www.insideselfstorage.com INSIDE: • Rebooting in Asia • Building in the Philippines • Growing in Australasia • Maturing in Europe • Fostering in Finland • Breaking ground in Germany • Building up in Latin America INTERNATIONAL • Weighing risk in Canada APPLYING INDUSTRY FUNDAMENTALS TO THE GLOBAL MARKET Storage operators worldwide compare their challenges, victories and goals

EXPAND YOUR KNOWLEDGE Learn what you need to be successful in any global self-storage market. Fall 2017 $15.00 US www.iss-store.com

INSIDE SELF-STORAGE INTERNATIONAL I FALL 2017

FEATURES 4 The Storage Industry Surges Ahead 21 Demand on the Rise in Finland Development is surging as major population centers Although the Finnish self-storage market is still relatively continue to embrace the product and institutional new, the demand for the service is great. Cityvarasto, funding looks for scalable development partners. the country’s largest operator, is leading the way for Here’s global view of industry trends, awareness industry growth. and transactions. By Ville Stenroos By David Blum 23 Embracing Mixed-Use Development 7 The Sun Shines on Asia in Scotland A year after a fatal fire at a facility in Hong Kong, the When Storage Vault set out to build its second property, industry is starting over. Operators and investors are the company first examined the needs of its customer optimistic about growth and the opportunity to build a base. What it discovered would take the growing sustainable business platform. company down a new path. By Luigi La Tona By Amy Campbell 9 Building an Empire in the Philippines 24 An American Builds in Germany Howard Sy eschewed the family shoe business to build The market remains largely untapped and ripe for his own self-storage empire. In this interview, he offers investors. An American discusses his foray into the insight to his decision, the challenges he’s faced and market, and the challenges he faced building three plans for the future. All Seasons facilities. By ISS Staff By Todd van Steenwyk

12 Driving Growth in Australasia 26 Building Up in Latin America Australasia is the third-largest self-storage market In many international markets, the momentum globally. Read what’s driving demand in this region as for storage is going in one direction—up! Here are well as industry growth and market awareness. some factors behind multi-story development in By Makala Ffrench Castelli Latin America. By Peter Frayser 15 Is Overbuilding Imminent in Australia? 28 A Customized Business Model Despite high property prices, new projects continue to in Colombia spring up. The article questions whether overbuilding A Colombian operator is following the U.S. business is on the horizon and offers a performance overview of model but customizing it to fit consumer preferences. existing operations. Learn how this approach has allowed Bodehogar By Sam Kennard Storage to grow to five facilities. By Carlos Cardona 18 Giba Goes Green Giba Storage has grown aggressively to keep pace 29 The Canadian Growth Surge with the demand in Westmead, South Africa. Now the Canada is experiencing a real estate boom, and operator is meeting yet another need—clean energy— the country’s self-storage sector is no exception. with the addition of solar panels. However, new investors and developers face significant By Amy Campbell obstacles to entry. By H. Michael Schwartz 19 Challenges for the Maturing European Market 31 Weighing Risk vs. Reward in Canada As the market matures, it faces several trials. The While the market is healthy, some owners may be CEO of the Federation of European Self Storage jeopardizing their investment by overleveraging their Associations explores the impact of language barriers, properties. Follow this advice to stay in the black. land scarcity and more. By Michael Foy and Jaimie Walker By Rennie Schafer 33 CONTACTS

ISS I 2017 International 3 www.insideselfstorage.com THE STORAGE INDUSTRY SURGES AHEAD A global perspective of trends, awareness and transactions

By David Blum

nternational self-storage development is surging as major Here’s another example: While year-over-year growth estimates population centers continue to embrace the product and in Mainland China for 2015-2016 show a 52 percent increase, that Iinstitutional funding looks for scalable development partners. may be only 75 additional facilities. However, the market appears to Across the globe, hot spots are emerging, and professionally be increasing at a faster pace each year. managed platforms are looking to expand. In addition, increasingly Though international development projections are low compared good industry data is becoming available, and better and more to the 600 to 1,200 new facilities projected to open in the U.S. in accurate information can be generated on these relatively the next few years, what stands out is the overall potential of these young markets. emerging markets. For example, it’s estimated there are 550 to 600 Following is an overview of global self-storage trends. I’ll storage facilities in all Latin America, which is roughly the same also discuss changes in industry awareness some of the major number of facilities in the Atlanta self-storage market. However, the transactions leading market expansion. total population in Latin America is more than 647 million compared to Atlanta’s 5.49 million. Following Industry Trends This type of potential is consistent in almost all markets around I’ve worked in the international self-storage market since 2004. the world. It’s generally understood that self-storage demand In that time, I’ve witnessed many cycles and trends. Though there’s metrics are different outside the U.S.; however, even if you more data available, when it comes to analyzing it, I can’t advise extrapolate generally accepted analytics (i.e., a target audience of enough caution. 20 percent of the population and an equilibrium of only 2 square For example, at one point, the Brazilian self-storage industry feet per person), the capacity is still huge. grew 100 percent in a short six- to seven-year period; however, that The metrics also change as industry awareness increases. For amounted to only an additional 100 facilities. Today, that growth is example, Mexico now has had a robust development cycle. The continuing at a fast pace of 25 to 30 new properties a year. estimates are that the country’s target audience for storage is now 30 percent, with a demand equilibrium of 3 square feet per person.

Spreading the Word One of the things that is clearly helping to spread industry awareness and spur development is the rising occurrence of international self-storage events. For example: • In October, the Federation of European Self-Storage Associations will host its annual tradeshow, this year in Berlin. Last year’s record-setting event in Barcelona, Spain, clearly reflects the growing interest in this segment. • In May 2018, the Self-Storage Association of Asia will host its fifth annual conference, in Bangkok. • The third annual LanAm Expo, designed for the Latin American market, will be held at the end of April in Miami. • The association for the Australia and New Zealand market alternates each year between hosting an owner’s summit and a tradeshow. Another key factor is industry reporting. For example, JLL Capital Markets compiles and distributes an extensive report focusing on the industry throughout Europe. In Asia, Ipsos Business Consulting surveys and produced statistics on that Goldman Sachs invested $200 million market. Colliers International has begun gathering and presenting to fund MetroFit’s expansion in Brazil. data for Latin America.

ISS I 2017 International 4 www.insideselfstorage.com Fremont Reality Capital recently purchased the Bluespace brand, which includes 30 facilities in Spain.

The reports show consumer awareness is growing, and global Storage Facilities Worldwide investors see huge growth potential. However, there are still many challenges. For example, government regulatory issues persist. In 2015, it was estimated that there were approximately There’s still a basic lack of awareness of just what our industry 2,600 self-storage facilities throughout Europe, comprising is and how local laws should be applied. So, while awareness is approximately 7.5 million square meters of space. The rising, much work still needs to be done. majority of those facilities were in the United Kingdom.

Watching Some Major Players United Kingdom Though there’s a willingness of major investment firms to partner on self-storage projects, a shortage of qualified platforms hampers France expansion. Several transactions over the past few years exemplify this need. Here are just a few recent transactions: • Goldman Sachs invested almost $200 million in MetroFit’s expansion in Brazil. 39.4% • Fremont Reality Capital purchased Bluespace in Spain and made a major investment in MyPlace Self Storage in Germany. • Calzada Capital Partners LLC acquired Aki KB Minibodegas in Chile. Netherlands • M3 Capital Partners acquired Quraz in Japan. 12.9% • Pátria Investimentos Ltda, the Brazilian office of The Blackstone Group, merged its Kipit brand with GuardeAqui in Brazil. Spain Global self-storage growth, though statistically still occurring on a relatively small scale, perhaps offers the greatest development opportunities. As awareness of the product continues to flourish, demand from consumers and businesses will increase. When 10.9% developers and operators build quality, investment-grade, well-managed facilities, investment funding and rapid expansion Germany follows. Expansion feeds the cycle of awareness, and metrics in 10.1% these markets will multiply.

David Blum owns and operates Better Management Systems LLC, Sweden a consulting practice he launched in 2003 to assist self-storage professionals worldwide with issues of development and management. He’s worked in Europe, Greece and Israel, and 5.5% currently has clients in Mexico, South America and the United States. Since entering the industry in 1996, he’s worked as a district manager for Storage USA and vice president of operation for Budget Mini-Storage in South Florida. He helped co-found 4.7% the Florida Self-Storage Association in 1998 and is a frequent contributor to industry publications. He can be reached at Source: JLL Capital Markets 954.255.9500 or [email protected].

ISS I 2017 International 5 www.insideselfstorage.com RELOCATABLE: ADD VALUE TO YOUR PROPERTY AND PROFITS TO THE BOTTOM LINE

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www.JanusIntl.com | 770.562.2850 THE SUN SHINES ON ASIA A year after a fatal Hong Kong fire, the self-storage community looks forward to improvement and growth

By Luigi La Tona

he self-storage industry in the United States is close to 60 years Catalyst for Learning old and has seen a lot of sunshine. At almost 8 square feet of More than a year after the fire, the industry is essentially starting Tstorage per capita, I’d say that’s a walk in the sun! from scratch. Retroactive rules put in place by the fire-services and The Asian self-storage industry dawned in Japan in the 1990s, building departments have forced many existing storage operators followed by Hong Kong in 1997, Singapore in 2003, and then the rest to re-evaluate their budgets and consider reconstruction. Some of the region in the 2000s. While potential users in these countries are investors have seen this as a fantastic opportunity given the perfect becoming more aware of self-storage, especially in the ever-densifying storm of potential: high demand coupled with increasingly smaller cities, the sun has yet to shine in countries including Cambodia, apartments, increased consumerism and higher storage rates. Myanmar and Vietnam. It has risen, however, in some major India and Those companies that have had to shut down have opened the Indonesia cities. door for consolidation. Asian self-storage has its own nuances in ownership, real estate, In the end, there’s been a lot of learning, sharing and culture, and consumer wants and needs. The early-bird and savvy encouragement across the region for sound industry standards. investors, suppliers and consultants are finding their way and have While we continue to work with the fire and building departments been in touch with the Self Storage Association Asia (SSAA) to among others, including government and enforcement agencies, discover more about the ins and outs of the region. the core of what we need is a safe and sustainable storage industry. As executive director of the SSAA, I’m happy to see these groups Knowing what we now know, the business needs to move forward not only have the foresight to consider all that’s going on, but the and continue its progress toward best practices. desire to learn, get involved in the region and grow their network. In We never want what happened in Hong Kong to happen the three years that we’ve been hosting our annual Self Storage Expo anywhere else, so we need to proactively prepare and increase Asia, we saw our largest contingent of attendees at our last event in awareness, especially among government bodies. It’s imperative Hong Kong in May. We’re expecting even more in Bangkok in 2018, for self-storage professionals in each country to find an appropriate and we look forward to experiencing the exchange of ideas among the definition for the product and shape standards according to local 200-plus global professionals. One of the major themes that emerged at the 2017 expo was, “It fire and building codes. This will ensure peace of mind for investors ain’t all rainbows and sunshine.” No doubt about it—the industry and lead to years of uninterrupted growth. is hot. However, exciting opportunities generate excited investors. The SSAA has been engaged with members to build Some expect a quick return, and that’s not generally what happens. codes of conduct, policies and procedures. In our member In Asia, property can be expensive (if it’s available), cultural meetings throughout the region, this has been met with 100 differences abound, there are ownership limitations, there’s no percent agreement. freehold in some countries, there are language barriers, and there’s a lack of industry awareness on behalf of customers, governments, Bright Days Ahead investors and lenders. The “glass-half-empty” folks may see these In light of what industry stakeholders have learned in Asia, as unsurmountable obstacles, whereas the “glass-half-full” folks see they know the path they need to take: safe and sustainable them as pure opportunities. growth. Knowing the industry isn’t all rainbows and sunshine may To be sure, there’s still a lot of work to be done to get the Asian give investors pause. However, if it eradicates those who wish industry up to speed. A lot of this work entails education. Country by to proceed in a manner that’s detrimental to the health of the country, self-storage is understood differently and, therefore, faces business, we’ll have done our job for the betterment and continued different standards for fire safety, building and construction codes, growth of the ever-bright self-storage industry in Asia. and best practices. Doing the right thing isn’t always the easiest route, but it ensures a sustainable industry in the long term. Encouraging this Luigi La Tona is executive director of the Self Storage Association is the sole directive of the SSAA. The need for higher standards has Asia, which is dedicated to assisting self-storage operators and especially come to light since the tragic June 2016 fire in Hong Kong industry suppliers working in emerging markets along the Pacific that killed two firefighters and brought the industry to its knees. Rim. For more information, visit www.selfstorageasia.org.

ISS I 2017 International 7 www.insideselfstorage.com

Building an Empire IN THE PHILIPPINES StorageMart PH founder makes his mark in a promising market

By ISS Staff

oward Sy, the grandson of a retail tycoon, eschewed be on par with what’s accepted as the international standard, the family shoe business in the Philippines to build his and for it to be the benchmark for quality self-storage in the Hown self-storage empire. The 28-year-old entrepreneur Philippines rather than a cheap local imitation. opened his first StorageMart PH facility in Makati last year and We have one facility that’s been open for about nine months, already has plans to develop a second location in Bonifacio and we’re looking to open our second facility in a month or two. Global City, a financial district in the Manila metro area. In this Hopefully, we’ll open a couple more within the next year. interview, Sy offers insight into his decision to enter the market, Just to clarify, StorageMart PH is in no way affiliated with the the challenges he’s faced and his plans for the future. international StorageMart. They are definitely a company I would aspire my company to become. It was really just by chance that You have an interesting background. Tell us about yourself and I thought of the same name, which is more of a tribute to my your storage company. grandfather, Henry Sy Sr., and his legacy, ShoeMart. Without Ever since I was young, I’ve always wanted to start my own him, I wouldn’t be here today. business. I knew one way or another I was going to make it happen. I initially worked What were some of the challenges you faced in opening for Macquarie Funds your facility? Group, which had a fund The biggest challenge I had was the lack of expertise in that invested in local self-storage. I had no knowledge or experience with the infrastructure. This provided industry, and there weren’t many experts in the Philippines. me the right foundation Most of the knowledge I have now is simply from online and work ethic, and a good research, discussions with international consultants and amount of seed capital for personal experiences. my first business. The next challenge was the lack of public familiarity with the One afternoon, I was industry and the service. There’s a significant lack of product watching the show “Storage awareness in the Philippines. A lot of customers weren’t familiar Wars” with my family and with self-storage service and didn’t even know it existed. A lot it hit me, “Is there a market of marketing expenses will be for industry awareness. for self-storage in the Another issue is customers have this stigma that they think Philippines?” After a bit of storage should be dirt cheap since it’s just for storage of their research, I saw there was, non-important items. They initially weren’t willing to pay for and that’s when StorageMart quality because, in their minds, they didn’t know how much PH was born. better a storage can be as compared to what’s already in the The way I envisioned market. We plan to change that stigma by offering quality service StorageMart was to replicate in convenient locations. how self-storage is done The last major challenge was the lack of available cheap overseas and offer the same and accessible space. The lack of land for new construction quality of service locally. I will hinder expansion. Looking to convert office buildings also StorageMart Founder Howard Sy would like my business to doesn’t work well in the Philippines. We don’t have many prime

ISS I 2017 International 9 www.insideselfstorage.com industrial buildings. Most of them are office buildings meant for What do you predict for self-storage in your country? business-processing outsourcing, so many don’t fit the required Self-storage in the Philippines will slowly grow. There’s load capacity for a self-storage facility. definitely demand right now, but nothing compared to how it is The Philippine market is nothing like how it is in the States. overseas in the States and in other Southeast Asian countries, We’re ridden with traffic, which makes a 3-kilometer drive take where storage has bloomed. The Philippines is also plagued by more than 30 minutes. This makes situating your facility in an many capacity constraints that hinder storage from blossoming. accessible and convenient location all the more important. The development of the industry has noticeably sped up ever It took me roughly two years to find my first location, and it since we entered the market. This is due to the fact that we continues to be difficult to find feasible locations for expansion. made a lot of effort to market the business and bring it into the spotlight. I feel it’s slowly bearing fruit, as many more developers Looking back, what would you have done differently? are looking into self-storage. I’m also beginning to see a lot of I would have avoided cutting costs on things I thought I didn’t other existing storage companies ramp up on their marketing. need. There’s some truth in the saying “You get what you pay I’m proud to see the permanent effects StorageMart has for,” and I’m beginning to notice the difference after nine months had on the Philippine self-storage industry. Conservatively, I of operating. Sometimes, it really is better to pay the premium foresee, maybe in five to 10 years’ time, the industry will pick up to ensure durability for items that will constantly be used or are its pace. Clearly, the local tourism slogan holds true even in the integral to the business. self-storage industry: “It’s more fun in the Philippines.”

StorageMart’s first facility in Makati, Philippines, which opened last year

ISS I 2017 International 10 www.insideselfstorage.com 1988 2008

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By Makala Ffrench Castelli

ustralasia is the third-largest self-storage market The increasing popularity of inner-city living has created a globally, both on a per-capita basis and by number of densification within the region’s major cities. As block sizes Afacilities, behind only the United States and Canada. continue to shrink and more people look to split existing parcels The industry emerged in Australia and New Zealand in the late of land to build townhouses and small-lot developments, many 1970s. Today, there are more than 1,500 storage facilities across items traditionally stored under or around the home need to be the region. sacrificed or stored in an offsite location. The three major owners—National Storage REIT (NSR), “Empty-nesters” moving from a traditional suburban home Kennards Self Storage and Abacus Property Group—have a into an inner-city apartment or retirement home often don’t wish combined market share of approximately 25 percent. NSR, the to part with treasured family memorabilia, hobby or collectible region’s largest self-storage operator and its only sector-specific items, or leisure equipment. Established self-storage centers real estate investment trust (REIT), has 116 facilities and more provide a convenient, secure and affordable alternative to storing than 40,000 customers. Kennards, a privately owned and goods at home. family-run company, owns and operates more than 85 centers, Commercial customers typically require storage for inventory, while Abacus is a diversified REIT with approximately 65 records and point-of-sale materials, with a growing number externally managed storage properties. of online retailers using self-storage as a flexible and scalable In general, the industry is highly fragmented, with most owners warehouse alternative. The major storage operators offer being independent; though there are several regional operators dedicated account management, business services including that own small portfolios in major cities, and several franchise receipt and dispatch, and centralized billing for large corporate and management groups that offer third-party management and commercial clients. services. Customer awareness, professional management and institutional investment in the Australasian self-storage industry Industry Expansion have progressed steadily over the past 40 years, particularly New supply in Australasia is primarily being driven by with the listing of NSR on the Australian Securities Exchange in population growth, with most development happening in capital December 2013. cities on Australia’s east coast. Urbis, an Australian firm that Demand Drivers advises property developers, owners and investors, forecasts 8 The demand for self-storage in Australasia, like in Canada percent to 12 percent growth in self-storage over the next three and the United States, is influenced by demographic and years, which is broadly in line with population advancement. socio-economic factors. Residential customers require short-term A third of the storage assets under construction are by storage due to change-of-life events, such as moving, a change in new market entrants, which signifies the growing popularity marital status, home renovations, births and deaths. Their long-term of self-storage as an asset class. The majority are in areas needs are typically related to limited space at home, particularly with limited competition, though established operators are due the growing trend of apartment living and the downsizing that’s willing to pay a premium for sites with strong demographic and supported by urbanization and an aging population. socio-economic profiles.

ISS I 2017 International 12 www.insideselfstorage.com National Storage in Brisbane, Queensland, Australia

Market Awareness Self-storage has traditionally been an offline industry in Product and brand awareness as well as differentiation are among Australasia, with many operators slow to embrace the online the greatest challenges faced by Australasian operators today. The environment. The challenge is to market the industry’s features most significant inhibitor to growth is awareness of the benefits and benefits, assist consumers with spatial awareness, and of self-storage. The industry has yet to succeed in provide confidence to rent online. The pace of mass marketing, so awareness is still low—well change in digital environments presents below the levels seen in Canada, the United several opportunities, of which the Kingdom and the United States—with standout is the ability for operators many Australians and New Zealanders to cost-effectively build having never heard of or used the awareness and improve the product before. customer experience. The major operators are As demand drivers continue working to educate the market The pace of change in digital to strengthen, the sector is using a range of channels becoming more established including television, radio, environments presents and product awareness will digital advertising and continue to grow. These content marketing. Social several opportunities, are all signs media is beginning to of which the standout is of an industry full gain momentum as an of potential. awareness-building platform. the ability for operators NSR has been at the Makala Ffrench Castelli forefront of these efforts, to cost-effectively build is the general marketing pursuing a sports- and community-sponsorship awareness and improve the and corporate manager strategy with the goal of creating for National Storage REIT top-of-mind awareness for the customer experience. (NSR). She has more than 12 both self-storage industry in general years of experience in corporate and its specific brand/product. This communications, investor relations plan, which encompasses major games and marketing communications. She of football, cricket, netball and basketball, oversees NSR’s retail marketing, business generates awareness on a local level, where the teams innovation and corporate affairs. NSR is the are actively engaged in their communities, and on a national first independent, internally managed and fully integrated level, where major games are broadcast on TV and online. This year, owner and operator of self-storage centers to be listed on the the NSR brand will have been seen by more than 70 million people Australian Securities Exchange. For more information, visit across Australia and New Zealand. www.nationalstorageinvest.com.au.

ISS I 2017 International 13 www.insideselfstorage.com PAIR A NEW CLOUD BASED SOFTWARE PROGRAM

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By Sam Kennard

espite high property prices, new self-storage NSR continued its acquisitive ways, completing $138 million projects continue to spring up across Australia. The in purchases between July 2017 and June 2018, as well as a Dentrepreneurial spirit is high “down under,” with many $285 million buyout of Heitman LLC’s 90 percent interest in the established operators adding new locations, and small and new Southern Cross Storage Group joint venture. That transaction set investors entering the sector. a new benchmark for capitalization (cap) rates in the Australasian The investment metrics for new projects are increasingly self-storage industry, with a passing yield of 5.8 percent. marginal, but the lack of alternative opportunities and the The portfolio consisted of 26 established and stable storage continuing capitalization-rate compression are still justifying facilities, trading at occupancy of 74 percent. new development—for now. Is overbuilding imminent in this Acquisitions have led NSR’s total asset value to grow to $1.1 well-established market? Let’s look at local operating billion. Its annual report also reveals an improvement in cap performance and other factors. rates from its annual valuation update, with those rates down .38 percent to 7.86 percent. Mixed Results for the REITS Abacus owns $629 million in self-storage assets. Its recent There are two real estate investment trusts (REITs) with reports have shown an occupancy increase to 89.2 percent assets in Australia and New Zealand. National Storage REIT and a REVPAM increase to 2.2 percent. The company added (NSR) is a pure self-storage REIT, while Abacus Property Group three new storage sites to its portfolio, taking it to 62 overall. It is a diversified REIT with self-storage as one of its significant now has 302,000 square meters of net leasable area. Abacus investment sectors. They both reported end-of-year finances on storage valuations have also seen a reduction in cap rates, down June 30, which is when the fiscal year ends in Australia. .3 percent to 7.7 percent. The firm also indicates an appetite to NSR has seen an increase in occupancy in Australian locations grow through acquisition and new development. to 77 percent, and an increase in revenue per available metre (REVPAM) by 5 percent. The company’s same-store results in Prices and Occupancy Flatten New Zealand have experienced an occupancy reduction from The Australian consumer has been under cost-of-living 76.3 percent to 71.8 percent in the past 12 months, while pressure with rising energy prices, housing and many other REVPAM is stable. increases. This appears to be biting many retail sectors, which see lower spending and report suboptimum performance. Urbis, an Australian firm that advises property developers, owners, investors and others, has been tracking self-storage prices and occupancy since 2008, and publishes the “Urbis Storage Index” twice per year. The December 2016 report revealed some softening in occupancy and prices in Australia. In contrast, Auckland, New Zealand, continues with strength. The report states: Results for the 12 months to December 2016 reveal a continued downward trend in area occupied for East Coast Australia facilities. The decline of 1.13 percentage points supports the Urbis view that occupancy expectations have “topped out.” Average occupancy at the end of the year for sample facilities for the East Coast of Australia was Kennards Self Storage in Hawthorne, an inner suburb of Melbourne 86.71 percent.

ISS I 2017 International 15 www.insideselfstorage.com The author at the company’s headquarters in Macquarie Park, Sydney

Total facilities monitored in Australia and New Zealand The REITs are looking to build and small syndicates have emerged average storage fee rates for all East Coast Australia facilities to develop. My company, Kennards Self Storage, will open five new continued to enjoy moderate growth over the year, recorded properties in 2017. In addition, we have several expansions and at 2.3 percent. Average storage fee rate growth continues to redevelopments planned for existing locations. track above consumer price index, which was 1.5 percent for There are opportunities for operators who appreciate the market the same period. and opportunity at a micro-level. However, it’s highly Auckland remains the standout performer likely that some markets will see too much new in terms of storage fee rate growth for development too quickly. It’s inevitable that an the year, recording a 6.15 percent overabundance of new supply will emerge increase. The Melbourne Outer Zone in some areas. experienced the second largest In addition, lenders in Australia increase at 3.69 percent for the have recently hardened their view same period. There are opportunities for on lending to many segments. Unproven new entrants to the Does Overbuilding Loom? operators who appreciate storage sector are finding it more With 26 years of almost difficult to obtain financing. uninterrupted economic the market and opportunity This might quell some of the growth in Australia, the oversupply risk. memory of recession has long at a micro-level. However, Urbis is developing a new faded for many, and there’s it’s highly likely that some an entire generation of adults tracker that will maintain a live that haven’t even experienced markets will see too much new list of known incoming one. Some observers worry self-storage supply. This will this is lending a false sense of development too quickly. improve the visibility of new security and infallibility to peoples’ projects and enable investors to investment decisions. more fully assess Asset prices are booming. There’s their prospects. strong appetite for property assets of all kinds, and self-storage is getting much interest, Sam Kennard is managing director of Kennards Self including new development. Despite the mixed economic Storage. Founded in 1973, the company operates more than signals, there’s noticeable increase in building in Australia 85 facilities across Australia and New Zealand, with more than 575,000 and New Zealand. Existing owners and new entrants are square meters of lettable space and a market-asset value exceeding jumping in to develop new sites and accepting lower returns $1.4 billion. It remains a private, family-owned and -operated business. to secure properties. For more information, visit www.kss.com.au.

ISS I 2017 International 16 www.insideselfstorage.com During the last three years we have:

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Over the next three months, we will be visiting every major city across the country discussing market updates. To find out when we will be in your city, contact us today.

Michael Foy [email protected] About Us 647 229 4065

Foy & Company and Storage Capital are Canada’s premier investment companies exclusively serving owners, developers, Jaimie Walker investors and financiers of the self storage industry. To date, we have purchased, sold, financed and invested in an industry topping [email protected] $2 billion in self storage projects. 647 922 5133 GIBA GOES GREEN South Africa storage operator adds solar panels as part of eco-friendly initiative

By Amy Campbell

ince opening in 2011, Giba Storage has grown aggressively “Our whole environmental management plan for the quarry was to keep pace with the demand for self-storage in Westmead, to rehabilitate the quarried areas into level platforms for future SSouth Africa. Nestled inside the Giba Business Park, the industrial use,” Harburn says. “We’re about 70 percent through this facility has expanded from 56 units to 220, and still has ample process and have about three to four years left of life in the quarry space for future development. In addition to storage, the operator is depending on demand.” meeting yet another need in the region: clean energy. Last year, Giba Storage added solar photovoltaic (PV) panels Funding the Goal to the rooftops of several of its buildings. The 150 kilowatt peak Unfortunately, lenders didn’t immediately see the potential and system feeds into the property’s electricity grid and supplies power benefits of the solar project. Giba Storage began raising funds to the business park, which strives to provide an eco-friendly to install the panels just a year after opening, but struggled to environment for light-industrial and commercial tenants. The goal find backers. “After fighting for three years, we eventually found is to add panels to every roof as demand for electricity increases. someone who would fund the first-phase installation—at a huge “We currently have just over 30 tenants in Giba Business Park, expense,” Harburn says. “For us, it was more important that we got all of whom are using electricity in various quantities,” says Giba started. Once we had a system up and running, we felt we could Storage CEO Chris Harburn. “They all make use of our own then go to the banks with a working model.” prepaid meters, so we actually have a captive market to sell our The system was installed in September 2016, with the first “green ‘green’ electricity.” electricity” fed to the park’s grid just a month later. The system consists of 567 panels and six inverters. To date, it has produced Part of Nature 158.72 megawatt hours, which is the equivalent of planting 207 Giba Business Park sits in Giba Valley, an area famous for its trees and saving 62,023 kilograms in carbon-dioxide emissions. diverse recreational activities. It’s known locally as Clifton Canyon, “We’ve borrowed just over R2.5 million at expensive rates, but and since 2007, it’s become popular with the public thanks to the once we’ve run the system for at least a year, we feel we could raise opening of the Giba Gorge Mountain Bike Park. Outdoor offerings additional finance at a much better rate and extend the system to include boot camps, horse trails, venture groups, mountain-bike cover the rest of the roof space,” Harburn says. “Our long-term rides, organic produce, restaurants and conferences. plan is to then cover the roof space on some of our existing factory The park’s location has been the driving force behind its design buildings. All future factories we develop will be designed with the as a sustainable environment with low-impact eco-practices. solar PV in mind.” It’s built on a large plot of land that’s also home to the Stockville While there’s still work to be done, the overall goal is to offer an Quarry, a decomposed granite quarry, which is being rehabilitated. eco-driven sustainable business park where people from all walks Waste from the quarry was even used in the construction of the of life can work and play together. For more information, visit storage facility. www.gibastorage.co.za.

Giba Storage in Westmead, South Africa

ISS I 2017 International 18 www.insideselfstorage.com CHALLENGES FOR THE MATURING EUROPEAN MARKET A look at language barriers, land scarcity, regulations and more

By Rennie Schafer Pelican Self Storage in Copenhagen, Denmark

urope was a relative late-comer to the self-storage game. it has less of a presence in South or East Europe, with no stores in After the industry emerged in the United States, it moved Italy, Spain or Switzerland. All the other operators have stores in Eto Australia and New Zealand before making its way to the only one or two countries, or a single region such as the Nordics. United Kingdom and, finally, Continental Europe. The pattern of Europe is really made up of a series of submarkets. Each has its growth, however, has been similar: A few innovative entrepreneurs own major brands, mid-tier operators and small independents. The kick-started the business, followed by the entrance of some larger language barriers are a major reason for this, making centralized operators with significant capital who increased awareness of management and the use of customer-service call centers more the product. This led to more small and mid-size operators, who challenging. Language also limits operator marketing campaigns. ultimately offered the larger players acquisition targets, and the Differences in building and planning laws, staff entitlements and industry began to consolidate. other local laws also make it difficult to operate across countries. Today, there are more than 3,200 self-storage facilities across Looking at each country in isolation, you’ll see significant Europe, more if you count the small container-based sites. The variances. For a start, markets like the U.K. (0.65 square feet of industry is maturing, but with that growth comes challenges. What storage per person) and the Netherlands (0.54 square feet) have makes self-storage unique in this region, and what does the future significantly more supply than Italy (0.03 square feet), Germany hold for this market? (0.06 square feet) and even Spain (0.21 square feet). Knowledge of the product differs greatly across Europe, with Language Barriers solid and growing awareness in the Nordic countries as well as Despite the European free market, the self-storage industry the Netherlands and the U.K., but much lower public awareness remains fragmented. There’s no single operator that has coverage in other regions. There are many Europeans who have a potential across Europe. Shurgard is the only brand that has any significant need for self-storage but aren’t considering it as an option because presence, with stores in seven countries. However, while it has sites they’re simply unaware of it. Or, they might also fail to understand in many of the major markets, like Germany, Sweden and the U.K., the fundamentals of storage use, such as “you lock it and keep the key.” This is an ongoing challenge for the industry. The lack of awareness is also partly a language issue, as “self-storage” is an English term that doesn’t always translate into other tongues. In English, the name is a very clear descriptor of the product. In other languages, it often gets translated into terms that also mean warehousing. It might even be interpreted as a place where people are stored!

Land Scarcity The real estate market has limited the growth of the European industry. There’s simply less land available for development than in the U.S., and it’s usually more expensive. Operators need to maximize the return on their footprint, which usually means building multi-story facilities and offering few drive-up units. The traditional ranch-style developments found in the U.S. are almost non-existent in Europe. The limited number of disused warehouses and industrial buildings suitable for conversion into self-storage were largely taken up in the early years of the industry. Operators looking to A Shurgard facility in London acquire properties for larger storage developments often compete

ISS I 2017 International 19 www.insideselfstorage.com My Place Self Storage in Berlin

against other retailers, supermarkets and residential-development delinquent units. However, it also means the rental contract needs speculators. These days, they quote the lack of suitable property to be watertight, as this is often the sole document to defend as the main limiting factor to the growth of their portfolios; whereas against legal challenges. The industry associations provide three to five years ago, they likely would’ve said limited access to standard templates for customer contracts and work to maintain a funding was their greatest inhibitor. best-practice standard for the industry. For the last three years in the U.K., demand for the product Another downside of being self-regulated is there are limited has grown faster than supply. While this is good for existing guidelines regarding planning and construction. This essentially operators who can push occupancy and revenue, it means operators often must contest the same shows developers are struggling to find suitable planning issues in different jurisdictions, as sites. That’s not to say the industry isn’t there’s no overriding document of rule. expanding; it certainly is growing through the expansion of existing sites and The Future Is Bright new development. Even in markets Industry challenges remain in like London and Paris, we’ve seen terms of increasing awareness in significant new sites open or For the last three years in the the marketplace and bureaucracy. begin construction in the past However, on balance, the 12 months. U.K., demand for the product European market appears to However, more new has grown faster than supply. be heading into a period of developments are being pushed prosperity. The financial crisis of into secondary cities or outer While this is good for existing 2009 is a distant memory, and metropolitan areas where operators who can push the industry showed its resilience suitable property is readily during this time. Building available. We’re also seeing occupancy and revenue, constraints are helping to control a growth in container-based it shows developers are supply while demand continues operators who use this as a to grow. Ongoing political and low capital means of entering the struggling to find economic uncertainty is becoming industry. They can offer drive-up suitable sites. the new normal, and businesses are solutions that often suit tradespeople and moving forward regardless. Publicly listed other commercial operators. companies are performing well, offering solid dividends and experiencing growth in value. Lack of Standard Regulations Across Europe, the industry is self-regulated, which means Rennie Schafer is CEO of the Federation of European Self Storage there are no storage-specific laws or other legislation. Broad Associations (FEDESSA) and the Self Storage Association of the consumer-protection and contract laws provide the only legislative United Kingdom. FEDESSA will host its European Self Storage framework. This reduces administrative costs and allows more Conference in Berlin, Oct. 17-18. More details can be found at flexibility in terms of dealing with operational issues such as www.ssauk.com.

ISS I 2017 International 20 www.insideselfstorage.com Cityvarasto in Turcu, Finland DEMAND ON THE RISE in Finland Cityvarasto spearheads industry growth

By Ville Stenroos

inland is a small country of approximately 5.5 million people. or tags. They don’t even have to get out of their car to access the The population density is 18 per square kilometer, which makes facility. All they need is a mobile phone. All our sites have security Fit one of the most sparsely populated countries in Europe. There cameras, allowing us to easily monitor them from the head office or a are only nine cities in Finland with a population exceeding 100,000. mobile device. The biggest region is Helsinki metropolitan area, which consists Digitalization is a huge objective for most Finnish companies, of three cities—Espoo, Helsinki and Vantaa—and has a population including Cityvarasto. In 2011, we were recognized for our of 1 million. The next largest is Tampere, with approximately technology advances by the Federation of European Self Storage 230,000 inhabitants. Associations when we won the “Innovation of the Year” award for Due to the country’s size, it’s not surprising the Finland self-storage our online rental platform and access-control system. In fact, we market is relatively new. However, product awareness has increased were the first company in the world to have an interactive website significantly in the last few years. According to a study by the Finnish that rented storage units. Today, the number of customers who Self Storage Association (FSSA), almost 90 percent of the population access the online platform grows steadily. We continue to develop knows what self-storage is and recognizes the operators who offer the the program to make the storage-rental experience as easy as service. The market is also growing as people are moving to the cities possible. Our platform offers a chat function, giving customers where apartments are small and there’s a need for additional space. direct contact to our customer-service personnel. More than half of Finns age 35 to 54 feel that there’s now too little space in their home for their goods, the study revealed. Marketing Cityvarasto Corp. is looking to meet this demand. Founded in 1999, Cityvarasto is a well-known brand in Finland. According to an the company has grown steadily and is now the largest self-storage FSSA study, 30 percent of the population recognizes the brand chain in Finland, with 34 sites. It’s the only storage company with by name. From a marketing point of view, we find it important to locations countrywide. continuously increase awareness and be top-of-mind for customers As in other countries, a self-storage facility’s location is important when they have the need for storage. for Finnish customers, as they’ll often choose a property near them. Most of our customers come to us via Google, which plays an Cityvarasto wants to be close to its customer base, so we actively important role in our marketing. We’re investing in search engine seek suitable premises in cities with adequate populations. One of our optimization and AdWords, and social media is becoming more newest sites at Rovaniemi—the official home of Santa Claus—will open important. With the analytics of digital marketing, we can easily this fall. It’ll be one of the northernmost storage properties in the world. make campaign decisions and see how they work. Although Finland is a small country, there are differences in how A Technological Business Model traditional marketing works in various areas. We gather information Our business model is advanced and cost-effective. Most of from our local personnel, measure different ways of accomplishing our facilities are unmanned and automated. However, as not all our goals, and use the data when making marketing campaign customers want to rent a unit via the Web, we also have personnel decisions. Radio, print, outdoor marketing and direct mail are who can meet a customer by appointment at the site. typical examples of traditional marketing for Finnish operators. As part of the model, we’ve developed a cutting-edge Customers are the heart of our business. As such, our goal is to access-control system. Our customers don’t need codes, cards provide the best possible customer-service experience. Besides unit rentals, we offer packing materials and, through our partners, Cityvarasto in Helsinki our customers can rent a van or arrange a whole move. Our aim is to have satisfied customers who are willing to recommend our services to others.

Ville Stenroos is CEO and the main owner of Cityvarasto Corp. He has more than 20 years of experience in leading successful companies. He founded his first company, Citystaff Oy, in 1995, which was sold to employment agency Barona in 2011. For more information, visit www.cityvarasto.fi.

ISS I 2017 International 21 www.insideselfstorage.com Find What You Need ALL YEAR LONG

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SEARCH NOW EMBRACING MIXED-USE Development in Scotland Storage Vault delivers more space to commercial customers

By Amy Campbell

Storage Vault in Cambuslang, Scotland (Photos courtesy of Alexis Basso)

hen Storage Vault set out to build its second Scottish Opening self-storage property, the company first examined the The first phase opened in October 2016, with 20,000 square feet Wneeds of its customer base. Already in tune with its of drive-up self-storage and 10,000 square feet each of studio and commercial tenants, the operator looked for ways to serve them office space. A second phase is under development and will add even better. What it discovered would take the growing company 40,000 square feet of rentable space. down a new path: mixed-use development. “The drive-up accessibility is attractive to domestic customers, “We found that business customers normally need to compromise as they only need to unload once, from their car to their unit. The with regular storage and their office, wasting valuable time traveling studio space allows industrial businesses to locate themselves on between the two every day,” says Fraser Sutherland, property and site, right next to their storage, saving them travel expenses and marketing manager. “By creating a multi-use site, we’re able to time,” Sutherland says. attract businesses of all sizes to not only store with us, but to make The office spaces begin at 150 square feet and are fully ourselves their base—in turn, driving more traffic our way.” furnished. Conference facilities, meeting rooms, a communal kitchen and lounge are also included in the month-to-month lease. Location “We strived for quality offices at our site and found that An outdated industrial building in Cambuslang, which is just businesses are jumping at getting their own space as the area minutes from the center of Glasgow, Scotland, proved to be the is well-connected but previously didn’t have many offices of this ideal location for the project, which would combine storage with quality,” Gifford says. office and studio space. The property is next to the M74 highway, the second busiest road in West Scotland. It clocks some 20 Future Growth million passing vehicles annually, resulting in great exposure for the So what’s ahead for Storage Vault? The operator has seven storage business. developments in the pipeline, including projects in Edinburgh “The site offered a great opportunity to regenerate an old and Glasgow, Scotland. One of the ventures will combine industrial area. The close connection to the city center also gives self-storage with a drive-through Starbucks, a first of its kind in our customers brilliant access across Glasgow,” says Anthony the city. The businesses would be built near the M74 highway on a McAteer, managing director. property at Polmadie Road. Project approval is expected shortly, Challenges Sutherland says. Although the location was ideal, the site needed a ton of work Using the Cambuslang facility as a guide, the company is open to make it operable. Large-scale groundwork was undertaken to to meeting the needs of the customers in each individual market, prepare the property for drive-up self-storage and studio space. no matter what they might be. “We can only improve on site to site Next up was a redesign of the property’s power, heat and from what we have learned at Cambuslang,” McAteer says. broadband capabilities. “We moved to a system that runs entirely off of biomass, heating our storage and our offices, and brought the fastest broadband available on site, which was unheard of in Founded in 2015, Storage Vault opened its first storage this area,” says Brian Gifford, finance and property director. “We facility in Paisley, Scotland. It draws on 15 years of also found that new builds have their own difficulties compared with experience in commercial property to deliver a safe, secure conversions, and that each require a different planning strategy and and easy self-storage service. For more information, e-mail it truly varies from project to project.” [email protected], visit www.storagevault.com.

ISS I 2017 International 23 www.insideselfstorage.com All Seasons Self Storage in Osnabrück, Germany

AN AMERICAN Builds in Germany Overcoming obstacles to launch All Season Self Storage

By Todd van Steenwyk

y foray into self-storage started serendipitously in 2013. Ultimately, having a team the investor group could trust, one that I’d been working in a single-family office doing mostly was willing to put quite a lot of skin in the game, triggered the Mequity analysis, but had started to delve into some of the investment to move forward, so off we went! company’s private-equity dealings. It was around this time that a longtime friend of the family needed to rent a storage unit in his Storage Awareness hometown of Oldenburg, Germany. He was very familiar with the It’s been quite an adventure so far. There are so many parallels concept of storage from his frequent visits to the United States; but with the U.S. market but, at the same time, massive differences. when he went online to search for a facility, he was surprised to find For example, let’s take advertising and marketing. If you simply no self-storage in Oldenburg and hardly any in Germany at all, apart advertise for “self-storage” in Germany, people will acknowledge from the capital cities. your ad and move on, never giving it a second thought. There are a We started to discuss the possible reasons for the dearth of lot of people who just don’t know what self-storage is. self-storage in Germany. After scratching our heads for a good At this point, advertising is more for educational purposes— number of months and finding no decent answer, we did our own explaining the concept of self-storage and how it can provide due diligence and came up with a business model that seemed too fantastic solutions and improvements to a cluttered life or good to be true. We decided more storage was needed. Now, who expanding business. A blanket campaign just doesn’t work. You was going to build it? must explain exactly what you can do for every application until the This is one of the biggest problems facing investors who want to population is comfortable enough with the idea that they start being tap the burgeoning European self-storage market: The literature is creative in using self-storage to solve their needs. out there and it’s compelling, but how do you gain exposure? There aren’t any real estate investment trusts in which you can purchase Financing stock. It seemed that short of moving to Germany to start a storage It’s not just the users who don’t understand self-storage, business, the only alternatives were to throw a bunch of money at but lenders as well. I’ll never forget the first time I walked into a a current operator or find a local consultant who wanted to have a German bank with my business partner. We had set up a meeting crack at it. Frankly, these options presented too many unknowns to discuss a potential loan for our first project. After the usual for us. Besides, we’d heard a horror story or two about investments formalities, we got down to business. The first question was, “What that went sour. is self-storage?” Coming from the U.S., I’d never thought about that I was never one to back out of a good idea on account of question. Everyone just knew! difficulty, so I proposed to move my family to Germany and start a After providing a brief description, we got to the fundamentals business with our friend. It was a tough sell (to my wife, especially). of what drives our business, namely renting units to people who

ISS I 2017 International 24 www.insideselfstorage.com don’t have enough space. I led off by noting that our assumptions Funny enough, a year and a half later, the bank that financed our for monthly rentals were well under the German average of around third facility was the same one that had declined our first proposal. €20 per square meter per month. I was halted again when the In summary, while it’s not easy, it’s not impossible to get bank loan officer said, “What? Why on earth would someone pay financing. Plus, the trend looking forward is positive. two to three times the cost per square meter of an apartment just to rent space?” Market Potential I’m sure you can see where this meeting We’re really excited about the storage was going. We didn’t receive a loan from industry in Germany. The country this bank, but I use the anecdote to has the largest population on the illustrate a similar theme—a lot of continent, the largest gross people in Germany just don’t know This is one of the biggest domestic product and yet the about self-storage. smallest amount of storage All in all, we probably spoke problems facing investors space. Even if it only catches to a dozen or so banks. Our up to its neighbors, which proposal and presentation who want to tap the have more storage per capita, were solid. Lenders were burgeoning European there’s an incredible amount of always impressed by our self-storage to be built. immaculate financial forecasts. self-storage market:

In our experience, it seems Todd van Steenwyk is a like the bigger banks are only The literature is out there co-founder and managing partner looking to loan big money, so our and it's compelling, but how initial commitment to open three of All Seasons Self Storage, facilities wasn’t worth their time. My do you gain exposure? which operates three facilities in business partner, however, had a great Oldenburg, Osnabrück and Porta connection at one of the smaller regional Westfalica, Germany. Having started his banks. Through this relationship, along with career as an equity analyst, he’s been involved an extremely well-thought-out business plan in the German self-storage industry for four years. and growing awareness of successful storage facilities in He’ll earn a Master of Business Administration from the Germany, we secured reasonable levels of financing at incredible IE Business School in Madrid, Spain, in December. For more interest rates. information, visit www.allstorage.de.

ISS I 2017 International 25 www.insideselfstorage.com DepoSeguro in Panama (Photo courtesy of Better Management Systems LLC)

BUILDING UP IN LATIN AMERICA Land scarcity and issues of access make multi-story development attractive to storage owners and investors

Pete Frayser

elf-storage is as trendy as ever in many international Land Scarcity and Accessibility markets, and all the momentum is going in one The most important contributing factor to the multi-story building Sdirection—up! trend in Latin America is land scarcity. As cities grow, the amount As I work in international sales for a U.S. building-components of available land decreases. This not only drives up land prices but supplier and focus a good bit on Latin America, I’m often asked, forces developments to grow up instead of out to become viable “How is self-storage over there?” The simple answer is: It’s big. investments. Urban sprawl is a truly American concept and not one And I’m not referring to the number of facilities. (According to international communities are willing to adopt for myriad reasons. the Louisiana Self Storage Association, there are more storage Accessibility is also a factor. First, wealth tends to be facilities in that state, with its population of 4.6 million, than in all concentrated in centralized pockets of these larger cities. When of Latin America, which has a population of 625 million.) Rather, you add the fact that traffic jams in the large cities can keep you in it’s big in the sense that the segment is following the trend of the car for hours, even just to go a few miles across town, you see how location is critical. When an owner has a nice parcel he’s ready most urban developments in large global cities—storage facilities to develop, he must do everything he can to maximize the space are going vertical. and get the most out of his land. Building multiple stories is the sensible solution. Why Storage Makes Sense In most markets outside of North America, self-storage is still in In the case of Latin America, where populations are much its infancy. While some people compare what we’re seeing abroad more concentrated in the capital cities, self-storage is a logical to the U.S. self-storage market in the 1980s, it’s difficult to predict choice for investment. For example, Colombia has around 47 what the future holds for the international sector. Large multi-story million people, more than 8 million of whom live in Bogotá. That’s complexes aren’t the answer for everyone, but those thinking of the more than 17 percent of the population living in a single city. future of the industry shouldn’t just look around for opportunities … Space is very limited, so opening a storage facility in the capital They should look up! makes perfect sense. International capitals aren’t only dense in population, they Pete Frayser is vice president of international sales for Janus tend to be home to most of the upper-middle class. The International Group LLC, a manufacturer of self-storage roll-up average income can be nearly double that of the national norm. doors and building components. Headquartered in Temple, Ga., the Obviously, the cost of living has to be considered; however, there company has eight U.S. locations as well as manufacturing facilities are more people with disposable income in these cities who can in Mexico and the United Kingdom. For more information, call afford “luxuries” such as renting a storage unit. 770.562.2850; visit www.janusintl.com.

ISS I 2017 International 26 www.insideselfstorage.com ANYTIME. ANYWHERE.

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SHOP NOW A CUSTOMIZED BUSINESS MODEL in Colombia Bodehogar puts its spin on traditional self-storage

By Carlos Cardona

fter living in the United States for 18 years, I decided to return the do-it-yourself model of packing their own belongings, transporting to Colombia in 1997. My plan was to invest in real estate and them to a facility and loading them into a unit. Most would rather pay Awork in the flooring industry, because that was my trade. someone to pack and move their belongings into a mini-warehouse. However, my Colombian family were pioneers in the moving business One reason this model is so successful is because it offers the dating back to the 1950s; and in 1978, I was offered the chance to security of traditional self-storage with the convenience of packing and purchase one of our established companies in Cali, Colombia. moving services. Our climate-controlled units are available in a variety After a couple of years of learning the legal and operational of sizes, and our facilities include several security measures, including aspects of the moving business, I saw another opportunity—to offer central alarms and video cameras. furniture-storage services to existing customers. Initially, we used one Another reason many people choose our mini-warehouse model big space inside our warehouse to store clients’ belongings. Then in is most traditional self-storage facilities have restrictive hours. They 2005, we built our first self-storage units inside a 4,000-square-meter might be closed on Sundays and holidays, offer limited access on warehouse and opened them as Bodehogar Storage. Saturdays, and operate only during normal business hours Monday At the time, self-storage was an unknown service to most of our through Friday. customers, except to those who had traveled to the United States. To Some of our customers never visit our facility at all. Unit selection spread the word about this new offering, we began attending real state payments are completed via phone or through our website. The conventions. Demand grew, and investors opened additional storage average tenant stay is about six months. When the lease ends, the facilities in other parts of Colombia, which helped self-storage become customer pays to have his belongings moved from the storage unit to more widely known by the public. his new address. We have our own trucks, and personnel is available In 2007, we opened a second branch in Cali, and in 2013, we at an additional cost to complete the task of packing and moving. opened facilities in Bogotá and Barranquilla in 2013. We opened our fifth site in Medellín last year. The demand has been so great that Challenges we’ve begun adding more units to our existing properties. We’re also Our main obstacle to growth is the high interest rates and building another large site in Bogotá that will contain 150 units. short terms offered by the banks. Also, the high cost of land obligates us to build our facilities at a distance from higher-income A New Model neighborhoods, though we’re still in the main cities. This The U.S. concept of self-storage doesn’t completely resonate with can sometimes make reaching our potential customer base Colombians, even today. Those looking for storage aren’t interested in problematic. To attract tenants, we rely on a strategic marketing program that includes the purchase of Google AdWords and organic search engine optimization. The four major cities in Colombia—Bogotá, Barranquilla, Cali and Medellín—have a combined population of 45 million people. While there are several traditional storage facilities and mini-warehouses in the area, there’s a rise in demand for both. Bodehogar Storage and others are adding more units and new properties in these large towns. In addition, Colombia’s 20 mid-sized cities have a great need for self-storage, presenting an opportunity for those looking to invest in an untapped market.

Carlos Cardona is the owner and general manager of Bodehogar Storage. The company operates five storage facilities in Bogotá, Barranquilla, Cali and Medellín, Colombia, and has another under development. For more information, visit www.bodehogar.co. Bodehogar Storage in Cali, Colombia

ISS I 2017 International 28 www.insideselfstorage.com A SmartStop facility in Toronto THE CANADIAN Growth Surge Self-storage opportunities are balanced by obstacles to entry

By H. Michael Schwartz

t’s no secret that Canada is experiencing a real estate boom, in the past. And as we know, mobile populations lead to greater and the country’s self-storage sector is no exception. The demand for self-storage. Iindustry is experiencing a growth surge that has led to Finally, the relative lack of storage space in Canada has led capitalization-rate compression and significant development to significant new development in several markets, particularly in some of the nation’s largest cities. But Canada also offers Toronto. Unmet and growing demand is being addressed with new significant obstacles to entry for investors and builds. However, with this opportunity comes significant developers, which can make success elusive pitfalls that require tools, resources and experience for those lacking deep pockets and to avoid. Heretofore, the Canadian industry institutional resources. has been regionally fragmented and led by smaller independent operators. As the Expansion Drivers market matures, however, institutional and Opportunities investors and managers should lead So, what’s driving self-storage the way. growth in Canada? Primarily, Though the self-storage market the strong economy, low Speaking plainly, it's isn’t as saturated in Canada interest rates, population very expensive to do as it is in the U.S., despite a growth and a historically significant amount of new product undersupplied storage market. business in Canada. You entering the market, demand The economy has been still outstrips supply throughout consistently strengthening need deep pockets and most of the country. I believe it’ll for the past several years. be several years before we reach Canadians are earning and significant resources on equilibrium. That said, developers spending more, and they’re in the ground. must be careful not to oversaturate need of additional space to store specific submarkets. their belongings. There are also more businesses using storage for excess Obstacles to Entry inventory, records and other uses. In fact, Speaking plainly, it’s very expensive commercial tenants are estimated to account to do business in Canada. You need deep for 20 percent to 30 percent of all leased storage pockets and significant resources on the ground. space in the country. There are appreciably more taxes and fees than in the U.S., and Additionally, as the population grows, people appear to be municipalities tend to play a larger, more aggressive role in the more mobile and are moving about the country more readily than planning process.

ISS I 2017 International 29 www.insideselfstorage.com SmartStop owns 10 properties in the Greater Toronto Area and has two under development within city limits.

These factors conspire to make development very costly. As a result, newer facilities tend to be larger to realize greater revenue. This can lead to a dangerous game of cat and mouse, as owners X Marks the Spot: Toronto increase operational risk and hope for higher occupancies to offset increased costs. The relative lack of storage space in Canada Furthermore, with greater input from municipalities, new facilities has led to significant new development in several require a significant investment in urban design and aesthetics to markets, particularly Toronto, the country’s largest secure development approval. As such, owners are caught between metropolitan area. The city and its surrounding increased development costs for a modern-looking facility and their suburbs are home to 6.5 million residents, with bottom line. significant population projections. It also maintains Thus, sophisticated site selection, financial modeling and market a ratio of 3 to 3.5 net rentable square feet of research is essential. However, there’s a lack of industry statistics and storage per capita. Analytics like these help to financial data available in most Canadian markets, which makes it identify quality opportunities for investments difficult for small organizations and traditional mom-and-pop owners and developments. to gauge demand in local areas and create economies of scale to In fact, Toronto has attracted significant manage facilities that sometimes operate with tight margins. industry interest, with roughly three dozen storage Success will probably elude those incapable of performing facilities under development in and around the city. thorough, independent and accurate underwriting. This is likely why SmartStop Asset Management, a Ladera Ranch, we’re seeing smaller, independent players replaced by institutional Calif.-based real estate company focused on investors and developers with the ability to hit the bullseye on a more self-storage assets as well as student and senior consistent basis. There’s simply little room for error north of the border. housing, owns 10 properties in the Greater Toronto Area, with two under development within city limits. Competition Valuations are beginning to reflect the institutionalization of the Canadian self-storage industry. From a management standpoint, this allows large-scale brands to be more competitive over local owners. Large brands have more pricing power and the infrastructure to achieve economies of scale. This has put significant strain on smaller independents and adds significant risk to their business as they attempt to compete with the power of corporate brands. Some of the larger storage operators have also added premium services to further differentiate themselves. These amenities vary greatly by brand but can include pick-up and delivery services, or wine vaults with onsite sommeliers and tasting rooms. Servicing a high-end niche, these premium services aren’t likely to become standard across the Canadian storage community, but they may cater to an affluent clientele. From my perspective, these premium services don’t drive the value some may expect. Frankly, it’s important to remember what our core business is, which is providing additional space to store belongings. H. Michael Schwartz is the founder, chairman and CEO of You typically won’t find institutional owners and managers offering SmartStop Asset Management, a diversified real estate company niche amenities. focused on self-storage assets as well as student and senior Canada is a growing market with significant upside and opportunity. housing. Its storage portfolio comprises 108 facilities throughout However, it’s also fraught with danger for the unprepared and the the United States and Canada, including 68,000 units and unsophisticated. The margin for error is slim, and success will require a approximately 7.9 million rentable square feet. For additional lot of money and manpower. information, visit www.sam.com.

ISS I 2017 International 30 www.insideselfstorage.com Weighing RISK VS. REWARD IN CANADA How to avoid overpaying for assets in a healthy market

By Michael Foy and Jaimie Walker

ast spring, we wrote an article that focused on self-storage markets such as Toronto and Vancouver, and strong operators will development in Canada. The emphasis was on risk-adjusted continue to outperform in their areas. Lreturns and how developers appear to be building to We’re seeing successful acquisitions, development and unlevered returns as low as 6 percent. Some developments we’re conversions throughout the country as well as an influx of seeing may produce cash-on-cash returns as low as 8 percent. groups looking to self-storage as an investment opportunity. These numbers are concerning. More troubling is our examples We’re also seeing that capital is cheap and easy to access. were based on conservative assumptions, without considering But there’s a flip side to every coin, which is people seem to be possible changes in the market. overpaying for assets. They’re putting themselves in a highly Since that article was written, the market has evolved. The Bank levered position and buying on future opportunity. Some seem to of Canada moved interest rates by 25 basis points. The consensus be dismissing any risks they’re creating for themselves in a moving is rate increases will continue and likely move again by the end interest-rate environment. of 2018. These movements will impact more than development loans, and the self-storage industry should be paying attention, as An Example construction loans are usually variable-rate. There seems to be a lot of things happening in the storage industry right now that just don’t make sense. People are taking on Moving Markets a lot of risk. Let’s look at a plausible example. We’ve been reading “Am I Being Too Subtle: Straight Talk From An asset is purchased for $20 million, but the market value is a Business Rebel” by real estate tycoon Sam Zell. One chapter $18 million. The buyer gets financing at 65 percent, so a $13 million revisits an article the author published in 1988. “From Cassandra loan on the purchase and $7 million of equity goes into the deal. It with Love” laid out Zell’s predictions for the future of real estate seems safe, but what if he doesn’t achieve budget and the asset in the United States, and the impact the lending and investment ends up being worth only $18 million? What if the market makes a communities would experience as a result of changing tax correction and capitalization (cap) rates move a quarter point? Now legislation, inflation, leverage and oversupply. the asset is worth $17.5 million. Fast forward almost 30 years and reading this article seems like When the interest rates move, there’s a compounding effect. All nothing more than a doom’s day scenario. But if you’ve read it, of a sudden, the owner has gone from 65 percent to 75 percent some things should resonate. Are we destined for a correction? Is loan-to-value. At that leverage ratio, it’s no longer considered this shift in interest rates the beginning of something bigger? We all conventional. This is when lenders become more cautious around know values can’t go up forever. the value of assets and the banks start to back off. At some point, We understand times are different. We simply want to create the owner will require backend, more expensive money. food for thought. We also want to preface this cautionary tale by Let’s say the experts are correct and rates move another 25 saying the self-storage industry in Canada is healthy—very healthy. basis points over the next 12 to 18 months. In this scenario, moving Facilities are experiencing good rates and growth as well as high interest rates should be a major concern. The rate doesn’t move occupancy. There’s still an immense amount of opportunity in major by 50 basis points but rather 200 basis points because of what

ISS I 2017 International 31 www.insideselfstorage.com happens to their leverage in that transaction. The cost of debt Cost of Capital may go from 4 percent to 6 percent. Now the owner has an asset So, what happens to the debt side of things if our environment that’s only worth $17.5 million. Let’s do the math. At a 6 percent changes? What kind of implications will there be on some of the cap, if there’s amortizing debt on the $13 million loan, the owner is riskier acquisitions and developments we’re seeing today? underwater from a cash-flow perspective. Even though he put up Let’s reflect. The cost of debt in the 2008 financial crisis was $7 million in cash, there’s a big problem. historically low. This helped people fake their way through things This is what we’re seeing in the market, and this is where we and pay off loans, even if they were underwater, because there caution you. We’re seeing people overpay and use too much was enough cash flow to support it. If an asset was producing a leverage based on future value. Simply put, when adjustments take 4 percent return and debt only cost 3 percent, you could still pay place in the market, people end up in a different pricing bracket on down your debt, so the banks would never have to realize on that. If their debt. It doesn’t matter what your assets are worth because interest rates were to increase from 3 percent to 5 percent and you every single month that you hold them, your equity takes a hit and don’t have the cash flow to support your debt, you’re in trouble. your balance sheet looks less attractive. Back in the 80s, people didn’t have the cash flow to support their debt, which resulted in bankruptcies and foreclosures. You needed The Cause someone who was willing to write big checks to buy you out. That Why are people willing to pay too much? Is it because the market put a lot of pressure on cap rates to move in favor of buyers. is overheated and they’re worried they’re going to miss out? It Over time, the market will change. We’ll see some level of seems they’re of the mindset that things will keep going up in value correction, and the bulk of that will come from a change in the cost forever, but they can’t. If interest rates move 50 basis points, cap of capital. The more levered you are, the more impact that will have rates can easily move 25 to 50 basis points, as they have in the U.S. on you. Those who are less credit-worthy and have less cash flow are One thing we know for sure is when you get swings in cap going to be the ones who are hurt the most. rates, banks become much more conservative. They’ll move to People need to be more cautious because we’re seeing some an ultra-conservative position quickly, and that will change the lending value of your asset. When the value of leverage changes, questionable decisions being made in the market. Make sure you people often end up in a position where they’re over-levered from a have the appropriate balance sheets. Have the cash flow in place to bank’s perspective. When this happens, lenders look for an equity protect you in the long run. Leverage can change, interest rates can injection. change, cash flow can change. All of this will have a bearing This can have a serious impact when loans come due. When on you, the true value of your asset and buyer equity. When people do high-risk or high-debt deals, they want interest-only evaluating your risk, remember that cash flow is always valuable. In debt. For the riskier transactions, it could be a good time to be the worst possible environment, the ability to go in and service debt thinking hard about amortizing. If things go sour, the debt you have is huge. If the cost to service debt is to change, you should consider is going to be difficult to finance in a changing environment later. your alternatives. It’s a catch-22, though: The riskier the deal, the less likely you are to have cash flow to pay down your debt. This isn’t to say that highly levered deals can’t be done; there are times when higher leverage makes sense. If you can buy a property for $17 million and Michael Foy is the president and Jaimie Walker oversees the the asset is worth $20 million, do it. Make your assessments on business development for venture-capital firm Storage Capital the in-place value. Buying a neighboring facility or constructing an and Foy & Co., a brokerage firm specializing in the acquisition expansion on an existing asset comes with a level of comfort and and disposition of self-storage operations in Canada. security. Any deal in which you can cut costs is a deal worth doing. For more information, call 647.922.5133; e-mail It’s highly likely you’ll be able to create value. [email protected]; visit www.foyco.ca.

ISS I 2017 International 32 www.insideselfstorage.com www.insideselfstorage.com

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