Executive Director Self Storage Association Washington, D.C. (703) 921-9123 Fax: (703) 921-9105 Michael L. McCune, President Argus Self Storage Sales Network 2755 South Locust, Suite 111 Denver, CO (800) 55-STORE Fax: (303) 300-3532 www.self-storage.com

By David Wilhite

If there is one absolute truism in the self-storage industry it is that you, as a facility owner, do not take possession of your customers' property; you act as a landlord and not a warehousemen. That is why you have a carefully-worded contract that clearly spells out that you are not responsible for any damage to your tenants' stored goods--you don't take care, custody or control of their possessions. However, certain situations can create a legal liability on your part for loss or damage to your tenants' goods that you need to guard against--which brings us to the topic of this month's column: customers' goods legal liability insurance.

Customers' goods legal liability is an important coverage unique to the self-storage industry. It provides coverage against loss of, or damage to, your customers' personal property if you are found to be negligent (note that "negligent" is a euphemism for "legally liable," which will be explained shortly, and not a moral judgement against you). Customers' goods legal liability also provides for defense and legal costs, even if the lawsuit is found to be groundless or fraudulent.

Let's look at an example of how this coverage works. Suppose high winds from a tremendous storm rips the roof off of one of your storage units. Assuming you have adequate business owner's insurance coverage in place, you would be insured against the damage to the building if wind is a covered cause of loss. Let's further assume that, as a prudent facility owner, you have a signed contract on file with your tenant that clearly states you are not responsible for any damage that might occur to his stored goods, and that he should either provide his own insurance or be personally responsible for any loss. So far, so good--you've taken steps necessary to protect yourself against litigation and don't have any cause to worry at this time.

Now let's assume that, as soon as the storm passes, you immediately call an emergency damage-repair service to cover the damaged roof until permanent repairs can be made. However, before they can arrive, the rain and wind return in force, further damaging your tenants' stored goods. At any point, the tenant can file a claim that you are "negligent" (i.e., legally liable) even though you had no control over the situation (which can be considered an act of God). You might be deemed negligent, even though you immediately acted in a prudent manner to protect your tenants' stored goods. In such a situation, the value of having
adequate customers' goods legal liability cannot be overestimated, as courts are awarding higher monetary judgements than ever in such cases.

It is important to remember that this coverage protects you, not only against damage to your tenants' stored goods for which you are determined to be legally liable, but also against the legal expenses that inevitably arise, even if a lawsuit is found to be without merit. In many instances, just one or two legal consultations will cost more than the annual premium. The good news is that the cost of customers goods legal liability coverage is quite reasonable--ranging from $300-$1,000 a year for $500,000 coverage.

Speaking of coverage limits, it is a good idea to consider securing an adequate amount to protect yourself against claims of negligence. Consider how much you can afford to lose should a judgement be held against you and protect yourself accordingly. And, of course, you should always take preventative measures to protect yourself against litigation in the first place.

Five Steps to Help Protect Yourself Against Claims of Negligence

1. Keep a signed lease contract on file between you and your tenant. This is the single most important tool you have for protecting yourself against claims and negligence. Its importance cannot be overemphasized.
2. Use a lease that contains language providing for the maximum dollar value of goods that a tenant may store on your premises. Such language may help limit your liability in cases where a judgement is held against you. We recommend that you consult with a legal advisor you can trust when drawing up such language.
3. Offer customer-storage insurance (CSI) to your tenants. There are precedent-setting court cases in which the self-storage operator was found to be not liable for damage to a customer's goods because CSI was made available. This coverage can be secured through various sources and should be made available to every tenant.
4. Keep a signed statement that property is stored at tenant's sole risk on file. Such statements are usually furnished as lease addendums and are supplied with the application for customer-storage insurance. A signed lease addendum is an important tool for limiting your liability in cases that claim loss or damage due to negligence.
5. Implement a regular program of preventative maintenance. For example, you might consider having the roof of your storage facility inspected once or twice each year by a licensed roofing contractor to alert you to the potential for problems or damage.

Remember, no matter how large or small your self-storage facility may be, securing adequate coverage is essential for protecting your business and your peace of mind.

David Wilhite is the marketing manager of Universal Insurance Facilities Inc. Universal offers a complete package of coverages specifically designed to meet the needs of the self-storage industry, including loss of income, employee dishonesty, comprehensive business liability, hazardous-contents removal and customer storage. For more information, contact Universal at Box 40079, Phoenix, AZ 85067-0079; phone (800) 844-2101; fax (480) 970-6240; www.vpico.com/universal.

By Harley Rolfe

They call economics the dismal science. Boring as the subject may be, it guides sellers in effectively diagnosing and treating soft income and low occupancy. One of the incipient conditions of the self-storage industry is commodity competition. Simple economics sets forth the rules we need to deal with it. When all facilities are seen by prospects as the same and there are too many units around, trouble is brewing. Raw commodity competition is no fun. Your choices vis-à-vis price competition are to do something dangerous, such as talk some sense into you rivals, live with it, or do what others in a competitive business do--employ the marketing process.

Keep Your Eye on the Ball

We must find a way to be unique enough to impel prospects to consider our offering as special. Marketers call that "differentiation." Keep your eye on that ball. The prospect must reduce his choices to one in order to act. He will choose location or price as his basis unless we help him to go in a different (our) direction.

If we are really good, we can create some killer features that are so unique and appealing that we are the only choice--a monopoly. Monopolies have picked up a bad name, so marketers often talk about "unique selling positions," or "exclusive" this or that, but they're all the same thing. Monopolies are not illegal; however, abuse of the economic power generated by one is. We know the difference and want to compete fair and square. When I say compete I mean win--wrest control of your pricing and policies away from your rivals.

Right Question?

You often hear that marketing asks the supplier to put himself in the position of the tenant. So, the operator says to himself, "What does a person shopping for a self-storage unit want?" Wrong question. Try this one: "What is a person who is looking for a self-storage unit trying to get done?" The first question leads to the characteristics of a unit (size, location, cleanliness etc.). The second question identifies the interest in the first place.

The tenant is moving to a new home. He has too much stuff for his basement, he's got an assignment in Greece, and he needs to store most of his household goods, etc. This is a whole or "global" understanding of the situation and puts you in the right place. Concentration on the first question will cause the operator to remain a commodity. Attention to the second question gets to the real concerns or goals of the prospect. It leads the operator to involve himself in provisions beyond the walls of a unit and into the tenant's mind. Some storage operators may rebel, saying that such things are not his province and are a lot more trouble. He confines his attention to his units. If so, he has decided that remaining a commodity is OK.

Differentiation: The Only Way To Go

You--along with everyone else in the business world--have only one way to achieve competitive marketplace independence: differentiation. It should be something unique and promotable. If it's good, others will copy it. If not, you'll drop it. Thus, the process is dynamic and never-ending as marketers strive to use one or more of the following differentiation choices:

Innovation. The offering has physical features that are unique and desirable. Such things as climate control or coded gate-entry/security systems are a couple of examples. Location might be one, if it is singular. An advantage of these is that they are capital intensive, which poses a barrier to easy duplication.

Packaging. Self-storage has immense opportunity for the packaging form of differentiation. The activities the prospect is generally confronted with in using storage are often grubby, and usually allied with other elements. That has all the makings for packages. If we can add convenience to the offering mix, we earn a premium for being unique.

One of the hardest ideas to accept is that, in most cases, self-storage is merely a component. It is no different than being the supplier of flour for a bakery. Without the other components (sugar, baking powder, etc.) the flour by itself has little value. This is true of most commodities. However, assembled with the other needed components and converted into what the user really wants, we have an excellent chance of being very valuable. That's synergy--where the sum is greater than the parts. The total value of the "cake" is much more than the cost of the physical components and labor. Not only is the buyer attracted to an approach that gives him a complete answer to his problem, he is also willing to pay a big premium for being relieved of an onerous task. "Convenience" is a separate characteristic of an offering that is both distinguishing and claims its own reward.

Consider a house move. Selling boxes or offering truck-rental services isn't enough. They may be included, but the package must look to the prospect like a better way, one that eases his chore. The operator should make the critical decisions. He should point out or include the best transportation options and packing materials, and set up a computerized property record-keeping system. The latter will help him know where tenant possessions are (which boxes, located where in the storage facility) and would even be helpful in the case of property loss. Have labor assistance on tap. Use off-peak concessions from movers. You have contacts he doesn't have. You are in a strong position to help. After all, usually, he's never done this before. In addition to distinguishing your facility from those of your peers, you can also look forward to a value addition for taking more responsibility. Making suggestions is not enough; you need to take a load off the prospect.

Positioning is the other main option. That's the difference between a Timex and a Rolex. Both keep time, but are perceived as distinctively different. Applied to self-storage, that means a differential offering that answers the question, "How are the needs of a person moving into a $80,000 house different than those of one moving into a $500,000 residence?" Pursuing the rest of the marketing aspect, where does a differential attitude kick in and what media is relevant to the either? Let's say there is a predictable difference between the expectations of a buyer of a $350,000 home and someone moving into a $100,000 track house. You compose an offering that recognizes those differences, then determine the most effective way of reaching those prospects

Many of you may feel that putting up a good facility, staffing it with responsible people, keeping it clean and pricing it fairly should do the job, but when enter competition enters, things change. Don't tell me that marketing is a lot more trouble. That I know. Tell me how to get yourself out the cycle of price competition another way. A commodity is the way to go until the arrival of competition trips it up. Then you are confronted by the futility of unrestrained price competition. Differentiation is the way out.

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Harley Rolfe is a semi-retired marketing specialist whose career includes executive-level marketing positions with General Electric and AT&T. He also owned lodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degree in economics from Wabash College and a master's degree in business administration from the University of Indiana. He can be reached at his home in Nampa, Idaho, at (208) 463-9039. Further information can also be found in Mr. Harley's book, Hard-Nosed Marketing for Self-Storage.