GETTING TO KNOW YOU

MAYBE THE SINGLE MOST IMPORTANT THING YOU CAN DO 

TO KEEP YOUR PROJECT COMPETIVE!

By Michael L. McCune

   This is likely to be the most controversial article that we have ever published in these pages, but it is also an issue that we feel very strongly about. I have spent a lot of ink and sweat talking about overbuilding in our industry in the past, with articles about what it is, it's causes, how to recognize it, determining a selling price when it happens, and what you can do to make your facility more competitive. However, there is one very simple thing that can be done to help preserve your competitive position.

In most real estate sub-categories (i.e. apartments, offices, etc.) there is usually very detailed information available about the amount of space, current rental rates and vacancies that exist in the market place. The information is usually "sliced and diced" in every conceivable way to let users, lenders and investors have a clear perspective on the market. The information relates to national, regional, local and, in many cases sub-markets.

   As an example, in most cities hotel owners take this a step further, by having an independent third party collect, collate, and redistribute this kind of information to interested parties. Using a third party keeps the individual property information private and avoids the question of price fixing. Typically they show average occupancies and rate ranges by type of property and other related information. This information is generally available to lenders, appraisers and investors. The same kind of information is generally available for other types of real estate as well.

  In the self-storage industry about the only information source that attempts to provide such information is The Self-Storage Almanac. Even to this, we advise our clients to not rely on this information as the sole source in building a feasibility study. The principle reason for this lack of useful information is that the self-storage industry is relatively new and that there are not enough diverse national companies that currently require the information as in other sub-categories.

   As you sit in the suburbs of a large metropolitan city minding your store, you may say "So what if the information is nonexistent or not much good". Let's spend a minute or two thinking about what our worst nightmare is in this business. That nightmare takes form when the grading starts for a new project of 75,000 feet, two blocks away, when your (and your competitor's) occupancies are at 78% and you are giving away the first month's rent and the kitchen sink. About this time the new owner appears in your office and tells you how excited he is to be in self-storage and that this is the first of what he hopes will be many more projects.

   Clearly, your new competitor didn't have the right information on this market - and neither did his lender! Guess who is going to help these two pay for their mistake? When he realizes that this wasn't such a good idea and he decides that the only way he can compete is to cut rates to lease up, it will really cause everyone to suffer.

    You can not keep people from doing dumb things, but on the other hand you don't have to help them either. What might have helped in this situation is that when this newcomer inquired as to the occupancy and the rates in your project, (Don't fool yourself! Your new friend, in one fashion or another, did this at some point) is if he had gotten straight answers. Even if this information might not have had an impact on his decision, it might have caused his lender to pause.

   The downside of this strategy is that when the information is quite positive, it may help to encourage someone to build. Yet, not having this information hasn't seemed to stop many builders either. With this knowledge, builders can be more selective of the sites they choose. On balance it is probably better to stop an ill-conceived project in a falling market and aid a project in the good times.

   Unfortunately, there is currently no mechanism in our industry that collects the necessary information, processes it and then makes the appropriate distribution. Thus, it is up to the individual owner to decide what approach is best in his own situation and to provide the information that he feels appropriate. It is our strong belief that the more accurate information that is available in the market place the fewer "dumb" mistakes that will be made simply because informed investors make better decisions.

    Over the next few weeks I am going to be visiting with several industry leaders to see if there is some way that an effective mechanism can be devised to simply and effectively improve the level and accuracy of information in our business. The need for better information is well established. If we are to take our place as a "respected" member of the real estate community, we must provide this information to not only ourselves, but to lenders, investors, Wall Street, appraisers and other interested parties. Because better information helps reduce the risk of being involved in self-storage, values will tend to rise with the improvement in information availability and quality. In summary, it is a lot better for a potential competitor to find out about your vacancies before he builds. By being sure that he has the right information you can save you a lot of grief. Having this kind of information available can also help in maintaining pricing levels because operators will not be as likely to become panicked or greedy in their pricing.