elf-storage has become the darling of the real estate industry over the last several years. Articles espousing the virtues of the business (limited capital expenditures and few, if any, employees) and phrases like, “recession proof” and “anyone can do it,” have driven the feeding frenzy in our business. As a veteran of the industry, I can tell you with confidence that none of those ideas are true. There are shades of truth to each of them, but anyone who’s been an operator or investor in this business over the long term knows the fallacies of those statements. In this section, we will delve into the reasons why management companies are (mostly) essential, the critical role of an on-site manager, and the steps to take when opening a new storage facility. We will also explore how changing technology is making it increasingly challenging for small operators to compete with larger, tech-savvy players.

Analysts on Wall Street constantly speak about the fragmentation in the storage industry as one of the attributes that make it ripe for sophisticated investors to be successful. While still true that about 50 percent of the industry is owned by small operators, that number has been decreasing over the last decade. Small, medium, and large companies continue to be bought out, with the biggest example being Extra Space’s acquisition of Life Storage. In addition to ownership, the third-party management offered by almost every large public and private company puts even more control in the hands of the biggest companies. My bet is that storage is moving in a similar direction as the hotel industry. There used to be hundreds of brands and now there are three: Marriott, Hilton, and Hyatt.

In addition to the consolidation in the industry, institutional capital has been flooding the space. The pandemic changed the real estate landscape. Hotel and retail have gone in and out of style over the last four years and office has a long road before it comes back in vogue. This void, along with the best-in-class returns in self-storage over the last 30 years, has pushed many of these investors into storage with or without expertise. This influx of capital has caused a boom in supply that has driven up competition and driven down rents in many markets. The REITs’ willingness to manage for these investors has given them confidence that their choice in market and/or location is a good one. I would implore anyone building storage to consult an expert, do a feasibility study, and really do homework before building a new facility. For my company’s design/build/manage program, I hear too often that people want to build storage just because they can, not because it’s a good idea.

The other transformation happening right now is being driven by the ever-evolving landscape of technology. Before the pandemic, only private operators rented storage units online, along with one REIT. The other REITs said they would “never” do it. Lo and behold, 20 to 40 percent of leases are now signed online for sophisticated operators. Sixty percent of tenants used to find facilities with drive-bys. Now 60 percent of tenants find us through online channels, with Google being the largest funnel. The rise of technology has allowed for unmanned stores, sophisticated minute-by-minute rate changes, real-time understanding of demand and competitor changes, ability to monitor and listen to every phone call, use of business intelligence (BI) software to understand performance in real-time, etc. In addition, most companies are starting to use AI for a plethora of tasks that I’m sure will be fleshed out in ways we can’t even imagine yet today.

Before deciding whether to hire a third-party management company, it’s important to understand what it takes to run a successful facility.

This is about as basic as it comes, but paying vendors, taxes, and lenders will keep the doors at the property open, along with the ability to collect rent every month. Also, having correct, comprehensive reporting is essential to making good business decisions (plus staying in good standing with the IRS). Along with balance sheets, income statements, and statement of cash flows, a good reporting package should include property reports specific to the needs of an owner.

While many would lump this in with accounting, I believe this is a separate endeavor. A good budget should be a meeting of the minds between operations, accounting, and capital markets. Having an achievable, realistic budget is the ideal, but we like to make it slightly aspirational as well. Without a budget like this, it is hard to measure whether the property is performing up to its expectations.

Self-storage-specific software along with the know how to use it to its full potential is vital to running a successful facility.

A functional, easy-to-use, comprehensive website is probably the most important marketing tool available today. Gone are the days where the Yellow Pages and drive-bys dominate the marketing. Effective search engine optimization (SEO) for organic rentals and a strategic pay-per-click (PPC) campaign will yield a sizable percentage of new tenants. Many of these people will visit your website or Google My Business (GMB) page before calling or visiting, but almost all new tenants touch your property virtually before renting or reserving a unit. Renting and paying online are essential components to any website.

While the website, along with SEO, PPC, and GMB, are the primary marketing tools today, there are many other effective avenues: social media, referrals, local partnerships, etc. Each property is its own animal, so figure out what’s going to work best.

There are many different effective strategies for managing street rates and rental rate increases. Being mindful of the market, competitors, and individual tenant needs will determine the best way to go about this. There are tons of software solutions, but this can also be done manually.

There’s an old saying in our business that a C property with an A manager is an A property and an A property with a C manager is a C property. Even if a property is unmanned, the same rule applies, as the signage, kiosk, call center, maintenance staff, and district manager will be the make or break for that property. For traditionally run stores, hiring, training, and keeping staff is one of the most challenging components to the business.

People who don’t drive trucks regularly are pretty good at hitting buildings, gates, and anything else when they rent a U-Haul truck for their move. Fixing things, along with landscaping, snowplowing, salting, elevator maintenance, camera maintenance, etc., are all huge components of the day-to-day operations of a storage project—not to mention constructing the facilities or expanding them.

Lien laws differ from state to state and are extremely important. Following guidelines to the letter of the law is necessary to avoid liability.

Speaking of liability, property-level insurance will be a requisite for any lender and a smart thing to have in general. It is getting more and more difficult to procure at a reasonable price, especially if a facility is in a place prone to natural disasters.

Over the last 15 years, this has become commonplace at storage facilities. Property-level insurance doesn’t insure the contents of a unit, so this is “renter’s insurance” for storage tenants. It can also be a revenue driver.

Call Center, Autopay, Reputation Management, Operational Goals, Procedures, etc.

The list goes on about how to run an effective and profitable storage facility. These last few things could be viewed as “optional,” but I would argue that they could be the difference between great results and mediocre ones.

There are a lot of successfully run “mom-and-pop” storage facilities around the country. Many do all the items mentioned above, and some do almost none to varying success. I’ve evaluated hundreds of storage facilities over the years and at least nine out of 10 times I salivate at the prospect of taking over a “mom-and-pop” property. In general, I know how much money they’re leaving on the table and how quickly I can get in there for a real pop in net operating income (NOI). Every once in a while, though, I do encounter a property where I know that they’re maximizing NOI or doing something very specific that I can’t replicate.

You’re probably thinking that if 90-plus percent of small operators are leaving money on the table, then why don’t they hire a third-party operator? In my experience, there are three main reasons: control, expenses, and big aspirations.

Building or acquiring a storage facility takes a ton of hard work and, in many cases, several years. Giving up operational control of your “baby” is very difficult for many people. They don’t trust others to care as much as they do about the property and can’t imagine giving up the day-to-day operations.

Third-party managers don’t run properties out of the goodness of their hearts! The fee is usually 6 percent of revenue, along with an increased expense load. Many of the services above come at a cost of call it $100 to 300 per month. That can add up quickly at a small property!

What I mean by this is that many people who have one property today believe that they’ll have 10 sooner than later. They know that it’s pretty inefficient to run one store, but they believe that the other nine are coming down the pipe quickly.

For the people who subscribe to bucket No. 1, it is hard to convince them to hire a third-party management company, although it would probably benefit them in the long run. For the people in the second bucket, what I generally say to those folks is that most third-party operators generate +/- 10 percent of revenue in “other income,” which more than covers the fees and those other costs. Those other income items come before revenue management and economies of scale on other expense items, which is where third-party managers really add value. For the person in bucket No. 3, this is the one that I would subscribe to if I was just starting out. That being said, you can hire a third-party manager until you get the scale to operate on your own and get a free education along the way while you focus on building the portfolio.

These three reasons that folks don’t hire third-party management companies should illustrate that logically it makes sense to hire a third-party manager. Organizing all the day-to-day aspects of running a facility is a challenge, and it takes every one of the items I listed to have a successful storage facility. A property with too few or poor Google reviews all of a sudden won’t be on the front page of organic results. A wrongful auction could put the owner in months of legal hell. The consolidation of the industry has also made it almost impossible to compete in many markets if you don’t have scale. A one-off property in a big market can be effectively invisible online without a huge budget behind it.

Operating a one-off store creates more work, more risk, and nine out of 10 times makes less money than hiring a management company. As far as I’m concerned, it seems like a no-brainer.

Not all third-party management companies are created equal. In some markets it makes sense to hire one of the REITs; in other markets a large or small regional player might be the best bet. Some companies specialize in small, unmanned facilities, while others thrive with big properties in urban areas. Some companies run every store the exact same way, and others customize their management style to that specific owner and property. If you’re in the market for a management company, do your due diligence and interview several different players. If you’re not sure, you can even hire a consultant to help you make the right decision.

I’m clearly biased as the owner of a management company as to what benefits can be provided, but ultimately what it comes down to is that running a storage facility to its full potential is really, really hard. Why deal with the hassle? Don’t you have better things to do than talk to the fire department at midnight when someone gets locked in behind the gate? If someone else is realistically going to make more money for you than you running your storage facility, shouldn’t you let them do that so you can focus on whatever it is that you’re really good at?

The self-storage business is changing quickly. To stay on top of new technologies, latest trends in revenue management, pay-per-click strategies, and the general movement in micro and macro markets is grueling. Big storage companies have the resources to stay on top of these changes, read the articles, go to the conferences, and maintain relationships with others to hear and understand the challenges they’re facing. Adapting to the world as it changes is what good companies do, and if you hire the right management company, it’ll pay dividends for you both in saved time and money.