The Power of Technology in the Self Storage Business
- Mar 13, 2020
Whether self storage can be a viable business is no longer a question. The sector has become highly competitive and experienced a record-high number of completions in the past couple of years, pushing the business into the spotlight. Although knowing a market and carefully planning where to invest or build is imperative, a successful storage business requires an even more solid recipe. In today’s competitive environment, investing in new technologies is also a must.
Commercial Property Executive talked with Brad Minsley, co-founder of 10 Federal, a commercial real estate company that uses technology to create unmanned, autonomous facilities. The firm operates 50 facilities in 12 states. In the interview below, Minsley provided his insights on how technology can turn self storage into a more efficient business and revealed his predictions on where the sector is heading.
10 Federal launched its Self Storage Acquisition Fund in 2017. What were your expectations back then and how do you see the business now?
Minsley: By 2017, we had developed a good working method to run self storage facilities on an unmanned, automated basis and that first fund is having success. However, as we added stores, we discovered many new challenges that come with scaling the model. These primarily pertain to two areas.
The first is to develop methods to monitor key performance indicators, ranging from whether the vehicle gate is working, to tracking whether a property is getting enough leasing traffic and converting that traffic to leases at an appropriate rate. These methods need to monitor the key performance indicators and notify us of exceptions, as there are too many things to keep an eye on manually.
The second challenge is to render out maximum efficiency of our operations. We have been laser-focused on developing methods to allow our team to manage more stores per person and we have made tremendous headway on that front.
What strategy do you use when choosing a market to invest in?
Minsley: We only operate in markets that are growing—it doesn’t matter how much value you can add if the ground is falling out from beneath you. We are typically in the smaller markets in proximity to the top 100 metropolitan statistical areas. This mostly has to do with our exit strategy as most of our buyers are 1031 exchange investors and they seem to favor metropolitan areas. That said, the key to our model is to buy facilities that are not operating to their full potential and to use technology to improve their performance. This method is agnostic to market size, it could work in Paris, France, just as well as it could work in Paris, Tenn.
What type of assets are you looking for?
Minsley: We do a lot of multivariable regression analysis to refine a model that ‘scores’ the extent that a property is underperforming its real potential. So, ultimately, the asset could be of any age, size or configuration. Typically, though, if the deals are smaller, that translates to less revenue to support upgrades such as a full-time manager or tech investment. However, there is a good chance that if the deal is under 40,000 square feet and still advertising in the yellow pages, the asset is still a good candidate.
What benefits does automation bring to the business?
Minsley: People sort of jump to the conclusion that the goal of technology is to convert a facility to ‘unmanned’ operations. Technology is more about efficiency. There is just as much opportunity to improve the bottom line whether 10 Federal buys small stores and initiates online leasing, as it is if the public REITs leverage technology to reduce personnel from 2.6 to 2.2 employees per store. If technology can increase the productivity per employee and, at the same time, improve the customer experience, then you’re going to have a winning recipe.
What kind of technologies are popular in the self storage industry today? Is there anything your are working on?
Minsley: It is a crazy exciting time to be in self storage! In the last five years, we have seen the creation of cloud-based management software, various controlled-access systems, AI cameras, robots, ever-advancing kiosk technology, online auctions and ever-evolving systems to monitor the facilities. In five more years, we will see pricing algorithms, universally adopted online leasing, impressive gains in the data science area and who knows what else, which is the most exciting part.
Those who are early adopters of these technologies will have an edge over their competitors. At last count, we had 16 different technologies we were working on. Some we have released to the industry such as the DaVinci Lock. Others are simpler pieces of software that let us do things like analyze a property’s entire rent roll down to the individual unit level and use it in various ways to very precisely plan rent increases and forecast resulting revenue gains.
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What are the costs of implementing new technologies in self storage?
Minsley: Well, it can be from mild to wild. Some things are free. For example, every operator should claim their Google MyBusiness page and fill out the info. It costs nothing to do it and will immediately make you more relevant in Google search. My recommendation is to immerse yourself in the technologies—the trade shows are a fantastic way to do this, but before you take the plunge on new technology, my advice is to talk to people who are using it and make sure it is providing them a positive return on investment.
How do you see self storage technologies evolving?
Minsley: My brother and business partner, Cliff, has two cars: an old Bronco and a Tesla. One barely has any electronics and the other has 1,000 times more computing power than the first rocket to land on the moon. Storage is going to make that transition over the years to come. Facilities will be coming ‘alive’ by automating the following processes: the leasing/move-in, pricing rents, monitoring HVAC systems, control of security/controlled access systems and by implementing other technologies to improve underwriting, tracking supply and forecasting performance. Together, these technologies will improve the customer experience, increase the profitability of the industry and help the industry make better decisions about where and when to build which, in turn, will help moderate, and possibly avoid, overbuilding in certain areas.
Tell us about your predictions for the self storage business going forward.
Minsley: I see the industry as having gone through three ‘evolutions’ so far. The first occurred in the 1970s and saw self storage as a covered land play until people recognized it as a viable business. The second evolution came in the 1990s when the industry discovered that spending 10 percent more on a building to make it climate-controlled could result in 25 percent higher rents. Since then, everything has been predominantly built as climate-controlled. The third evolution started around 2010 when the industry realized that renters in the top 50 metros would be willing to drag their stuff up three floors in an elevator. As a result, this last cycle has seen a gazillion multi-story deals get built.
I see the fourth evolution as the consolidation of the smaller stores in the smaller markets by the big operators. Self storage is the only major real estate sector where more than 70 percent of the stores are still owned by mom-and-pops. In comparison, more than 70 percent of the multifamily deals in the country are owned by institutions, private equities and REITs. Self storage is a giant and the world is not going to let an industry this large and valuable stay in the hands of mom-and-pops. Technology is the key for big organizations to roll these smaller stores up and, until recently, this option did not exist.