I want to tell you about a great concept recently shared with me by the manager of a self-storage facility in the Moreno Valley of Southern California. This unusual philosophy of management has helped keep all the facilities in the area full and otherwise successful.

The local managers decided to take a positive outlook toward what is normally referred to as "the competition". They began to regard each other not as rivals, but as compadres in the same industry. The result was the formation of the the Moreno Valley Self Storage Managers Social Club, which works to achieve maximum incomes and occupancy levels at all of the facilities in the area.

Each member works with others by referring prospective renters to another facility if he himself cannot accommodate them. Every month, the managers exchange rental rates, occupancy levels, and numbers of units and sizes available. This information is then put into a spreadsheet and faxed to each member. This greatly facilitates recommendations.

The managers also send a creative monthly newsletter via fax to each site. It contains information such as who is having a birthday during the month, and who is a new manager, with a welcome note for that person. If there is an issue that needs to be addressed, such as a rodent problem or a new facility that was just approved to be built, this kind of information is included.

These managers get together every other month, at their own expense, for a casual dinner during which they bond and discuss issues such as changes in lien laws, new marketing concepts, delinquency problems, rental rates, new facilities coming on line, etc. They take this time to exchange ideas and build friendships, viewing each other, not as competitors, but colleagues sharing the same ideals and goals. This is a positive step for these managers. It was very insightful of them to take the initiative in creating such a club. It helps them keep their facilities full and provides an opportunity to interact with one another.

Some states have their own self-storage associations and, of course, we have the national Self Storage Association; but let's face it--most of these organizations are primarily for owners and management companies. Facility managers are, for the most part, ignored. The cost of membership is usually too prohibitive for most managers, as are the fees to attend industry conventions.

California owners and operators recently formed the California Self Storage Association. Its annual dues are purposely kept very low so the organization can attract site managers. The CSSA recognizes site managers are a key element in the operation of local facilities. It wants them to join the association and contribute their ideas and expertise.

If more managers across the country would work together and form their own loosely based social clubs, it could be a win-win situation for all parties involved--owners, management companies, managers and tenants. By taking a positive approach to competition and changing the attitude from antagonistic to cooperative, many possibilities can be explored. Not only could all facilities enjoy the highest level of occupancy and income, but they could offer excellent benefits to customers.

Managers could learn from one another about marketing, reducing delinquencies, using software or offering ancillary services. And there is no reason owners can't get involved in clubs such as these by supporting their managers. They could begin by providing a budget for the bimonthly dinner or newsletter, or hiring industry professionals to speak to managers at the social gatherings.

By working together, we can build a strong, well-educated industry to meet customers' needs while earning greater profits. Kudos to those managers in Moreno Valley. Congratulations on a job well done!

Pamela Alton is the owner of Mini-Management^®, a nationwide manager-placement service. Mini-Management also offers full-service and "operations only" facility management, training manuals, inspections and audits, feasibility studies, consulting and training seminars. For more information, call 800.646.4648.

It's 2 a.m. Your storage site is closed and your manager is asleep. At one end of the property, an intruder has climbed your fence. Before he can reach the first unit, a siren sounds, floodlights illuminate, an armed response is on its way, and a video record of the entire event has just been e-mailed to your home. This is today's video surveillance.

Security that provides real and psychological value is a tangible asset that commands higher rental rates, reduced insurance premiums and increased control over your business. A professional surveillance system should:

• Allow your managers to observe suspicious activity without ever taking their eyes off the management computer screen.
• Have the intelligence to automatically determine when to record, based on what is occurring.
• Provide instant recall of prior video-surveillance events, even when they are viewed from a remote location.
• Allow authorized tenants to remotely watch their boat or RV during harsh weather. Even prospective tenants can use your website to watch the cameras you designate as safe for public viewing.
• Fuzzy images and VCR tape changes are things of the past. Today's quality digital video recorders (DVRs) make it easy to recognize a face or read a license plate anywhere on your site. The system is made of two key parts: DVRs and cameras.

Digital Video Recorders

The DVR was first introduced in the 1980s. Like a VCR, the DVR could originally only capture one video signal. If you had multiple cameras, you had to use a multiplexer to allow the images to share the same recording screen. This resulted in a significant loss in image detail. Alternatively, you could use a sequencer so each camera could take a turn being recorded. While this maintained image detail, each camera spent the majority of its time being unmonitored.

In the 1990s, DVRs and VCRs improved in terms of the amount of detail they could retain and how long they could record. By the end of the millennium, DVR recording quality had clearly surpassed that of the VCR. DVRs could simultaneously monitor dozens of cameras without losing any image detail. Imbedded intelligence allowed the DVR to make judgment calls as to what was worthy of recording and what response should be taken.

Today, DVRs take full advantage of the Internet and allow multiple remote-viewing capabilities. In self-storage, this means you gain remote control over your business in addition to a marketing tool to lure prospects. Tenants will gladly pay a premium after knowing your security will catch intruders before their RVs or boats can be harmed or stolen.

A commercial-grade DVR should offer all of the features noted above. It should also record at a resolution (measured in pixels) that is at least as good as that of your cameras. Never accept DVRs that record at only 76,800 pixels (a 320x240 resolution). Doing so will render your recording resolution inferior to that of the cheapest VCR. A quality DVR will provide 640x480-resolution recording, representing more than a quarter-million pixels of detail per camera.

To capture smooth motion, the DVR should record at 120 frames per second (this speed is divided among all active cameras). Once the DVR's hard drive is full, it will automatically overwrite the oldest images. To ensure you can recall the last week or two of activity, your DVR should have at least 100 gigabytes of storage.

DVRs come preconfigured for four, eight or 16 cameras. The DVR you choose should include a CD writer to permanently store images that might be needed by the police or insurance company. If the DVR includes a sound card, your office video records will include a soundtrack.

Cameras

Camera technology has also made quantum leaps in form and function. Gone are the days of mailbox-sized camera housings, as they have become a popular theft item. Modern surveillance cameras are compact enough to hide inside alarm-bell boxes, access keypads and weatherproof housings the size of your thumb. Yet their diminutive size is misleading, as their image quality exceeds that of their larger predecessors.

When it comes to surveillance cameras, image quality depends on what's inside. The viewed image enters through the camera lens and iris. The job of the iris is to regulate the amount of light that enters the body of the camera. Too much light saturation, and the images are featureless white blobs. Too little light, and the objects appear as dark shadows. If the camera is in a controlled lighting environment, like an interior hallway, a manual iris can be used. Otherwise, an auto-iris will be required to optimize the view.

Camera lenses are rated in millimeters (mm). A 3.6mm lens provides a view similar to the naked eye. These are the lenses of choice for small areas like office spaces and elevator lobbies. An 8mm is a general-purpose lens well-suited to most outdoor spaces. It provides a view that is similar to looking through the cardboard center of a toilet paper roll. For an even more telescopic view, choose a 12mm lens, which is the best choice for monitoring long rows of units. You can purchase variable zoom lenses that span the full range of choices. However, if you determine the correct lens prior to installation, there is no need to pay extra to add a variable lens.

The camera lens passes its view to the camera's imager. The recommended resolution is 525 lines. Anything less may make it impossible to read a license plate or recognize a face. To save money, several vendors still provide cameras with 440 or less resolution. Not all imagers are created equal, and there are dramatic differences in picture quality among brands.

Surveillance cameras are available with either analog or digital circuitry. Digital cameras are more compact, draw less power, and eliminate the need for an iris by automatically compensating for changes in lighting. Almost all digital cameras contain electronics made by Sony or Sanyo. The highest-grade cameras will incorporate the "full Sony chipset." Previously available to only the wealthiest clients, digital cameras have been steadily dropping in price.

Color surveillance cameras have become so light-sensitive they provide the low-light capability previously available only with black-and-white models. However, if you need a camera that can see in near or complete darkness, select a black/white model with a built-in infrared illuminator. Thieves can't see the camera, even though the camera can clearly see them. There are even models that operate in color during the day and automatically switch to black and white at night.

Each camera requires a mount and, if exposed to the elements, a protective housing. If the camera temperature might drop below freezing, the housing also requires a heater or expensive freeze-proof circuitry. Alternatively, the camera housing and mount can be combined into a dark dome that disguises the camera's direction of view. Lastly, you need a power supply to operate the camera and its components.

To recap, each camera is made of many parts: camera body, lens, iris, housing, mount and power supply. These items are sold separately, which makes the camera seem inexpensive until you add the costs together. Your vendor should be able to combine all of these items into a package that costs less than $600 per camera for a top-of- the-line model.

Putting it All Together

Common RG-59 coax cable brings the signal from the camera back to the DVR. In almost every county, you can "free run" this cable, which is a great cost savings considering you might have runs up to 2,000 feet when you cannot take a direct path.

If your pavement is already laid, or you need to cover nonadjacent property, consider going wireless. For about $100 more than a regular camera, you can get a short-range 2.4-GHz wireless camera. You are limited to only four channels, and one may already have area interference from a neighbor's cordless phone. Thus, you should not plan on having more than three wireless cameras per site.

You can add several more cameras using expensive 5.4-GHz cameras. These will become more affordable in the coming years. By contrast, 900-MHz cameras have been discontinued due to the popularity of cordless phones. The resulting oversaturation has rendered the 900 MHz band far too unstable for use with security equipment.

There are also wire-free cameras that transmit their video signal over your pre-existing AC power lines. Wire-free cameras can be placed anywhere at your site without running an inch of wiring. They can be easily relocated during the construction phase and make the perfect camera for discreet observations.

Cameras should be mounted at a height of at least 10 feet to keep them out of the reach of vandals. If you have a light pole at your site, consider mounting several cameras aimed in different directions. I do not recommend using a platform that pans the camera back and forth. Panning will cause your DVR to record constantly, and critical events may occur while the camera is aiming elsewhere. It is better to place additional cameras to provide complete security coverage.

A skilled security vendor can lay out a camera placement that will cover your storage units, office, dumpster, elevator, stairwell, access doors, drive-up gates, manager's apartment, perimeter fencing and other sensitive areas. A high-end 16-camera system should cost approximately $15,000 and include the DVR, cameras, monitor, Internet connectivity and everything else needed except coax cable. Contact several vendors and compare features and costs. You will find features, price and skill level vary dramatically.

Doug Carner is on the Western-region board of directors for the Self Storage Association. He is also the vice president of QuikStor Security & Software, a California-based company specializing in access control, management software, digital video surveillance and corporate products for the self-storage industry. For more information, call 800.321.1987; e-mail [email protected]; visit www.quikstor.com.

This month, I gathered a roundtable of experts to discuss the state of self-storage in the southern United States. Let's hear what local experts have to say about their respective cities and regions. Our panel of brokers includes: C. William Barnhill, Omega Properties, Mobile, Ala.; Dale C. Eisenman, Midcoast Properties Inc., Hilton Head Island, S.C.; Mark D. Keys, Cornerstone Realty, San Antonio; Richard Minker and Tyler Trahant, The Richard D. Minker Co., Fort Worth, Texas; and Frost Weaver, Weaver Realty Group Inc., Jacksonville, Fla. Because of the unique economic times in which we find ourselves, I have contributed comments on the national market as well.

WHAT IS THE RANGE OF CAP RATES IN YOUR MARKET? WHAT DETERMINES THE DIFFERENCE?

Barnhill: Cap rates in our market range from 10 percent for larger upscale properties to 11percent to 12 percent for smaller, older properties. The cap rates vary according to size, location and other features of the property as well as the size of the city in which they are located.

Eisenman: Cap rates in this market range from 10 percent to 11 percent on trailing income--unless there is a clear reason, in the buyer's mind, to use pro forma income, such as additional rentable square feet, land not included in the net operating income, or some other factor that creates additional value.

Keys: Cap rates are now generally running between 9 percent and 11 percent based on the past year's historical performance for stabilized facilities. What determines the difference is largely the buyer's perception of the income stability and potential upside the investment offers. Newer facilities with appealing features situated in prime locations with barriers to competitive entry are commanding the highest prices and, conversely, the lowest cap rates. Older, less functional properties are more difficult to keep leased and more expensive to maintain. Buyers recognize this and require a higher cap rate to "risk adjust" their investment.

Minker/Trahant: We are currently seeing cap rates in the range of 10 percent to 13.5 percent. The lower cap rates are for class-A facilities with strong stabilized occupancy. The higher cap rates reflect either underperforming new properties or older properties with lower occupancy rates. Mid-range cap rates are for newer properties with moderate occupancy and future lease-up potential. There are some buyers who will pay 9 percent-plus cap rates--but on actual income not pro forma--for class-A-type properties.

Weaver: Cap rates on listed properties have fallen as low as 9 percent on properties of marginal quality for several reasons. First, some brokers are very aggressive in trying to get listings and will represent to an owner a higher price than is obtainable in the market. Second, due to lower interest rates for financing, leverage returns are higher, giving a justification for a lower overall cap rate on quality properties. Finally, due to the fact there are not a lot of quality properties on the market at this time, owners believe the supply-and-demand factor justifies lower cap rates. While there is certainly some justification for this, in theory, I don't see transactions being consummated at these lower rates. Recent transactions have still been in the 10 percent cap range for quality properties and higher cap rates for the smaller owner/operator properties.

Weaver makes a great point when he suggests many properties are listed at higher prices than market because the broker is simply "buying" the listing with the promise of a higher price than market and hoping that the seller will capitulate on the price as the true market value unfolds. As beguiling as the promise of an unrealistic price is, the result is often that sellers miss potential sales to serious buyers, thus missing the great "market" sale that exists at today's market cap rates. It is shame to see sellers miss a good market because they are induced into a listing on false expectations.

IS OVERBUILDING BECOMING A SIGNIFICANT FACTOR IN YOUR MARKET? DESCRIBE THE CURRENT SITUATION.

Barnhill: Overbuilding has been and continues to be a significant factor in our market. Developers continue to add product even in markets that are not fully absorbed with existing product. I do see most banks are demanding more due diligence, and even a feasibility study in some cases.

Eisenman: Like everywhere, there are pockets of overbuilding or, as I like to say, "capacity well-positioned for the future."

Keys: Overbuilding is a significant factor in the Texas market, but it is spotty rather than epidemic. Developers are still managing to identify pockets of demand and build profitably. Yet there are facilities that have been open for two years and are only 50 percent leased. Overall, the pace of new construction in the market has outpaced absorption for the last several years. And with the current economic downturn, facility owners across the board are starting to feel the effect all this new space has on the market.

Minker/Trahant: Overbuilding is continuing to become a bigger factor in the overall market, but it is not yet a significant factor except in selected geographic areas. In North Texas, those markets appear to be in North Fort Worth, South Arlington/Mansfield and North Dallas/Plano/Frisco.

Weaver: Overbuilding is a significant factor in the urban market areas. Due to a lack of quality product for sale, many investors that would acquire existing properties are now looking to buy land and build. The economics look good on paper, and banks are still willing to lend. There are still several inherent factors that are affecting the lack of product available for sale. If a seller cashes out, there are few attractive investment alternatives. Interest rates are still very low and the stock market is still very volatile. There is a lack of quality product available for 1031 purposes, even in other types of real estate. In general, retail and industrial properties are very hard to find, and while there are numerous office properties for sale, there is a high vacancy factor statewide.

The comments our brokers provide on overbuilding are generally true across the country. While the problems are currently somewhat isolated to specific markets, the trend is to entire cities being overbuilt. However, a major problem is our industry does not have information available to determine the exact extent of the problem. All other categories of real estate keep track of such statistics, thus enabling lenders and developers to moderate the development plans prior to a major overbuilding. Obtaining this information should be the highest priority of the national and local associations, as not having it harms every owner in a market. Right now, with low interest rates making investments (i.e., development) particularly attractive and no reliable information to dissuade them, developers are going to continue developing--it's what they do! Market surveys and feasibility studies are a must.

ARE OCCUPANCIES DECLINING AND RENTAL RATES DECREASING? WHY?

Barnhill: Well-run properties are maintaining occupancies. However, older properties that are poorly managed are losing ground. Effective rental rates have declined somewhat due to the rental discounts offered by most facilities.

Eisenman: There are some signs that rentals are picking up or becoming more stable after a soft December and January. The weak economy, seasonal trends and overbuilding make an analysis of the relative causes of market softness difficult to isolate, but it certainly appears they are all contributing factors. It is likely overbuilding will turn out to be the most significant cause and will have the longest effect on rates and occupancies.

Keys: Overall occupancies have declined in the major Texas markets, as well as in some secondary markets when you take into account new facilities in lease-up. New facilities often offer rental discounts to encourage a quick lease-up, which has the effect of depressing the overall market rental rates. Still, many properties have managed to maintain their occupancy and income despite the effect of new competition and a softening economy. Storage facilities have fared better than other types of income properties during the current downturn. Both are favorable indicators for the industry as a whole.

Minker/Trahant: Occupancies are declining pretty much across the board. In some selected markets and/or facilities, some of those declines are significant where extensive new development is taking place. Self-storage operators are attributing the decline to the overall state of the economy, job loss, etc., and the mindset since Sept. 11 from which they have never fully recovered. As to rates, we are seeing very limited or small rate increases. Most owners are pleased to be able to hold their current rates, but many are discounting to match the deals offered by newly opened or slower leasing facilities.

Weaver: There is a trend of declining occupancies in the major cities due to continued building and oversupply. In the smaller markets, occupancies remain strong, with rental rates stable of increasing. In the major markets, published rates have not been decreasing, except in certain market areas; but there is a trend toward concessions as an inducement to the consumer.

WHAT TYPE OF FINANCING IS AVAILABLE FOR FIRST-TIME BUYERS?

Barnhill: Local bank financing is the predominate method available for local properties. Refinancing is usually with a 15- to 20-year amortization and a five-year balloon payment fixed for five years at 6.5 percent to 7 percent. Variable rate loans are at least 250 to 350 basis points over one-month LIBOR, or prime plus 1 percent. For first time buyers, the equity requirement is 25 percent to 30 percent, and the underwriting requirements are quite stringent unless the owner is very strong financially and has a good banking relationship. Additionally, the debt-coverage rate is about 1.30.

Eisenman: Local banks are willing to finance self-storage buyers based on normal credit underwriting. Banks with existing loans for self-storage may be the best sources for the first-time buyer. If one is buying an existing facility, he should explore financing with the existing loan holder. The first-time buyer should strongly consider hiring existing management or using a professional third-party manager, which will demonstrate to the lender a greater likelihood of success and loan repayment.

Keys: First-time buyers may find favorable financing with a local bank or conduit lender. Currently, a first-time buyer can expect a 70 percent to 75 percent loan on a 15- to 25-year amortization, due in five to 10 years. Interest rates have been running in the 6 percent to 7 percent range. Most lenders want a debt-service coverage ratio of 1.3 or better. These are broad parameters; the actual terms a buyer can achieve will depend on the facility being purchased and the buyer's credit worthiness.

Weaver: There is financing available for first-time buyers, provided they have decent credit and general business experience. This financing is generally available from local banks that know their markets and the property being acquired. The local banks have money to lend and understand the favorable economics of self-storage facilities. I have recently had local banks contact me regarding their interest in lending on self-storage facilities.

WHAT IS THE STATUS OF FINANCING FOR EXPERIENCED BUYERS?

Barnhill: Experienced buyers can command five-year money at 5.5 percent to 6.5 percent with a 15- to 20-year amortization. The equity requirement is usually about 20 percent to 25 percent, providing the debt-coverage rate is at least 1.20 to 1.25. Some experienced buyers in our area have opted for variable-rate bond financing with LIBOR rates. The overall effective interest rate is currently about 3 percent floating with LIBOR. These loans usually have a 20-year amortization with a five-year balloon.

Eisenman: Experienced operators with a proven track record will have an easier time securing financing. While rates are low, underwriting is becoming more conservative, so an experienced operator who can demonstrate past success in self-storage will find banks more receptive than one who cannot.

Keys: Experienced buyers are finding financing in essentially the same places, as well as with regional banks with which they have established a lending relationship. These buyers can often obtain financing on so-called "value-add" facilities--those that have not achieved a stabilized occupancy level--much more readily than a first-time buyer. For the experienced buyer, the operational history of a facility and debt-service coverage ratio may be less critical.

Weaver: The local bank is also a very viable source for the experienced buyer, but other options are available to him in the national lending market, including banks, insurance companies and conduit lenders. I was recently contacted by a regional bank interested in self-storage loans in Florida. At this point, financing does not appear to be a limiting factor in self-storage transactions or development. However, the favorable economics of self-storage development and the lower perceived risk is increasing supply at a faster rate than absorption. This is increasing supply to a precarious level in many selected markets, leading to higher risks for the developers and lenders and lower returns for the investors.

As can be seen from our Brokers' comments, the availability of loans at great, historically low rates means buyers can get a terrific cash-on-cash return and sellers can get the best market price in years. The dark side is development will continue and could cause serious problems for individual properties. This suggests two strategies: 1) if you are going to be a seller in the next couple of years, now is the time, before interest rates go up and occupancies go down; and 2) if you don't plan to sell, make sure you have refinanced and lowered your debt-service costs so you can compete in a difficult market.

Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.