Self Storage as an Asset Class - A Summary

Self-Storage
As An

Asset Class

Overview:

Self-storage continues to be a vital component in both urban & suburban markets, especially in
Texas. Depending on demographics, a local population can support 5 to 8 square feet per capita.
Rental rates typically exceed per square foot rates of multifamily rents with lower initial capital
outlay and lower maintenance & management cost. These factors along with multiple REITs
willing to purchase mature properties as an exit strategy make self-storage very attractive as an
investment with the capability to produce IRR’s in the 25% range. Additionally, larger numbers
of facilities in excess of 10 locations have been selling on less than 7% cap rates.

Product mix:

Historically, all types of facilities have been built. Our experience leads us to suggest a menu of
services including multiple sizes of units, both climate and non-climate controlled units and
depending on location, other services such as office, fur or wine storage. On the lower end, we
can also build in phases with later phases utilized initially for open or carport type storage of RVs
and boats. Direct driveway access draws a large premium on many sites.

Sites may range from 1.5 acres to above 5 acres. By going multi story, even the 1.5 acre sites may
produce 90,000 square feet of rentable space. Many larger sites may be either a large single
building with various components or multiple smaller buildings. Some of the large independents
will usually do a series of 1 story buildings with at least 1 multiple story building for visibility.

Locations:

Locations need to be high traffic, high visibility and densely populated in the immediate vicinity.
Easy access is of course highly desirable. The lower the household income in an area, the lower
demand for storage. Conversely, the higher the income the heavier the demand for storage.

High producing locations are usually well appointed, well maintained and landscaped. Many
jurisdictions may require specific exterior treatments.

The average American man buys clothes approximately once annually. Men’s clothing stores are
almost always in high traffic, high visibility mall or mall pad type locations. Self-storage users turn
over in many markets on average in less than a year. If the men’s clothiers demand high visibility,
high traffic locations, the successful self-storage operator must also.

Barriers To Entry:

Although the market is very receptive to the product, many of the higher end suburbs tend to
resist storage facilities through zoning. The product itself can be physically appealing but many
jurisdictions see them as not as productive on commercially zoned land. Added to this mix is the
relatively low amount of sales tax generated to the jurisdictions as compared to retail, restaurant
or fast food on a square foot basis.

There are few barriers financially to the marketplace as storage is well accepted as a cash
generating business. This coupled with available exit strategies make self-storage easy to finance.

Copyright: Custom Private Equity, Abilene, Texas 325-665-7818

Management:

The larger independent as well as the REIT owned facilities typically employee a layered
management approach. An on-site manager or management couple may live at the facility. A
regional supervisor, depending on the skill set of the regional as well as the on-site personnel,
may easily handle 5 to 20 facilities. Some regional personnel actually handle more.

Centralized billing is essential for control.

Website quality and internet visibility are as essential as a quality physical location. Marketing
during ramp-up is required.

Hours of operation can also be a contributing factor. Many small operators may be completely
closed 1 or more days a week. If you have a management team or couple, it will allow each facility
to be open parts of 7 days a week.

Products such as packing boxes and other items required or needed in moving are a good revenue
center. They also may serve to introduce the customer to a particular facility.

Design & Construction:

Again product mix and quality of appearance are essential. Construction should be quality, with
concrete drives which drain well. Customer convenience and safety should be the cornerstone of
each project.

Firewalls or sprinkler fire suppression systems are required in most jurisdictions. Insurance rates
may be effected by choices made for fire prevention.

Most facilities are metal frame construction. Some visible buildings may have additional
treatments for aesthetics or requirements from local jurisdictions. Since you are actually renting
empty space, appearance, safety, cleanliness, well maintained facilities and friendly, convenient
staff are a must.

If sites can be acquired at preferred locations without on-site storm water detention, it is a plus.
Storm water detention facilities may be unsightly and require a modicum of maintenance.

Not all architects, engineers and other development professionals are created equal. We use
experienced professionals in the self-storage industry in each discipline. Our contractors are
professionals in the marketplace with experience in designing and building multiple facilities.

Operating and Exit:

Size matters. The bigger the number of facilities leads to both operating efficiencies as well as
stronger wholesale buying power. For the non REIT operators, 15 facilities is considered a large
operator. This will open doors for the REITs to pursue a purchase at very low cap rates as it gives
them the opportunity to gain critical mass with fewer purchases.

Conclusion:

Well placed Self-storage facilities will generate excellent financial returns with safety of capital.
A well-capitalized, well managed organization can carve a strong niche in today’s marketplace.
There is elasticity in new markets as populations spread and create new urban and suburban
centers. This asset class is executable with a good developer and readily marketable.