Neighborhood Start-Up: An Industry Disruptor or Passing Trend?

Neighbor Storage Inc. started with the simple premise that people with extra space in their homes, garages, sheds, or driveways, as well as owners of commercial buildings with vacant space, might want to generate extra income by renting that space for storage.

Then-classmates Joseph Woodbury, Colton Gardner, and Preston Alder co-founded Neighbor in 2017. The idea struck Alder when he was leaving for an internship in Peru. He had searched for an affordable storage option but found only expensive, dirty, and inconveniently located facilities. So, he used a friend’s garage instead.

“I felt so much more peace of mind having my items in a nice, clean, residential garage,” Woodbury says.

The company, based in Lehi, Utah, provides an online platform to connect renters with storage-space providers, or “hosts,” at rates Neighbor says are 40 percent to 50 percent lower on average than traditional self-storage. It says the amount of commercial space listed on its platform increased more than 10 times in 2020.

Neighbor verifies the identify of every host on its platform and requires hosts to submit extensive information about their space before they may list it. The company also advises hosts to present clean, uncluttered, and attractive spaces for potential renters. It provides more information on its website, neighbor.com.

Enticing Investors
Venture capitalists are taking notice of Neighbor. The company secured a $53 million second round of venture capital in March of this year, according to TechCrunch. This came after a $10 million first round in January 2020.

The second round was led by Fifth Wall and included venture capital firm Andreessen Horowitz (known as a16z) as a repeat investor as well as DoorDash CEO Tony Xu and StockX CEO Scott Cutler as new investors. Xu, Cutler, and former Uber CEO and Neighbor investor Ryan Graves are also advisers for Neighbor.

“We really grew into a national business over the last year and now have active renters in more states than Public Storage, which is a $43 billion publicly traded company,” Neighbor CEO Woodbury told TechCrunch.

Fifth Wall partner Dan Wenhold told TechCrunch he had offered to present Neighbor’s concept to Fifth Wall’s limited partners, including more than 65 of the largest real estate owners and operators in the world from 15 countries. These included Acadia Realty Trust and Jamestown, which are putting properties on Neighbor’s online platform.

“We are sort of the bridge between the largest owners and operators of physical real estate assets and the most disruptive technologies that are impacting those property managers and landlords,” Wenhold says. “And Neighbor fits perfectly into that thesis for us.”

The Business Model
The increasing exodus from big cities such as New York City and San Francisco to more rural areas and people increasingly winnowing what they store in their homes have stimulated demand for self-storage, Woodbury told TechCrunch.

Woodbury also told Pulse 2.0 that “storing your personal goods in someone else’s space is rooted in trust, and we’re proud to have expanded our community’s trust into tens of millions of square feet in big cities, small towns, suburbs, and rural areas across all 50 states.”

Neighbor provides a free $1 million liability guarantee to hosts and a free $25,000 property protection guarantee to renters. Both guarantees are secondary to applicable insurance coverage. A host bears no liability for damage to a renter’s stored items unless the host is negligent or causes the damage.

The company generates revenue by charging renters a service fee, which “allows Neighbor to provide our $1 million guarantee, a secure platform, responsive customer care, and other services,” according to its website.

Other information from a FAQ link on the company’s website includes:

• How much should I charge for my space?

Although Neighbor provides a recommended price range for storage listing, hosts can set their own price based on location, size, and features. Neighbor strives to provide renters with affordable storage options at roughly 50 percent the cost of traditional self-storage. In order to ensure a quick rental, it is always a good idea to price your listing according to Neighbor’s recommendation rather than based on unreserved listings in your area or traditional self-storage.

• Is Neighbor a safe platform to find renters?

Before approving a storage reservation, hosts can view the renter’s profile, read what they want to store and why they are storing, and message them through Neighbor’s internal messaging system to get to know renters.

• What if I need to use the space that a renter is occupying?

If you need the renter to vacate your space, we recommend that you work this out with the renter and allow them to cancel the reservation themselves. You are required to provide 30 days advance notice, otherwise you will be charged a $60 Eviction Fee (except in the case of Terms of Service violations by the renter).

• What is Neighbor’s refund policy?

If you cancel more than three days before your reservation begins, you will receive a full refund. All renters who cancel within three days of reservation start will be returned 80 percent of the listing cost (not including Neighbor’s Service Fee). Renters that cancel a reservation after a rental period starts will not receive a refund. If a renter cancels a reservation less than 24 hours after approval, regardless of start date, the renter is eligible for a 100 percent refund of the listing price and the service fee.

• Scam Prevention: As long as you stay on Neighbor throughout the entire process, you’re protected by our multi-layer defense strategy. Measures used include photo ID, phone, and email verification.
• Secure, Automatic Payments: If the renter is late or stops paying, hosts receive guaranteed payouts for as long as their space is occupied. Also, our PCI-compliant payment processor has the most stringent certification in the industry.
• Safe Messaging: Messaging through Neighbor’s website or mobile apps allows you to communicate without sharing private contact information.

Is It A Disruptor?
Other industry experts are taking notice of Neighbor, though some are skeptical of it. Kenneth Nitzberg, chairman and CEO of Devon Self Storage, based in Emeryville, Calif., says he wonders whether Neighbor’s 40 percent to 50 percent lower average rents claim is accurate. The company’s prices “nudge right up against our prices,” he says. “Pick a city and check a few of the rates (Neighbor offers). Go online to self-storage facilities in the same market and check their rates. If (Neighbor’s rates are) 50 percent less, I’ll eat your computer. It’s great advertising, offering five times the insurance coverage that all the public REITs and we offer, at half the price, and (Neighbor must) pay the homeowner and make some money themselves.”

Devon Self Storage learned through focus groups with its tenants that 70 percent of its leases were signed by women during the week. Those tenants cited safety and cleanliness as the main reasons they chose Devon Self Storage.

“I don’t think (Neighbor) is going to affect the self-storage business at all,” Nitzberg says. “Everybody wants to try to ‘Uberize’ our industry or whatever industry. … There’s always going to be a market for brand new Mercedes and … for used Kias.”

The problem with that Uberization, he says, is that the self-storage industry, which the Self Storage Association values at $34 billion annually in the United States, has 2.8 billion square feet of storage in the United States with 60,000 stores. Business models such as those used by Neighbor and Clutter, which pick up customers’ belongings to store them, are “all viable to a minimal degree” in some markets.

These companies’ approaches are “a neat idea,” but their real viability is that they have been “spectacularly good” at securing venture capital, Nitzberg says, but “none of them have ever turned a profit.” However, Neighbor could be the first.

“And at some point, you’ve got to make a profit, or you don’t get to stay in business … (but) maybe I’ve got my head in the sand and I’m playing ostrich,” says Nitzberg.

One of Neighbor’s biggest space providers in the San Francisco Bay Area is a small self-storage company, “not somebody’s garage or backyard,” Nitzberg adds. Neighbor confirms that it allows anyone with space for rent to list it on the platform, including traditional self-storage facilities.

If Nitzberg were to rent storage space in someone’s house, he would “be worried like crazy that someone’s going to steal the stuff or it’s going to disappear.”

“It’s not like it’s a facility with 600 units, a full-time manager, security, and locked doors and locked units,” he says.

Dense urban markets where space is costly and hard to find also tend to have small apartments with little extra space to rent out, Nitzberg notes. A friend of his in Queens, N.Y., has a storage business that serves several hundred big apartment buildings in Manhattan. He puts storage cages in the buildings’ basements, rents them to the buildings’ tenants for storage, stores them in a warehouse, and splits the revenue evenly with the buildings’ owners.

“So how am I going to rent my closet in that building?” he asks.

Nitzberg also questions the details of Neighbor’s $25,000 protection of a renter’s goods. How much is the deductible? Where is the proof of what was stored?

Some answers to those questions are listed on Neighbor’s website: “All items must be disclosed upon reservation. Items with a value greater than $1,000 (USD) must be disclosed as such per our terms of service. If a vehicle is stored outdoors, an anti-theft device (e.g., hitch lock, tire boot, steering wheel lock) must be installed to qualify. Vehicles must also be properly registered and/or insured according to local laws to qualify. If a claim needs to be reported, documentation (photos, receipts, police reports, etc.) may need to be provided as part of the resolution process. More details can be found in our terms of service (neighbor.com/terms-of-service).”

Devon Self Storage sells a maximum of $5,000 in tenant insurance at $16 a month, according to Nitzberg. Most of the better operations, all the REITs and the better independent companies, have a lease provision that prohibits renters from storing more than $5,000 worth of goods without the owner’s approval and an inventory.

“Every time a disaster happens, you find out everybody’s storing their 70-inch plasma screen TV and their Picasso in their storage unit,” says Nitzberg. “So, we limit everybody’s storage to $5,000 liability, and we’re actually on the hook for nothing because we don’t do the three Cs: care, control, and custody. All we do is rent floor space.”

A building’s owner has insurance to replace the building if it burns down, for example, but the tenant is responsible for insuring the stored items.

With Neighbor, Nitzberg wonders: Who is liable for what? For whom is Neighbor working? The homeowners trying to get revenue by renting space below market cost or the renters? For Devon Self Storage, “the renter is our customer.” How much revenue goes to Neighbor and how much to the storage space provider?

Companies such as Neighbor, Clutter, and PODS (Portable On Demand Storage) increase awareness of traditional self-storage, Nitzberg says, describing a panel ad in New York City subway cars that says, “Self-storage is stupid. Call Clutter.”

“Clutter two years ago damn near threw in the towel,” says Nitzberg. “I love these guys … (and they have) raised a lot of money.”

Anne Mari Decoster is careful not to let her 20 years in the self-storage industry skew her evaluation of Neighbor. DeCoster is chief operating officer of Storelocal Storage Co-Op, based in Newport Beach, Calif., and executive vice president of its Tenant Inc. subsidiary.

She asked some people whether they would store their belongings in places Neighbor lists on its platform, and she got a variety of responses. A colleague of hers did the same. Some younger people told him they were interested enough to find out more, but no one she talked to was especially interested.

One said, “I recently stored with Clutter. When I got my belongings back, there was damage. I couldn’t confirm whether it was stored in the climate-controlled environment they said it would be.” He also said he would return to using traditional self-storage because of security.

“If I were storing my belongings in someone’s house, I would have the same concerns,” DeCoster says.

She wonders whether Clutter’s storing of items in space vacated from other sectors or warehouses falls under statutory definitions of self-storage, which vary by state. That use is not self-service storage, which raises that question.

DeCoster found a 10-by-30 unit listed on Neighbor’s website in a mall storefront that looked like retail space for a company that was no longer in business.

“That might be an interesting way to cross-purpose that space,” she says. “As a consumer, that would be of greater interest to me and other folks I’ve talked about. It seems safer.”

She thinks the industry should evaluate Neighbor’s possible effects on it. With empty retail and office space, which has increased because of the COVID-19 pandemic, it would not be a long-term use of the space because it would generate insufficient revenue to service the debt.

But it could be an effective short-term option for owners who assume a foreclosed property from a bank while the bank finalizes its plan for the property.

She also wonders whether Neighbor’s protocols prevent storage of things such as guns and illegal items such as stolen goods, hazardous materials, and infested items. Neighbors’ rules stated on its website do address that issue, but a host might not know the full range of what renters are storing despite the required inventories.

“I think that’s uncharted territory,” DeCoster says.

Traditionally, it’s hard for a storage business to win a case in court against a tenant who claims the business wronged them.

“It’s a legal issue, a moral issue, (and) a comfort issue,” she says. “The customer bears legal liability in self-service storage.”

All states have legal requirements for leases, which must be modified for each state. How would a homeowner know whether a lease he signs with Neighbor complies with the law? If a lease doesn’t comply, DeCoster says, how would a homeowner evict the tenant?

“Are you going to come to the (Self Storage Association’s) lien seminar?” she says.

Despite these uncertainties, a market segment of consumers who want to store their items in people’s homes probably will always exist, she says. But, just as Nitzberg does, she doubts it will be a niche that poses a significant threat to traditional self-storage.

She cites the SSA’s most recent demand study, which says price is not renters’ most important factor in deciding where to store their goods. Conversely, safety is first, followed by a location’s convenience and then price.

Anne Ballard, president of marketing, training, and developmental services for Atlanta-based Universal Storage Group, says that despite the $63 million in venture capital Neighbor has raised, and “knowing the storage business and how solid it is and what customers want and demand, it’s not where I would put my money.”

“I don’t think it’s ever going to pull any self-storage customers,” Ballard says. “This is a different class of customer.”