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Storage Niche Overpacked

Competition has forced some operators to trim rates. And now demand may be dropping.


People stick all kinds of junk into self-storage centers. Now, many centers are becoming junk themselves.

In an example straight out of Economics 101, supply is now outstripping demand in the self-storage industry, dragging down a business that once seemed practically recession-proof.

In a humbling setback, Glendale-based Public Storage Inc. was forced earlier this year to roll back its prices after a sharp increase in 2001 prompted customers to store their stuff in cheaper facilities being built by an ever-growing number of rivals.

"Our timing was not very good," acknowledged Harvey Lenkin, president of Public Storage, the industry leader with about 1,500 locations nationwide. "We began to be impacted by our competitors offering incoming specials and discounts."

Across the country, the number of storage facilities has shot up by more than 60% in the last decade to 35,176 properties, according to MiniCo Inc.'s Self-Storage Almanac. Officials at the publication said they had no figures for California specifically, but industry executives say the pace of growth in the state has been equally swift. There are about 6,000 storage centers statewide, with more than half of them in Southern California.

Certain spots in Southern California are especially overbuilt. Construction of self- storage centers has surged in such places as north Orange County, the San Fernando Valley and the Inland Empire. And since storage centers draw from a fairly small geographic area, it doesn't take much to throw a market out of whack.

In La Habra, for instance, the managers of a Shurgard Storage Inc. center must compete with a new A-1 Self Storage center, while a new Public Storage facility goes up just down the street.

"The business environment is difficult," said Jim McNamee, regional vice president for Seattle-based Shurgard, the nation's second-largest self- storage provider. The company's facilities in Southern California, he added, "have certainly seen erosion in rates and occupancy over the past year."

Traditionally, self-storage executives have bragged that their business was immune to the ups and downs of the economy. That's because demand seemed to be driven primarily by milestones in consumers' lives--new jobs, unemployment, divorce and births--that remained constant. But now, industry representatives say, there are even signs that besides supply shooting up too fast, demand may be slackening.

For example, calls from potential customers to Public Storage and other companies began to decline at the end of last year as the booming housing market moved many families from apartments to more spacious homes. Industry executives estimate that self-storage occupancy rates in Southern California have dropped as much as 10% from year-ago levels.

Despite the cutthroat environment, some insist that the right location can still make self-storage a lucrative business. In the rapidly growing Inland Empire, executives of real estate firm Empire Cos. said they had no qualms about nearly doubling its number of self-storage units. The occupancy rate remains above 95% even though the company has raised rents.

"We like the business," said James Brooks, president of Empire's commercial real estate division. "It's a business of collecting rents."

Meanwhile, the relative ease of building and operating self-storage centers and the entrepreneurial nature of the business--the top 100 operators control less than 15% of the industry--continue to attract newcomers.

It takes only about $3 million to $5 million to build a typical suburban storage center that--thanks to minimal construction and staffing costs--can break even if it is only 30% occupied, according to industry analysts. Owners of favorably located centers can reap rents on a per-square-foot basis that equal those of apartments but without the high maintenance and investment costs.

Enticed by these fundamentals, many go into the business with big dreams, determined to become the next B. Wayne Hughes.

Hughes, an industry pioneer and Public Storage co-founder, ranks as one of California's richest individuals, with a net worth estimated at about $1.6 billion. At this week's Inside Self Storage Expo, a large industry convention in Orlando, Fla., one of the seminars is titled "Who Wants to Be a Self-Storage Millionaire?"

But too many would-be millionaires are clearly bad for the industry.

"It's too easy to get into the business," said Irvine real estate investment manager Robert M. Campbell, whose CT Realty is investing in self-storage centers. "That gets everybody and their grandmother into self-storage."

The difficult conditions have prompted some to become more cautious. For its part, Public Storage plans to add only about 35 new locations this year, which, the company notes, is a small increase over its existing portfolio.

"We are going to play conservatively," said Lance Watkins, head of Storage Outlet, which operates a small chain in Southern California. "I'm ready to pass on certain sites to make sure we're building at the right locations. I think the yellow [warning] light is on and strong on overbuilding."

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