Publications

- July 1, 2021: Vol. 8, Number 7

Fifth generation self-storage: The niche property type meets mixed-use and produces some startling results

by Bill Leitner

Like an ever-increasing wave, self-storage began rather simply as a covered land play, owned mostly by mom-and-pop operators. Still today, the industry is about 65 percent owned by mom-and-pop operators, so the industry remains rather fragmented. But, as the attractive operating fundamentals, revealed during the 2008 recession, initially, and again during COVID, more institutional investors began to take notice. It seems self-storage performs well during upcycles and downcycles. With a growing capital demand for the product, the design and operational efficiencies of storage are evolving quickly, reaching a crescendo with the present day fifth-generation storage. So yes, the evolution happened fast, beginning with the self-storage facility with the live-in apartment, evolving to a professionally managed asset class, operating much like an apartment complex to, today, a contactless kiosk rental system that offers a fully automated process. I think the current evolution, fifth generation self-storage, is far and away the most exciting.

Fifth generation self-storage is defined by three primary factors: design, location and use. The design is typically a vertical, three-plus story building with architectural articulation resembling an urban mixed-use project. We call it neo-industrial; my team calls it “urban millennial.” Put simply, fifth generation self-storage is typically located in an urban, densely populated location, where city officials have no interest in a metal building with roll-up orange doors. They want differing materials, metal canopies and inviting facades facing the street. The attractive design elements are a derivative of location. We match the architecture to the market — red brick in Virginia, stucco in Florida, stone and stucco in Arizona — but the interior space plans are effectively unchanged, so our operating fundamentals stay consistent.

Location is probably the most weighted factor within the fifth-generation definition. The site selection process is almost 100 percent identical to retail anchor-tenant’s site selection criteria. In our prior life at Leitbox, retail was our focus. Proximity to rooftops, vehicular commuter patterns, view corridors allowing for branding and, most importantly, ease of access. Those were the mandates. In other words, it’s all about convenience and efficiency for the customer. That’s where we see the greatest parallel to retail. Storage is no longer out by the airport; it’s next door to Starbucks.

Within the fifth-generation definition, the use component is the most exciting in my mind.

By “use” we mean, what services does the physical plant offer. In the past, self-storage has been simply that, storage. Certain amenities, such as conference rooms or office cubicles were often offered. But we are talking about introducing an entirely new use into the physical plant, that’s fifth generation, and this evolution is both better for the community and, in my opinion, required to get the best locations.

Think about it. From a political standpoint, why would a mayor or city council approve storage in their premier urban or retail-centric corridors? The facility does not create substantial jobs (usually two), the facility does not generate significant sales tax revenue (box and locks), and the facility does not produce material impact fees (two bathrooms). So, why allow the zoning? Fifth generation storage integrates other uses to overcome this reluctance.

We typically prefer to introduce what we call high-urban-street front retail. We do not change the scope of the business plan, as this retail component is usually about 4,000 square feet in a 90,000-square-foot building (4 percent of total square footage). But what it does is produce a great looking storefront, more jobs and sales tax revenue. If we deem the area more appropriate for shared office space, we execute on this use too. The office buildout costs are minimal. We simply stain the concrete floor, and the ceiling is exposed piping and conduit. It’s exactly the same buildout as the storage unit space, just without the storage units themselves.

The secret “profit kicker” to mixed-use integration is the break-even occupancy benefit. Mixed use will often decrease the risk of the overall investment. We have found if we lease all 4,000 square feet of retail, open and operating on day one, then our break-even occupancy declines on average from 50 percent occupancy to 35 percent. The retail lease income is about the same amount as 15 percent of the storage income, and the retail pays 100 percent of its contractual rent day one; there is no absorption period. We realize a lower break-even and, therefore, a greater profit opportunity.

The retail uses introduced into the storage building is best determined by the submarket and the other retailers represented in the market. We utilize the same leasing standards we have implemented for the past 25 years with lease guarantees, tenant co-investment in the space buildout, and overall creditworthiness. If the tenant can pass the underwriting test, we welcome users typically spanning various types such as FedEx/UPS stores, coffee and juice shops, professional services, and health and wellness. We also see a combination of retail showroom with a large storage unit to inventory supplies. Think artisan jewelers or custom home furnishings. The storage facility only needs about six parking spaces, so the retailers never have to fight for parking. It’s the perfect combination of a passive use (storage) with an active, customer-heavy use (retail).

Where the fifth-generation evolution is taking us is quite phenomenal. A self-storage building is built like a German-tank. The structural loads are almost twice that of a suburban office building. So, you can pile it in, which is exactly what many nearby apartment manager discussions have revealed. Apartment managers are overwhelmed with deliveries (Amazon boxes and Instacart groceries). Storage facilities provide a secure delivery outlet and are open 24 hours, equipped with dozens of video surveillance cameras, and key-fob access. The apartment managers simply share their code or send a concierge to retrieve. Proximity must work, but this is certainly an area of growth and creativity.

The creativity and differentiation of mixed-use within self-storage is more widespread than many realize. We have seen quasi-industrial uses such as last-mile retail in New York, artisan offices coupled with street-front galleries in Arizona, and even city fire departments in Pennsylvania. We really like the introduction of civil services into the building. With only six to eight customers per day, it is highly unlikely a fire truck, with sirens blazing, would encounter traffic within the project. Quick exits are a cinch.

The idea is to refine the building prototype often. We call it our Anytown USA building, and it’s a constant analysis to squeeze more rentable square feet out of the building and reduce costs. The best location with the lowest cost basis is the secret sauce, and it often manifests great new applications. Imagine a design that involves full automation (meaning no manager) of the storage operations, with a first-floor integration of mixed-use offices around the perimeter of the building.

Fifth generation seems here to stay. We all know real estate is constantly evolving. Not too long ago, many mall developers said food will never be outside the food court, a grocery store will never anchor an open-air fashion center, and apartments don’t need an Amazon delivery solution. Evolution is always good for the customer. Fifth-generation storage will be too. It will be better located, its architectural design will be higher-end and symmetrical to nearby uses and, most importantly, hopefully perform better by capturing more customer traffic. It’s a triple-win trifecta: the customer wins with a better location, the city wins with a better design and supplemental tax revenues, and the investor wins with the potential for lower break-even occupancies yielding greater profits.

Here comes the fifth-gen wave.

Bill Leitner is CEO of Leitbox Storage Partners.

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