David W. Fleming, 36, a former self-storage manager and columnist for Inside Self-Storage (ISS) magazine, passed away on March 17. David started his self-storage career in Oaks, Penn., where he became the winner of the ISS "Manager of the Year" award for 2000, one of his proudest moments. He went on to co-manage facilities with his wife, Tina; and the couple moved through several states where David served as area manager, trainer, regional manager and director of operations for some of the industry's finest operators.

David loved meeting new people and speaking to groups. He presented at many state and national tradeshows on "Successful Facility Management." His ISS column, "From Behind the Counter," provided managers with a hands-on perspective of the industry. He will be greatly missed by his self-storage friends and co-workers.

A trust has been set up for David's son. Donations can be sent to:

D. Chase Fleming Foundation
c/o Commerce Bank
991 S.Township Line Rd.
Royersford, PA 19468

Tina can be contacted at [email protected].

In response to a recent Census Bureau report regarding new record rates for construction spending, Ken Simonson, chief economist for the Associated General Contractors of America (AGC), said the industry is experiencing strong, balanced growth. He also identified materials costs and availability as key areas of concern.
 
In February, spending was at a seasonally adjusted annual rate of $1.19 trillion, up 0.8 percent from January and 7.4 percent from February 2005. "Not only was the overall total up strongly from a year ago, but all major segments showed similar growth," Simonson commented. "For the first time since the 2001 recession, private nonresidential construction led the parade with a 9.6 percent increase from the year-ago pace. Private residential construction was 7.1 percent higher and public construction, 6 percent higher.
 
"The year-to-date, or two-month, totals actually provide a more meaningful comparison, given the extremely mild weather in January and more seasonal conditions in February," Simonson added. "On a two-month basis, there were several segments that showed exceptional growth. Shopping-center construction leaped 61 percent, after swelling nearly 40 percent in 2005 and 25 percent in 2004. Hospital construction grew 22 percent, while manufacturing and commercial-warehouse construction climbed 20 percent. The previously lackluster office segment was up 18 percent.
 
"Both single- and multi-family residential construction shot up 14 percent in the first two months of this year compared to the same span of 2005," Simonson noted. "Home sales may be weakening but builders still have a big enough backlog of unbuilt houses and condos that residential construction spending should hold up for a few more months.
 
"On the public side, there were double-digit increases for educational, sewage and waste disposal, amusement and recreation, public safety, and water-supply construction," Simonson said. "That reflects the upturn in state and local tax receipts, which will keep public construction spending pumped up all year.
 
"The biggest worries are materials costs and availability," Simonson concluded. "As AGC's latest Construction Inflation Alert documented, numerous materials are going up in price much faster than are consumer items or most producer costs. An agreement with Mexico to allow cement into the U.S. for a duty of $3 per metric ton instead of the previous $26 takes effect today, and that may provide limited relief for some regions. But I fear cement shortages will reappear this spring. And by fall, there may be shortages of liquid asphalt. Several refiners have announced they plan to curb asphalt production as they produce lower-sulfur diesel fuel."
 
The AGC represents more than 32,000 firms and 11,000 specialty-contracting firms. It is also associated with more than 13,000 service providers and suppliers through its nationwide network of chapters. For AGC's Construction Inflation Alert and more detailed information on the Mexican cement agreement, visit www.agc.org/economics.

Kennards is the largest operator in Australia. This three-story Port Melbourne facility, built from the ground up for self-storage, has more than 1,000 units.

No question about it, self-storage in Australasia will grow like a King Kong koala in the coming year. Economic returns have settled somewhat, but the industry is still widely viewed as an attractive investment. Occupancy rates remain in the 80 percent to 90 percent range, considered ideal by most operators, and supply is meeting demand overall.

Back in the late 90s, the market had suffered from an influx of facilities, mostly retrofitted factories and warehouses. The trend has eased, with a jump in self-storage popularity helping to correct the imbalance; still, operators in some locales continue to struggle with overbuilding and discounting. Its a problem that isnt likely to disappear as long as investors rush into self-storage without researching the industrys realities.

Growth Outlook

Already hale and hearty, the Australasia markets growth potential is tremendous. Only 3 percent of the population uses self-storage and 75 percent of Australians have never tried it, according to recent research by the Self-Storage Association of Australasia (SSAA). Most nonusers dont fully understand the product and services, which indicates the industry has considerable room to expand. The challenge will be in educating the public about how self-storage will benefit them.

To empower future marketing, the SSAA is conducting a detailed study to build on previous research. Rather than focusing only on existing and past customers, pollsters will profile those who have yet to try self-storage. A close look at nonusers will reveal a truer picture of the untapped market, and how it perceives self-storage costs and benefits. Results will be unveiled at the SSAA convention and tradeshow, Oct. 4-6, at the Marriott Hotel, Gold Coast.

Koala Self Storage has two sites in Perth, Western Australia. Sloping block construction allows drive-up access to all three levels.

Property Trust Impact

As the industry grew and matured, it attracted intensified interest from institutional investors and the property market. In 2005, a heavyweight property trust entered the self-storage marketAbacus Property Group in conjunction with Storage King. This means the top-three self-storage businesses in the region (Kennards, National Storage and Storage King) are all aligned with property trusts.

National Storage started the process in late 2003, creating a relationship with APN Funds Management. Kennards followed suit in 2004 with the purchase of the Millers portfolio in conjunction with Valad Property Group, making it the largest provider of storage in Australasia.

The effect of property trusts on the market has been considerable. With more industry investors, pressure has increased on facility operators to perform. Some would say returns forecasts are unrealistically high, although they have generally been met. With large and small family institutional investors scrutinizing the inner workings of large businesses, facilities have less flexibility to ride out slumps.

Even the slightest deviations from expected results are questioned. As a result, facility managers must ensure their stores are continually running at optimal performance, heightening the importance of quality staff.

Controversial Investment

Other investment opportunities into self-storage have increased in the past 20 months, including the sale of individual strata-titled units within a facility. This allows developers to sell separate self storage units to potential investorsoften off the planthus raising funds to develop the site and turn a tidy profit. Unit owners then pay a management fee to have their units rented, and receive profits from their rentals.

This controversial method of financing a self-storage development is generally marketed at smaller investors, who are promised a real estate investment for only a few thousand dollars. One of the largest facilities in Australia was opened in North Queensland just prior to Christmas, entirely strata titled.

The arrangement is perfect for owner occupiers, particularly commercial clients, tradesman and the like, who can own their own unit rather than continually pay rent for one. As an investment strategy, though, care must be taken on several fronts: actual rental returns on the unit; quality and cost of facility management services; and the potential re-sale market for the unit if you need an exit strategy.

Developers offering rental guarantees for a short period further complicate these issues. Guarantees are used to hook investors, promising returns of 9 percent or more for a fixed term. The rental guarantee can increase the purchase price by thousands of dollars, particularly if the investor is basing the figures on growing this return in the future. If realistic returns are, say, 7 percent, the developer pays the extra rent for the period of the guaranteeand still comes out ahead due to a higher purchase price.

Of particular concern is the developer interested only in building more storage centers, and not actually managing them afterward. Similar rent guarantees have been used in Australia to artificially increase the value of residential housing developments, usually in major urban areas. Developers benefit, but investors get in troublemany must move into their investment property once rental guarantees expire and real returns emerge.

Storage units marketed as an affordable way to enter the property market appeal to many family investors, and they dont tend to be as stringent with their research. Negative publicity from small guys losing big in self-storage could harm the industry as a whole. The SSAA will monitor this issue closely over the next few years. Already, its lobbying the government for more regulatory control over property developers promising unrealistic investment returns.

Midlands Self Storage is a 60-unit facility in regional Tasmania. Designers incorporated colored steel and gabled roofline to echo the architectural heritage of the old farming community.

Acquisition Craze

Throughout most of 2005, real estate prices continued to rise, making it difficult for developers to find new sites. The market appears to have turned in the last few months, particularly in the Sydney area. But last years high real estate prices, escalating construction costs, and opportunities for acquisitions under the property trusts led to an unprecedented level of facility sales.

Major operators National Storage and Storage King, with the backing of their respective property trusts, have acquired many facilities across the country. National recently bought four properties in Perth, making it the only operator with a presence in all the mainland capital cities. Up until 2003, few significant facilities had sold within Australasia; then, in 2005, the number of traded stores within capital cities equaled that of new ones opened. Fierce competition for established sites has seen yields for self-storage drop from around 11 percent to 9 percentand below, in some cases. Only time will tell if this is sustainable.

Also, for the first time, prospective buyers are eyeing immature sites, willing to bank on their own skills to expand and fill units. Major operators arent the only ones on the acquisition trail. A number of local operators are looking to strengthen presence within their respective corners. Even in the country areas, where large operators have yet to enter, facility owners crave acquisitions so they can run a network in the region, gaining efficiencies in advertising and other administrative costs.

Trends and New Ideas

Despite all the industry consolidation, new investors continue to enter the market and existing facilities keep expanding. While self-storage growth has waned somewhat, dropping from its zenith of 15 percent to around 8 percent last year, a number of significant facilities are now under development. Strong growth is evident in regional areas and outer-metropolitan districts. As real estate prices ease, more sites should become feasible for self-storage.

Recently, more consideration is being given to multiuse sites, a tactic yet to take off in Australasia. Developers are investigating self-storage facilities combined with car washes, take-away food establishments and major shopping complexes.

More than one-quarter of self-storage customers are commercial, and their numbers are increasing. Commercial business is a market segment the industry is enthusiastically wooing with value-added services such as powered units, office facilities, administration services and document retrieval.

Mobile, or door-to-door storage, is also making its presence felt. More facilities are likely to explore this option in 2006. While none of the larger groups have made the leap and no dedicated mobile-storage exists, an increasing number of facilities offer it as a value-added service in major regional towns. In the popular model, trailers drop off storage units directly to customers, who fill them. Packed containers are transported to storage facilities where theyre lifted off the trailer with a forklift or crane.

An ongoing challenge for the selfstorage association is managing growth and developing standards while maintaining industry self-regulation. Representing more than 80 percent of self-storage businesses in the region, the SSAA is considered by most operators to be an integral part of their successful operation. All members use the associations standard self-storage agreement and are working to follow its best-practice manuals, including Occupational Health and Safety and Manual of Advice and Procedures, which details the legalities of running a facility.

If you are interested in how the Aussies are developing the market, why not come down and visit during October and attend the SSAA convention and tradeshow? The SSAA is pleased to organize pre- or post-touring for international guests. 

Rennie Schafer is the Self Storage Association of Australasias first full-time executive officer and has held the position since March 2004. Mr. Schafer, who holds an MBA, has a range of business qualifications and experiences and has been working with industry associations for more than seven years. For more information, visit www.selfstorage.com.au. 

Self-storage services are slowly expanding in Puerto Rico, 1,000 miles southeast of Miami. The Caribbean island, just three times the size of Rhode Island, has fewer than a dozen facilities serving 4 million residents. John Wilson, of Texas-based Construction Processes International Inc., has been involved in the construction of 700 facilities in 46 states. He talks with Inside Self-Storage about his experiences as a self-storage contractor in the commonwealth.

Q: How did you get started in Puerto Rico?

A:

We built the first facility in Puerto Rico (just outside of San Juan by the airport) in the early ’90s. I met a developer interested in Puerto Rico at a Las Vegas tradeshow, and that’s how we got involved with our first project there. Now we are building our fifth project, a four-story, 108,000-square-foot facility in the city of Carolina.

Q: What’s the self-storage landscape like?

A:

It’s an interesting situation. There are 4 million people and only eight or 10 storage facilities. Compare that to Houston, which has the same population and about 800 facilities. I believe Puerto Rico will one day support 25 to 40 storage sites. The ones there now are doing well, getting good rents and are fairly full. It’s similar to where the U.S. market was 20 or 25 years ago. Facilities tend to be bigger and fewer.

Q: Describe the real estate situation.

A:

Land is very expensive and has gone up a lot since we built our first facility, a multistory. All the facilities in Puerto Rico are multistory—I don’t think they would be financially feasible otherwise. It’s not unusual for land to sell for $20 to $40 per square foot.

Q: Who is the average self-storage customer?

A:

There are a lot more commercial users and people running businesses from their units. As a result, the facilities get far more visits and activity than in the U.S.

Q: Have you noticed Puerto Rican owners following the U.S. business-services trend in self-storage, offering fax services, Internet access and meeting spaces?

A:

No, they haven’t done much with office-type amenities. It’s not as sophisticated as in the United States yet.

Q: How important are security features?

A:

They do tend to have state-of-the-art security. There are cameras on site, and alarms on every unit. The crime situation is similar to that of Miami. Surveillance is important because most of the facilities don’t have onsite managers. In fact, I don’t know any that do.

Q: How does the average unit size compare to that of the United States?

A:

Units tend to be a larger because so many tenants are commercial users.

Q: What about aesthetics? Is it important to communities that facilities look attractive?

A:

It’s more industrial. You don’t see the lavish finishes or landscaping you see here, and cities don’t require them.

Q: Is it difficult to find the supplies and workforce you need?

A:

There are Home Depots and Wal-Marts, and all kinds of supply stores. It’s not like working in Somalia. But it’s an island, so everything has to be shipped in and that’s expensive. Workers are plentiful.

Q: What is it like dealing with the regulations and building codes?

A: They really aren’t any more difficult than in the United States. The unusual thing is Puerto Rico is vulnerable to hurricanes and other weather risks, so you have a seismic-3 earthquake load and South Florida winds conditions. Structures need to be heavier. Most of the building code is UBC 97, same as the States. All of the projects now have sprinkler systems because one facility had a fire and the whole island knows about it.

Q: Who are the major players?

A:

Triple A, led by an American, has four facilities. Universal Storage is another developer—we’re now building its second site. Commercial Centers Management has two facilities and is working on a third. Commercial opened the island’s first facility, which is 300,000 square feet and has more than 2,000 units. We have done many additions, including a 150,000-square-foot, four-story building for the latter.

Q: Do sites tend to be in high-profile areas?

A:

Yes, you want your building to be very visible because most people aren’t familiar with what self-storage is. One company is advertising on TV, so people are starting to get the idea.

Q: What are special challenges of the locale?

A: It rains a lot, and you can count on many rain delays in construction. There are also a lot of holidays—28 a year. It tends to take a few months longer to build over there.

Q: What team members do you bring with you from home?

A: We bring the typical people: building erectors and door/partition installers. Then we hire local electricians and site and plumbing contractors. 

For more information, call 713.409.1862; e-mail [email protected]; visit www.constructionprocesses.com.

When Morningstar Properties LLC went looking to open a self-storage facility in the central business district of Raleigh, N.C., the company found its home in an unlikely placea former beer warehouse.

Once known as Harris Wholesale Distribution Center, the location was considered a prominent landmark in the capitol and fit all the criteria for self-storage. The 69,700-square-foot site was air-conditioned and included a 22-foot ceiling with a mezzanine ideal for modification to two stories. Solid, insulated metal panels made up the buildings exterior skin. As added perks, traffic studies revealed that more than 50,000 cars passed by daily, and no rezoning would be needed.

The project was deemed a good investment by the joint venture partnership of Seattle-based Shurgard Storage Centers and Morningstar Properties of Matthews, N.C. Morningstar managed the conversion and today oversees the propertys business activities. This latest acquisition brings the number of storage centers operated by the Shurgard/Morningstar partnership to 13 in the Raleigh area.

A Taste of Conversion

The partners marketing strategy was to make the facility easy to use for all types of storage customers. However, cost-effectiveness was an issue, requiring the team to utilize as many existing building components as possible.

Morningstars construction company, MSC Development Inc., acted as general manager for the conversion; Ediface Construction served as project manager; and Overcash Demmitt Architects designed the new layout.

The Harris Wholesale Distribution Center was built in the late 1980s, solidly constructed with materials capable of handling the weight requirements for self-storage. Necessary modifications included changes to an existing multiple-bay loading dock and a 32,900-square-foot drive-through. By filling in a long entrance ramp with concrete, it was possible to convert half the drive-through into storage units. The remaining driveway was retained to provide interior loading and unloading of customer goods.

About 12,000 square feet of rental offices were retained, with plans to lease the space to local businesses. Minor demolition was necessary to the buildings interior, and Morningstar chose a structural steel post and beam system by SS-20 Building System. The improvement gave the facility a full second floor, spanning the drive-through and accommodating cars and panel trucks.

Reuse, Refurbish, Install

Builders managed to recycle much of the existing HVAC, electrical, sprinklers and plumbing systems. Sprinklers were installed in the new first-floor ceiling. Two large view corridors were added to the front of the second floor, displaying unit doors to passersby and creating visual interest, night and day. Two new elevators provide access to second-floor units.

A 1,100-square-foot retail office, including Shurgards trademark 35-foottall lighthouse, was constructed and attached to the front of the building at dock height. To access the office, stairs and a ramp were installed. The office features a 24-hour video security system to digitally record building activity, with two plasma screens for viewing the property.

The facility has 540 units, ranging from 5-by-10 to 10-by-30, with customized flexible spaces available for commercial tenants. Janus International provided the interior partitions and doors. Business customers are attracted by the central location, easy access, storage docks and drive-through features. To provide adequate parking for office tenants, a railroad spur at the back of the building was filled in and paved. Fencing and a security gate were also mounted, and the site was configured to provide 20 outside parking spaces.

Unique to Market

The project was completed in April 2006, one year from the date the contract was signed, with a construction period of about five months. The facilitys drive-through and interior loading areas make it unique in Raleigh. The target market encompasses the central business district, North Carolina State University with more than 30,000 students, a dense residential base and state and local government offices.

Morningstar is the 11th-largest self-storage operator in the country, according to Inside Self-Storage. Morningstar has been in the self-storage business for 25 years, and has developed more than 50 properties in the Carolinas. Company founder Stephen Benson, regarded as an industry pioneer and self-storage innovator, serves as chairman, and his son, David Benson, as president.

Shurgard Storage Centers Inc. is a real estate investment trust headquartered in Seattle. Shurgard specializes in all aspects of the self-storage industry and operates a network of more than 644 operating storage centers throughout the United States and Europe. 

Phyllis McArthur is executive vice president of Morningstar Properties LLC, a developer of more than 60 properties in the Carolinas since 1980. For more information on Morningstar, call 704.847.0968; visit www.mstarproperties.com. To learn more about Shurgard, call 800.947.8673; visit www.shurgard.com. 

Over the last five years, Canada’s supply of self-storage has ballooned. The three most developed urban markets are the Vancouver Lower Mainland, Greater Toronto and Halifax, each of which has 2 to 2.5 square feet per capita. Considerable new development also is underway in Edmonton, Calgary and the province of Quebec.

Self-storage per capita in Canada is about half that of the United States, possibly because Canadians aren’t nearly as mobile. Also, there is no military-market segment, whereas soldiers will account for 8 percent of all U.S. tenants by year’s end, according to Self Storage Association predictions. Occupancy rates are higher in Canada. In my opinion, this is due to lower supply and a healthy economy over the past few years.

Details on individual urban markets follow.Vancouver

In Vancouver Lower Mainland nearly 20 new facilities have opened, raising the amount of self-storage square footage from 1.83 to an estimated 2.5 per person by January.

Leading industry player Public Storage has strengthened its presence in the Lower Mainland with four additional facilities and a fifth in development, accounting for a total of 300,000 square feet. Another major developer, Maple Leaf, has doubled the size of its portfolio, adding three new facilities with two more in the works. Occupancies are high in all sub-markets except the North Shore and the Tri-Cities, each of which are struggling with the influx of 300,000 square feet of new storage space to the area.

Of major concern to self-storage owners and developers is a new B.C. Transit levy on surface parking, which may result in an annual tax of $30 per parking space. The tax has sparked substantial increases in property-assessment appeals for 2006.

Market statistics also show:

• The Vancouver Lower Mainland will have a supply of 6.65 million square feet of self-storage by the year’s end.
• Rents range from a low of $12 per square foot to $26 per square foot for a new urban facility.
• Occupancy rates have risen from 88 percent to 95 percent, excepting the Tri-Cities and North Shore areas.
• Rentals have increased from $9.60-$16.20 to $12-$26.
• Cap rates have dropped from an average of 10.25 percent to 8.25 percent.
• Recent construction costs for new concrete tilt-up buildings are $65 to $70 per square foot (hard and soft costs).

TorontoMetro Toronto has an estimated 5 million square feet of self-storage, or roughly 2 square feet per capita—with the industry undergoing a growth spurt, according to Joe Kormos of Canadian Storage Centres Inc. Another .5 to 1 square foot per capita is reportedly under construction or in the development process.

An equal amount of storage is available in the Greater Toronto area. Overall, occupancies are in the range of 85 percent because of new supply. Developers report that 60 percent of new customers are drive-bys, attracted by high-profile locations rather than through Yellow Pages advertising. Also:

• Rents have risen since 2001 from $11-$18 to $20 per square foot.
• Cap rates are between 9 percent and 11 percent, a slight dip from recent years.

WinnipegFraser Kulba of Storageville reports that Winnipeg has been discovered by out-of province and U.S. self-storage developers. They have built four new facilities in the last five years and completed two large conversions. Kulba estimates the increase to be 200,000 to 250,000 square feet. Storageville is in the process of constructing a 66,000-square-foot facility. Few viable retail locations remain, according to Kulba.Montreal

The estimated supply of self-storage in the Montreal trade area is less than 1 square foot per capita; the number is anticipated to rise to 1.5 to 2 square feet with proposed new construction. Turan Kalfa, owner/developer of the Depotium portfolio, says he had an offer on his eight-facility portfolio in 2005; when the transaction fell through, he decided not to sell but to double the size of his holdings. Two recent sales (to an Ontario company) were at a 9 percent cap rate, but the majority of sales are in the 9.5 percent-10 percent range, according to Kalfa.

Due to very stringent bylaws, self-storage development on Montreal Island is limited to conversions. Occupancy averaged 80 percent from July to April, exploding to 100 percent in May and June to accommodate “moving day” on June 30 when all annual leases expire. Rents average $14 per square foot annually on the Island and $12 annually in suburban locations.

Overall, occupancies have improved and lease-up time frames have shortened.Alberta

The Edmonton and Calgary markets remain strong with significantly higher occupancies. The last comprehensive study was done in 2003, indicating a supply of 1.05 square feet per capita in 37 facilities. Since that time, three or four new facilities have been constructed. Vancouver-based Maple Leaf is developing two additional multistory facilities, each offering 1,400 to 1,500 units.

In May 2005, Public Storage announced the purchase of an existing store in the Harvest Hills area of Calgary at $123 per square foot of net rentable area for 73,000 square feet. The facility was a year old at the time of sale and represents the first purchase of an existing facility by the partnership. The most recent previous sale is believed to be Storagemaxx’s May 2003 purchase of a 50,000-square-foot facility at a reported cap rate of 10.97 percent. The most recent Calgary self-storage land sale was to Maple Leaf at $15 per square foot of land for a 4.2-acre site. Also:

• Rental rates rose from $11-$16.36 per square foot per annum to $14-$18.
• Occupancies are reportedly very high.
• Storage supply in Edmonton is estimated at 2 square feet per capita.

SaskatchewanIn April 2004, Storagemaxx acquired Rock Solid Self-storage, a four-facility portfolio comprising one store in Edmonton (Alberta), two in Saskatoon and one in Regina. The reported cap rate was in the range of 10.5 percent and overall occupancy was at 82 percent.Halifax, Nova Scotia

The Halifax trade area is within a 7-mile radius of the downtown core. The amount of self-storage is estimated at 2.19 square feet per person. Occupancies reportedly range from 86 percent in the winter months to 100 percent in the summer months, and:

• Average rents are $12-$15.50 per square foot.
• There have been no recent sales of facilities, but estimated cap rates are 9 percent to 9.5 percent.
• The total square footage of self-storage is approximately 635,000 square feet. 

Candace Watson is a professional real estate appraiser who has specialized in the valuation of self-storage for more than 25 years. Her company, Canadian Self Storage Valuation Services, conducts regular surveys of self-storage supply, occupancy and rents in the Lower Mainland, and prepares feasibility studies for prospective developers throughout the province. Ms. Watson has appraised more than 40 percent of facilities in the Lower Mainland. For more information, call 604.681.2929; e-mail [email protected]. 

Over my entire business life, I have been fortunate enough not to be influenced by the World War II generation, which basically was against anything foreign. My parents were very anti-anything that wasnt homegrown. If it didnt say USA on the label, it was inferior and not worth buying. 

As a car washer I have tried to avoid the prejudiced opinions of my parents. But lets face it, ask most car washers how they bleed and theyll tell you the right arm leaks red, white and blue; the left detergent. We are a very patriotic group and, on top of that, we basically feel we invented car washing! So if it wasnt built here, it basically isnt any good. Bottom line, made in the USA just works fine.

With that said, I have to admit to having a predisposition to some Asian products. As an ex-motorcyclist, I was impressed when Honda and all the other British look-alike bikes came to our shores. Good looks, great performance, and you knew that when you went out for a ride it would always be reliable.

As I have matured and been further exposed to the world, I have become a global buyer. My business life has always involved manufacturing and distribution. Like the countries we import from, I, too, have become an exporter. Other countries have recognized our skills in producing durable car wash products, and have welcomed our expertise to their shores.

Our manufacturing capability, which created the wealth of our country, has been studied, emulated and supported by other governments. As a result, other manufacturing nations have become successful and super wealthy. Instead of looking at the label on a product and refusing it because it was imported, we now embrace trade as a way of life. How and why we got here is fodder for a much longer and controversial article. For now, lets say that internal complacency has opened the door for imported products that are well made and competitively priced.

Since 1965, the percentage of workers involved in durable goods manufacturing has shrunk by more than 50 percent, while many service industries have doubled. According to a recent article in The New York Times, we are now becoming a nation of advisors, fixers, entertainers and high-tech engineers. As we have continued to lose our manufacturing base, the share of the economy that has gone to medicine, banking and law has grown. Maybe we could help the trade deficit if we could export more lawyers and bankers?

Global Access

No matter how you look at it, the Monroe Doctrine of insular isolation has no place in todays economic environment. And thank goodness. We have access to not only the best and brightest in our country, we now have the ability to choose from the best the world has to offer.

In the car wash business, the ability of an international player to be taken seriously has been extremely difficult. Not only do car washers wave the flag, they are a notoriously practical group of business people. A car wash only makes money when the equipment is operating. The importance of uptime for an operator is critical. Not many years ago, a major national car wash chain of in-bay automatics looked at downtime. In its evaluation, 1 percentage point of downtime was a loss of $100. So if you were operating at 90 percent, you were losing $1,000 per month. Imagine now the concern an operator might have for an imported product. How easy is it to find off-the-shelf parts and ensure that replacement time is at a minimum?

This recognition of uptime has become an opportunity for a few smart manufacturers. Programs that guarantee a certain percentage of uptime are now available. International manufacturers of car wash equipment that recognize the importance of the American market have listened well.

Just this year, several major U.S. players have announced affiliations with overseas counterparts. Mark VII, one of the major touch-free suppliers, was acquired by Germanys WashTec, the largest provider of vehicle-wash equipment worldwide. This was a good move for all parties. Mark VII remains a U.S. manufacturer, retaining all of its employees and gaining the opportunity to offer U.S. operators Americanized products that previously were only available as imports.

Yes, for some industries the distance between shores has become a nanosecond away. Those of us who buy durable goods are very fortunate. We now have access to concerned global players. For us, the best and brightest is a catalog away. It certainly has become a small, small world! 

Fred Grauer is president of Grauer Associates and vice president, investor services, for Mark VII Equipment LLC, a car wash equipment manufacturer in Arvada, Colo. He has made a lifelong career of designing, selling, building and operating car washes. He can be reached at [email protected].

A self-storage facility doesnt make money until it reaches breakeven occupancy. When mapping the success of your site, wouldnt it be great to have a formula to indicate when you will reach breakeven and maturity, considering current market conditions and operating history?

The European self-storage market is in its infancy, which is why a basic mathematical calculation still works in anticipating a facilitys monetary future. In the United States, most sites have enough new tenants every month that they need not worry about reaching breakeven. But in Europe, where a fair number of facilities are unable to add more than 100 square meters per year in new rentals, a site can quickly reach 60 percent occupancy and stay there for a long time. Thats a difficult situation if the facilitys breakeven point is 65 percent.

In this case, it could take years before a storage business generates any profit. So lets take a look at that magical formula that will tell you the potential outcome for a facility.

The Method

What is the formula to calculate your facilitys ceiling point? First, lets look at how many square meters you rent each month. If your average number of move-ins is MI, and the average square meters rented by each customer is S, then simple multiplication of these two numbers will tell you how many average square meters you rent monthly.

Now lets look at the process of losing square meters, which is when tenants depart. A certain percentage of your customers are leaving each month. If we call T the average number of months customers stay in your site, then the percentage of them leaving each month is 1/T. Lets name RS the total of square meters rented in your facility. This means RS/T is the number of square meters you lose every month, on average.

When will your site stop adding rented square meters? Thats when the number of square meters left by your customers is equal to the number of square meters rented. In mathematics this could be translated like this: RS / T = MI x S. Therefore, the maximum of space you can rent is equal to RS = MI x S x T (monthly move-ins multiplied by the average surface, multiplied by the number of months your customer rents with you).

The above figure could be above your net rentable surface, in which case you are fine. But it could be below, and thats bad news because it will take years for your site to reach maturity.

Lets look at an example. Assume a facility rents 40 units per month; the average unit size is 6 square meters; and each customer rents for an average of 12 months.

• MI = 40 rentals 
• S = 6 square meters 
• T = 12 months 
• 1/T = .08 or 8% 
• RS = 40 x 6 x 12 = 2880 square meters 

Using these numbers, the maximum amount of space you should expect to rent in any given month is 2,880 (40 x 6 x 12). If your site has 2,900 square meters of rentable space, youre in good shape. But if you have 4,200 square meters, you should not expect to rent more than 69 percent of your site. In this case, things are not desperate, especially if you have time on your side. The two variables that can change over time are MI and T.

Increasing Move-Ins and Stays

To increase your average monthly move-ins, focus on long-term strategy and not one-shot advertising campaigns that will only temporarily boost business. The best ways to boost MI is through great location, excellent customer service, word of mouth, repeat customers, referrals and a better conversion rate of prospects to rentals.

Location is critical to success in the European market since nobody knows what self-storage is. Your facility should be on a busy street with lots of drive-by traffic. It should also feature signage and other visuals that help customers understand the product.

Once a prospect rents from you, the key is to get him to stay as long as possible. Temporary users, such as those using storage during a move, arent long-term candidates, so dont focus on that market. Other users will generally continue to need storage over longer periods and will only move out if they are treated poorly or you raise prices too drastically. Keep customers with excellent service, and do your best to retain business during rate changes. Also try to get more commercial customers, as they tend to rent for the long haul.

A French executive once told me, I dont know much about your magic formula, but we sure ask our managers to get more clients and make them stay longer. Thats just one part of the equation.

In Europe, one of the key indicators for your business is monthly move-ins. The number tells you if you will reach the breakeven point and fill your site. Make the most of this calculation to determine the best strategy for your business. Perhaps its smart to phase your project and adjust your unit mix to what the local market will accept. 

Philippe Peyrot is president of Annexx SAS, a leading French self-storage company based in south of France, and founder of Self-stockage.info, an online magazine on self-storage in Europe. Mr. Peyrot has a masters in mathematics from the University of Toulouse, and an MBA with a major in finance from the University of Connecticut. For more information, visit www.annexx.com; e-mail [email protected]. 

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Common Real Estate Terms

Capitalization (Cap) Rate:

The assumed rate of return on a real estate investment. The cap rate is commonly used in the valuation of commercial and investment property because it directly links the value to the income produced. To determine the value of a particular asset, divide the net operating income, or net cash flow, by the assumed cap rate.

Cash Flow:

The amount of cash a company generates and uses, calculated by adding non-cash charges (such as depreciation) to the net income after taxes.

Discounted Cash Flow:

A projected cash flow that is discounted to arrive at an equivalent present-day value. For example, if you use a discount rate of 10 percent, an item worth $100 a year from now is only worth $90 today.

Exit Yield:

Yield expected at the time a property is sold.

Freehold:

The legal ownership and control of a building or piece of land for an unlimited time.

Leasehold:

The legal right to live in or use a building, piece of land, etc., for an agreed period of time.

Notional Sale:

The supposed sale of a property at an estimated price.

Yield:

A generic term for return on an investment.

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Storage Valuation: Free vs. Lease

By Philippe Peyrot

More and more European self-storage companies are undergoing a valuation process. Listed companies must endure it every year to show to their shareholders a clear picture of their business. For non-listed companies, the goal is either to make a sale or show bankers and future investors the value of the enterprise, even if they havent reached the breakeven point.

Most lenders simply do not understand the dynamics of the self-storage market. A valuation can help them grasp its potential. This makes it a good tool to get money for business expansion. But how is valuation achieved, and how is it different for freehold vs. leasehold properties?

The United States has more than 50,000 self-storage facilities trading in a highly fragmented market. These properties have a well-established track record and are, therefore, considered liquid assets. In Europe, however, large operators control more than 70 percent of the sites. Though several portfolios have been sold, the transaction amounts were not disclosed. Even still, evidence suggests there will be liquidity as the market continues to develop. For this reason, the valuation methodology adopted in the States is now regarded as appropriate for European sites.

The value of a freehold property is a discounted cash flow of its net operating income projected over a 10-year period and the notional sale of the asset at the end of the 10th year. Existing and future net cash flow are estimated by referencing the yields for industrial and retail warehouse property. The notional sale is calculated using the average weighted exit yield.

The same methodology is deployed for a leasehold, except no notional sale of the asset is assumed. Instead, the discounted cash flow is extended to the end of the lease. This approach gives a far better value to freehold, and its always surprising to see companies considering leasehold as a good strategy.