Reasons To Renovate: When A Facility Rehab Makes Sense

The self-storage developers of a few decades ago would have been awed by today’s new facilities. The sophistication of our technology, state-of-the-art security, levels of automation, and sheer aesthetics of some properties would have seemed implausible. What’s more astonishing is that customers have come to expect these features. In a time of rising competition, rehabbing an older property may be the only way to remain relevant in the market.

When contemplating a rehab, owners consider several factors: How will the cost of upgrades bring a return on investment? What needs to be upgraded? How do you provide minimal disruption for existing tenants? Industry experts have distinct thoughts on the answers to these questions. Whether you own a single facility or dozens, it’s important to consider your market, financing options, expected ROI, and exit strategy when planning the scope of a project. It’s also critical to use vetted self-storage professionals at every stage.

Tarik Williams, vice president of Gilbert, Ariz.-based TLW Construction, says the renovation projects his company has done have always happened after an acquisition. “When someone buys an existing site that has deferred maintenance, they have more ambition, a greater purpose, and sometimes are better funded,” he says. “They want to allow that asset to reach its full potential or its underwritten potential in the purchase. Entrepreneurial individuals see that there’s greater potential for increasing rents by coming in and doing certain improvements.”

Other owners undertake a rehab project because delayed maintenance is causing significant problems, such as a leaky roof or doors that don’t work properly. These issues lead to tenant complaints and safety issues. However, Charles Plunkett, CEO and founder of San Antonio-based CAPCO Steel, Inc. and CAPCO General Contracting, says a more common scenario for owners they have worked with is the need to bring a facility up to par with the surrounding competition. “You have to get yourself current in the marketplace or you can fall behind,” he says.

Competitive Forces

In markets where competitors have built impressive new facilities near an older generation property, even a property in good repair may need an aesthetic makeover. Plunkett says that in these scenarios, what the public sees from the road is key. A first- or second-generation property may require a facelift as well as an interior remodel. “We may give it a completely new look, framing around the exterior and adding new rooflines,” he says. In addition, owners usually add new signage and upgrade the landscaping. “Everyone is attracted to things that look nice and are well done,” Plunkett says.

Anne Ballard, president of marketing, training, and developmental services for Atlanta-based Universal Storage Group, agrees that competitive forces are a frequent driver for rehabs. She says it’s time to upgrade when a facility has become obsolete among its competitors or is nonfunctioning. “For example, when all other stores have gates and electronic access, those without cannot compete for the same rate structure,” Ballard says. “If the property has had no upgrades to its physical plant or to its technology in decades, it is time to rehab and get back in the game.” 

Troy Bix, president of the R3 Division at Temple, Ga.-based Janus International, believes an owner who is deferring maintenance to save money will ultimately lose. “When a REIT pops up on the corner with a beautiful, shiny self-storage facility, they will see people leave because they’ll pay the extra $10 or even $30 more per month for that kind of safety, security, and functionality,” he says. “And once they’re out the door, they aren’t coming back.”

Popular Upgrades

Once it’s been determined that renovation is necessary, owners have many options regarding the scope of a rehab. Bix says their R3 (Restore, Rebuild, Replace) program is geared toward helping owners decide what features need upgrading. “If you have dark hallways, unsafe doors, or unsafe gates, it’s beyond time to renovate,” he says. “If you have a door that has issues, that’s a big liability. You don’t want that door to drop on an elderly person and have them get hurt. It’s the owner’s fiduciary and ethical duty to create a safe rental experience for their customers.”

Safety is an issue that can’t be ignored. “We’ve seen things out there such as elderly people going into their units with the door held up with a broom handle, and they’re ducking under.” In addition, Bix says these facilities are rarely ADA compliant. Such safety and compliancy issues expose an operator to potential lawsuits.

Access is often a primary concern in facility upgrades. “Maybe the office is behind the front gate, so new tenants don’t have access to the manager,” Williams says. “So, they might completely rearrange the parking and gate access to make it more new-tenant friendly or maybe more secure.”

Office remodels are also prevalent, sometimes with new facades, new glass, new flooring, and new finishes. Replacing worn fencing can alleviate an eyesore as well. In some projects, TLW Construction has demolished existing structures and built two- or three-story buildings for expansion. With such a wide range between the scope of rehab projects, costs vary considerably. “It could be $50,000 or it could be $3 million,” Williams says.

Security, lighting, controlled access, gates, and switching to LED lights are common in rehabs. Redoing driveways and adding climate control are also frequent additions. Plunkett stresses that it’s important to consult with an industry veteran. “They know what’s current in the self-storage world,” he says. “We collaborate to tell them what probably should be done, what can be done, and some things that are optional.”

In some cases, large-scale renovations are economically feasible because they add rentable square footage. “If you look at a lot of the older generation projects, they put their buildings close together with narrower driveways,” Plunkett says. Capco has combined two existing buildings and the driveway in between to create one, large climate-controlled building. “That’s obviously an expensive rehab,” he adds. “You have to be careful because normally the water drains between the buildings. You have to get an engineer involved and check the drainage to make sure you’re able to do that.”

Plunkett also cautions that when you take single-story drive-up units and add square footage with multistory, new parking requirements or sprinkler requirements can come into play. “So, you have to get water lines to the building and include all of that in the design,” he says. “It can get pretty involved.”

The extent of a very large renovation can require tearing down existing buildings and building new ones as well as adding entirely new buildings if land is available. “This involves regrading and repaving,” Plunkett says. “It can require going to the city for permission.” Meeting ADA requirements may also come into play with large rehabs.

Ballard suggests that a renovation should include “all the technology you can afford.” She says this can include electronic access with keypads, electronic locks, kiosks for on-site rentals and payments, and cameras that read license plates, especially if the owner is running the site remotely.

In addition, the site should be cleaned and painted if needed, the grounds should be well-manicured, and any doors and locks that need upgrading should be replaced. “Signage, as well, should be clean, modern, and easy to read with adequate lighting both internal and external,” Ballard says. “Lighting can make a big difference in the perception of safety for your clients. There are even tax credits or other breaks for installing LED lighting over existing fluorescent or old-style lighting.”

Raising Rents

Of course, owners should embark on a rehab with the intent to increase rental rates. Sometimes, the fear of losing tenants due to rate increases keeps independent owners from upgrading their sites and remaining competitive with newer facilities, especially those whose strategy has been to win when customers play the price-shopping game.

“There’s a small percentage of the population that is very price sensitive, and they’re always going to look for the cheapest deal they can find,” Plunkett says, “but not a lot of people are that way. If you could shop at Neiman Marcus for 10 percent more than you could shop at Walmart, most people would spend a little bit more to have a better experience and get better quality.” He notes that people are generally storing things they care about, or they wouldn’t be storing it. “So, the people who are used to shopping the least expensive, it’s easier to pull them up to a higher quality than to pull people interested in quality down to a lower level,” Plunkett says.

He adds that someone buying an existing facility probably has taken renovations into consideration in the purchase price. “They look at the income stream, but they also look at deferred maintenance and the condition of the facility,” Plunkett says. “The facility may be undervalued. Maybe they haven’t increased rates in a long time, and they realize it needs to be brought up to a better standard. They can afford to spend the money to update the facility and increase the rates accordingly to offset it.”

Bix says it’s a given that when you do a renovation, you increase your rents. “There’s an epidemic in the industry of independents not raising their rents, and they’re leaving money on the table,” he says. “It makes zero sense other than they’re just not good patrons of the business. It’s hurting everybody.”

One miscalculation Bix sees among independents is that 99 percent or 100 percent occupancy is a good thing, although he says it’s the worst place they could be. “Because when that U-Haul pulls up and a family needs a 10-by-30 and you’re full, you have no inventory to do business with anybody,” he says. “Instead of raising rates and, God forbid, three percent of the folks move out, you have the capacity to service new customers. You have to service new customers to remain viable.”

Bix also notes that your quality of tenant decreases when you are drawing the low-price shoppers. Not only do these tenants typically stay for shorter periods, but they are also more likely to pay late and more likely to engage in undesirable activity while on site. Even so, smaller operators may go for long periods without raising rates to align with market demand. “Believe it or not, some are making so much money that they don’t need to make any more,” Bix says. “I love the independents and I’ve worked with them my whole career, but a lot of them have lost their entrepreneurial spirit.”

Most operators, of course, are looking to maximize income. Ballard has seen firsthand how renovations can lead to higher income. “We took over a store near the downtown Atlanta football stadium in November 2012, and by July 2015, we had completely remodeled the office and exterior,” she says. “The streetside no longer looked like a blue prison wall but an inviting retail space.” Comparing income for the two years before the rehab with the two years after, Ballard says they saw a 27 percent increase in revenue at that location.

Managing Tenant Expectations

A big challenge when rehabbing a facility is managing the expectations of current customers during the process. “Communication is key,” Plunkett says. Most rehabs are primarily cosmetic and don’t affect many tenants, he says, but you have to advise them of any renovation project.

“Let’s say you want to do a facelift on 20 or 40 feet at the end of a building and it affects four tenants,” Plunkett says. “You can take this group of people and move them to empty spaces. You tell them, ‘We would like to move you either permanently or temporarily. We’ll hire bonded, licensed movers to move your things. We’ll hire security guards to observe, and it will be video recorded. We’ll make sure your goods are well-cared for and nothing is damaged. We’ll bear the cost of it all, and if you want to be there, you can.’”

Janus uses a similar process. “We come in with a third-party independent security company that films every second of the door replacement process,” Bix says. “We can do 20 doors a day or more. We get them installed and operational very quickly.”

Williams says the hardest part of an extensive rehab project is helping existing tenants understand that things will get worse before they get better, especially when renovations involve paving, gate access, adding climate control, or reroofing. “On occasion, they have to vacate a building,” he says, adding that a re-roof should always be done in one day. Tenants’ reviews may also get worse before the situation gets better, so managing expectations can help the facility’s reputation to stay intact.

Ballard agrees that communication is essential. Universal Storage Group uses texts or emails to send group messages to keep tenants informed of upcoming repairs or maintenance on site. She suggests saying something like, “The 100 Aisle will be closed off on Monday and Tuesday while we replace the doors on those units. Security will be on site monitoring the activity, so please let us know if you need access during that time.” Ballard also suggests letting tenants know when upgrades to cameras, keypads, and other on-site technology will be happening.

Once renovations are complete, customers will appreciate the upgrades to the facility. Industry professionals agree that a rehab should make you money, whether it’s through raising rents, reducing costs through technology, or keeping the competition at bay. Bix notes that all of these factors help you get top dollar for an older facility when it’s time to sell. “There are upwards to 40,000 facilities today that are 20 years and older,” he says. “The market grows daily. You want to remain market relevant.”

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Tammy LeRoy is a freelance writer based in Indianapolis, Indiana, and is a long-time contributor to Modern Storage Media.