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Key Takeaways:
- While hundreds of industrial warehouses and big box retail stories have been converted to self-storage spaces over the past three years, former department store sites are poised to have a much bigger role in these conversions.
- The latest driver of self-storage use is the red-hot housing market, creating demand from both buyers and sellers.
- Consumers are more likely to view self-storage as an extension of their home, which means a need for more frequent access.
Self-storage facilities are getting a design and function makeover. Once largely consigned to industrial zones, today’s new sites seek high-visibility locations in commercial retail centers adjacent to residential neighborhoods with new, tech-enabled amenities to meet consumer demand. Helping to advance this trend is the growing number of vacant large retail outlets available for adaptive reuse, including mall anchor stores like Sears and Macy’s. Self-storage is among the business types eyeing these properties for innovative uses, joining recreation centers, medical facilities, and libraries, among others.
While hundreds of industrial warehouses and big box retail stores have been converted to self-storage spaces over the past three years, former department store sites are poised to have a much more significant place in these conversions, compared to the dozen that have reportedly been transformed for self-storage since 2018, according to Yardi Matrix. Driving the change is the prediction that more than 50% of U.S. malls anchored by department stores could close permanently by the end of 2021, according to Green Street, a commercial real estate advisory firm.
Existing mall retail space is attractive for self-storage conversion, says Barry Johnson, CCIM, vice president of investments for Fairway America, a private equity and advisory firm specializing in commercial real estate asset-based investments. “Beyond the fact that retrofitting is less costly than building new space, mall anchor stores are often two-story and come with loading docks and freight elevators that allow operators to maximize their use of the space. Existing HVAC systems support a climate-controlled environment, which is an essential feature for many consumers and may allow for premium pricing by owners.”
Johnson warns, however, that retail-to-self-storage conversions often face pushback from municipalities, and zoning approvals can be hard to secure. While the payoff can be significant for developers, investors, and brokers who benefit from a high-visibility infill conversion, real estate professionals must overcome objections associated with a loss of retail tax revenue and outdated perceptions of what self-storage looks like.
Retail-to-self-storage conversions are a boon for consumers. Convenient locations and ease of access make them attractive. Among the demand drivers are downsizing baby boomers reluctant to part with their possessions and, more recently, remote workers needing to clear space for home offices. But perhaps the most enduring shift fueling growth pertains to consumer mindset: People are more likely to view self-storage as an extension of their home, which means a need for more frequent access. In the industry, this is referred to as “lifestyle storage.”
Beyond convenience, consumers value the clean, secure, climate-controlled environment retail conversions provide, even if their desire for storage isn’t related to a lack of space at home. Retired broker and developer Chet Snavely of Gulf Stream, Fla., uses his storage unit as a wine cellar, taking advantage of the climate control feature.
Housing Market Driver
The latest driver of self-storage use is the red-hot housing market, creating demand from both buyers and sellers. The high cost of housing means that many buyers—including millennials, who represent the largest share of home buyers according to NAR research—are opting for smaller homes. Add to this that younger generations prefer to spend their money on “experiences,” many of which require the storage of items such as bicycles, camping gear, and jet skis.
Alternatively, sellers may use self-storage to help manage a move that can’t be timed with the sale of their home. “Homes are selling quickly, with buyers wanting to close within 30 to 40 days, forcing sellers to vacate the space before their scheduled move into a new home,” says Bill Gassett, a real estate blogger and sales associate with RE/MAX Executive Realty in Hopkinton, Mass. “Most agents understand that making a ‘double move’ is one of the least desirable aspects of selling a home, but in a hot market, a layover between the sale and the permanent move can’t always be avoided.”
Existing mall retail space is attractive for self-storage conversion.
Self-storage costs vary, based on size, availability, and amenities. Prices for a standard-sized unit may range from $60 to $180 per month. Add 25% to 50% for climate-controlled units. As most self-storage contracts run month-to-month with automated electronic payments, “owners can increase rents by as much as 10% to 15%, often multiple times a year, and receive limited pushback from renters,” says Johnson. For those who plan to use a storage unit for an extended period, Gassett recommends asking for a discounted rate.
Aside from basics such as price and location when comparing local storage facilities, Gassett points out other important considerations including lighting (especially for nighttime access), electricity (to keep stored items charged), and access (drive-up versus loading carts). “Self-storage isn’t cheap, so it makes sense to perform some due diligence. A listing agent who can assist with this process provides a real value-add,” says Gassett.
Sellers also rent storage units to store excess furniture and clutter before having the home photographed and staged by a listing agent. “Even in a market where homes sell within just days of being listed, staging is still important to get the maximum price,” says Bette McTamney, associate broker with RE/MAX 440 in southeast Pennsylvania. “In my market, a clutter-free home can mean a difference of $20,000 to $30,000 on a $400,000 home.” In a 2021 NAR survey of buyer’s agents, 23% said staging a home increased the dollar value offered between 1% and 5%, compared with similar homes on the market that were not staged, and 18% said staging increased the dollar value between 6% and 10%.
McTamney advises leaving items in storage until all sale contingencies have been addressed—including the appraisal. “The house should look the same for the appraisal as it did when listed. Appraisers are like buyers. If there is a lot of junk lying around, it can affect your appraisal.” For sellers who ask about setting up a storage pod at a property, McTamney says “absolutely not” unless they plan to locate it elsewhere. “A pod detracts from the appearance of the home.”
Storage for Stagers
Self-storage units are a useful resource for real estate professionals who stage homes. Debra Grant, owner of Show To Sell Homes in Westport, Conn., consistently rented as many as 15 self-storage units to support her company’s home staging activities until leasing a warehouse proved to be more cost-effective. Multiple units allowed her to store staging supplies by category. “I’d use one unit for sofas, one unit for beds, and so forth,” says Grant.
Pods may have a helpful role when a listing is being staged, Grant offers them as a service to her clients as they prepare to move. “My team will put a pod at the property and load items removed from the house as part of the staging process. The pod is then sent to the new home or moved into storage until the owner is ready to accept it.” This is especially helpful in a market where storage options are limited and homes sell quickly. “I tell my sellers, ‘Locate your storage space in advance to make sure you have a unit, because you may get a cash buyer who wants to close in 30 days,’” Grant says. While clients pay for the cost of the pod and its transport or storage, Grant doesn’t charge for the labor and time spent packing and loading it.
Grant offers valuable lessons about the need for climate control and strong security when using self-storage. “When you’re storing furnishings—especially rugs—you don’t want to attract moths or other insects,” says Grant. “A good HVAC system will minimize the chance of mold or dryness, which can damage furnishings.” Real estate agents can’t always control when they will need to access storage, so a facility that is open seven days a week with evening hours is essential, but you want to feel safe, Grant advises checking for lighting, cameras, and other security features—particularly with contact-free storage.
A less obvious consideration is the layout of the facility. “If you’re storing large furniture for staging, look at the hallway design and ask yourself how easy it will be to move, especially if you’re on your own,” advises Grant. “Maze-like layouts can be challenging.” Insurance is another factor many agents overlook. “One of my first leased units was next to a creek,” says Grant. “I didn’t know the facility didn’t have flood insurance or that I needed my own coverage.” An overflowing creek left Grant with 20 sopping wet Asian-style rugs. “Check your business policy to see what’s covered.”
An App for That
Like other industries, modern self-storage is tech-based. Industry group Inside Self Storage advises that to stay competitive, self-storage operators need to embrace the technology that consumers demand. This means using an app to enable contact-free rental, access, and payment. While these features were available before the pandemic, they’ve become much more popular over the past year.
Remote monitoring and biometric security are among the newest features available in self-storage facilities. Remote monitoring allows users to monitor and track unit temperature and humidity to protect environmentally sensitive items such as antiques or documents. The system also detects water or motion, triggering a text, email, or voice alert. Biometric technology uses the owner’s unique characteristics, such as voice patterns, fingerprints, or retinas for top-level security. Companies such as Innuvo, which offers audio/video, security, and networking services for residential and commercial estate, use facial recognition technology that gauges unique facial measurements and characteristics. The data is then scanned and matched with customer records.
Whether using self-storage to support home staging activities or guiding clients on choosing a storage facility to meet their needs, real estate professionals have significantly more and better options than in the past—thanks in part to retail conversions. These modern self-storage facilities provide easy-access locations with technology-supported amenities that offer secure and proper storage of items, over the short or long terms.
Self-Storage: A Draw for Investors
Inside Self Storage, a self-storage industry group, reports continuing acquisitions and strong investor interest. Despite last year’s economic disruptions, self-storage sales totaled $7.7 billion in 2020, up by a third from 2019 levels, according to Real Capital Analytics. Large self-storage REITs, such as Public Storage and CubeSmart, account for only about 20% of the market. The other 80% of facilities are owned and operated by individual investors, including mom-and-pop owners.
A space conversion project may make the most sense for local buyers. For brokers willing to work with an owner to address zoning challenges, conversions can deliver high returns because the properties can often be converted for a fraction of new from-the-ground-up construction costs. “Once there is a clear path for redevelopment, you’ll see that reflected in the price,” says Fairway America’s Barry Johnson. Regardless, projects already zoned for self-storage are attractive to buyers. Such was the case with the Bon-Ton department store conversion in York, Pa., that Blaze Cambruzzi, with TRUE Commercial Real Estate in Lancaster, Pa., settled in April. “Once the zoning text amendment was in place, we received seven letters of intent within 60 days, adding to a buyer already at the table,” he says.
For the investor-owner, the self-storage sector is strong. Yardi Matrix reports positive street-rate rental performance in 87% of the markets tracked. Top markets include San Francisco and East Bay; the Inland Empire (Calif.); Washington, D.C.; San Jose, Calif.; Phoenix; and Miami. Some of the 2021 growth is attributed to the pandemic—such as college students returning home and needing to clear out dorms, workers carving out space for home offices, and restaurants storing unused furniture to accommodate social distancing—but the American appetite for acquiring “stuff,” combined with smaller homes, suggests this sector will continue to perform well.
Adding to the strength of the self-storage sector is consumers’ tolerance for rent increases. “Rates will be comparable elsewhere, so there’s no incentive to move, especially given the time and effort involved,” Cambruzzi says. “Self-storage provides a level of inflation protection other commercial real estate investments lack.”
