Arlen Nordhagen

Over the past few years, the self-storage industry has gained unprecedented momentum, capturing the attention of new investors and spurring the development of new, unique storage options such as valet services that provide higher levels of service at higher rates. Although the future remains bright for the industry as a whole, some seasoned professionals recognize new challenges coming from the segmentation of storage demand. For example, Arlen Nordhagen, CEO and Chairman of the Board of National Storage Affiliates Trust, a self-administered and self-managed real estate investment trust (REIT) headquartered in Greenwood Village, Colo., believes that the maturation of the storage industry is beginning to alter the playing field and possibly the game itself.

“Overall, I remain very bullish as we provide a valuable service,” Nordhagen says, “but the industry is moving into a more mature stage in its life cycle. There are more alternatives within self-storage, which is typical as an industry matures, and advantages of scale are becoming more important than ever before.”

Scoring With Scale

Of course, there are a plethora of ways that economies of scale can benefit self-storage facilities. From access to capital and “bulk” rates for products or services to less tangible items such as knowledge, skills, and experience, economies of scale can be a winning solution to consolidate smaller operators.

“There wasn’t enough economic value in past economies of scale to drive significant consolidation,” says Nordhagen, whose company, through contributions from its participating regional operators (PROs) and third-party acquisitions, currently owns 277 self-storage facilities in 16 states. “Now, with management information and Internet marketing, it’s a big economic advantage.” He adds that the state-of-the-art facilities and high-end services offered by many of the large storage operators are making it more difficult for mom-and-pop facilities to compete.

Undeniably, the most significant difference between small and large operators is their online presence—or lack thereof. Because Internet marketing and website development are two of the costliest expenses, many independent or single-facility operators simply cannot afford to offer top quality online presence and services. Nowadays, with the majority of the population using their smartphones, tablets, and/or other mobile devices to search for storage, this is a clear disadvantage. Therefore, this is one area that economies of scale can be utilized to create significant gains and establish branding.

Moreover, some economies of scale, such as the one provided to partners of National Storage Affiliates (NSA), enable storage owners to diversify their risk and profit from tax advantages of a tax-free exchange while enjoying incremental liquidity for their equity. For instance, NSA’s size and geographic diversification reduce the risks associated with specific local or regional economies. In other words, PROs trade full ownership of their portfolio for equity (referred to as OP units) in all of the NSA’s properties. Nordhagen credits these perks to NSA’s rapid growth. “These are part of the reason we have been successful at growing so fast,” he says. The REIT currently has six participating regional operators: Guardian Storage Centers, Move It Self Storage, Northwest Self Storage, Optivest Properties, SecurCare Self Storage, and Storage Solutions.

Time To Team Up?

Although Nordhagen acknowledges that the self-storage industry is still very fragmented, with many mom-and-pop operators and single-facility owners, he foresees an uptick in consolidation over the next few years due to the segmentation of demand, the maturation of the industry, and the economic advantages of scale. “Those will lead to consolidation,” he says. “Look at the percentages; there hasn’t been much consolidation in the past.”

Indeed, when you look at the industry as a whole from its inception to present day the amount of consolidation has been nearly nonexistent. Nordhagen points out that while the top operators of the industry have grown significantly in size, they still only make up a small percentage of the total number of self-storage facilities. As a matter of fact, according to the 2014 Self-Storage Almanac, the 100 largest operators combined operate only slightly more than 17 percent of the approximately 50,000 primary storage facilities.

Although the amount of consolidation that will occur within the industry is uncertain, Nordhagen doesn’t anticipate many, if any, more self-storage companies becoming publicly traded REITs. “It’s difficult in storage to get mass,” he says. “You need at least $1 billion is asset to be a public company. You also have to take into consideration the geographical presence. You need broad geographic diversification and at least a couple hundred properties to be a legitimate public company.”

An Industry Goal

With consolidation aside, Nordhagen emphasizes that storage operators need to stay on top of new supply. “For private, individual operators, it is becoming more important to know where local growth is expected and where demand is growing more slowly,” he says. “In sub-markets, small operators should be concerned about and aware of local, new supply in light of that sub-market’s demand growth.”

Right now, operators who wish to stay abreast of incoming supply must conduct a considerable amount of legwork on a fairly regular basis. This includes contacting zoning, planning, and permitting committees to inquire about new storage supply. Unfortunately, there is no other way to obtain accurate data.

First of all, Nordhagen notes that municipalities should be consistent when categorizing self-storage. “State associations could approach municipalities and request that they be uniform with the categorization of storage,” he says. “If it was categorized in the same way, operators could collect better data.”

In addition, Nordhagen urges both state and national associations to add value to their memberships by supplying timely and accurate supply data through their member websites. “Associations should provide better information to members about new supply coming in,” he says. “That would allow operators to gather information in a thorough, logical way.”

Basically, this idea would pass the collection task from the operators to the associations. However, Nordhagen believes that the national and state self-storage associations have the resources and ability to establish an easy way for every municipality to report all new self-storage supply. As an example, all municipalities within the state of Arizona could access a specific website to report permit and zoning applications for new self-storage supply. That website would then tally the supply in real time and make the information available to members of the Arizona Self Storage Association. While it may seem like an arduous undertaking, Nordhagen believes it’s a valuable service that plenty of operators, as well as developers and investors, would pay to access.

“The whole industry would benefit from it,” says Nordhagen. “Operators could keep up with markets and state associations could make it easier.”

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Erica Shatzer is the editor of Modern Storage Media.