Forecasting economic trends, particularly in real estate, is risky business. However, failing to pay attention to trends such as interest rates, cap rates and overall investor confidence is even riskier. Self-storage owners make or lose money because theyre in the real estate business, not the self-storage business, even though their facilities may be an extremely reliable income stream.

The value of your self-storage property is affected far more by economic trends that impact the real estate market than by operational factors. Today investors not only have capitalization-rate risk but interest-rate risk. The first thing to remember is income creates the basis for value.

In real estate, the relationship of income to value is called a capitalization (cap) rate, which is the rate of return an investor will expect on the invested equity without taking into consideration debt on the investment. If you think about the return on an investment, a low return or cap rate usually implies a higher value for the same income. Conversely, a high return or cap rate usually means a lower value for the same income. This ratio, or cap rate, is set by buyers and sellers in the market.

Property-specific and market conditions also have a dramatic effect on cap rate. Together, they determine what buyers and sellerswho often do not agree on associated riskfeel is an appropriate cap rate for an investment. Therefore, its important for self-storage owners and real estate investors to understand the risks and factors affecting value in the market. If you do the math, youll see that capitalizing market conditions will have a greater impact on an investments internal rate of return (IRR) than simply renting more units and improving facility operation.

The True Cap Rate

First, understand a cap rate is a mysterious number and changes from one property to the nextthere is no standard. When you hear someone say they bought a property on a 10 cap or sold on a 7 cap, remember many things affected those rates.

The relationship of income to value changes from asset to asset. Property-specific actors include:

• Is the property on a land lease?
• Is the market overbuilt?
• How difficult is it to develop a new project in the market?
• How many competitors are in a five-mile radius?
• Who are the competitors?
• Is the state considering a sales tax on self-storage rentals?
• Whats the quality of construction on the project?

Market conditions may have an even bigger effect on the cap rate and include such things as investor confidence, inflationary risk, interest-rate risk and the availability of financing. There simply isnt one number that can be used to value every project. Every property has its own set of risks.

Interest Rates: Whats Next?

The continuing low-interest-rate environment has had a dramatic impact on self-storage investments over the last six to nine months. The most obvious and positive effect is owners are able to sell their properties for close to historically high prices or refinance and keep a larger share of their hard-earned income by paying less to their lenders in the form of interest.

The reality is buyers are paying high prices because theyre able to borrow at somewhere between 5.25 percent and 6 percent interest, which leaves plenty of spread between the cap rates and the cost of borrowed money. As always, investors are looking to create arbitrage, taking advantage of the difference between what they can borrow and the return theyre receiving on investments. This tactic increases the rate of return on equity.

With these thoughts in mind, many investors wonder how long current interest rates will last. With the liquidity crisis of 2008 still fresh in the minds of the U.S. Federal Reserve and the ever-increasing concern about inflation, the question is when to jump.

We also wonder when the Fed and other political types will make it a priority to control inflation, i.e., raise interest rates. What we do know is as interest rates go up, prices relative to income will go down. Buyers will not purchase properties at cap rates that are less than the cost of borrowed money. Not even the best management can make that situation profitable.

Overcoming the Risks

When considering the cap-rate and interest-rate risk in the market today, you can protect your investment by ensuring you have plenty of time left on your existing loan, and the interest rate is locked or has a ceiling you feel is reasonable. Also, your ability to take advantage of perceived market conditionsfor example, selling when the market is improvingwill have a greater impact on your investments IRR than simply renting more units and improving operation.

To execute on this strategy, you must have a low or no prepayment penalty on your existing loan. As you know, its not how you get into the deal, its how you get out of it that counts. Lastly, keeping your loan-to-value in line with the depth of your resources will enable the property to make money for you rather than its leverage. Its also just a good business practice.

There are many things that affect self-storage value, and I cant begin to address all of them or even do justice to the details as it relates to the relationship of cap rates and interest rates. Hopefully, this article has given you some insight as to the risks and opportunities present in the current market.

Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail bvestal@argus-realestate.com.

Hill Country Self Storage in Cedar Park, Texas, a suburb of Austin, was recently sold to Don Clauson, a local owner. The 555-unit, 68,777-square-foot facility was built in 2005 and was 85 percent occupied at the time of sale.

The seller, Legend Communities, was represented in the transaction by Steve Mellon, vice president and director of the Self Storage Group at Grubb & Ellis Co., a Houston-based real estate services and investment firm. Mellon was joined by Pete Williams, executive vice president of the Grubb & Ellis Memphis, Tenn., office. According to Mellon, Hill Country Self Storage is considered a trophy asset since it is a recently constructed, well-leased property in a good location. 

During the past six months, the Grubb & Ellis Self Storage Group has closed self-storage assets in Florida, Tennessee and Texas with a total value in excess of $20 million.

Grubb & Ellis employs more than 5,200 professionals in more than 100 company-owned and affiliate offices. The firm provides real estate transaction, management, consulting and investment services as well as investment products to property owners, tenants and investors.

Red Storage at 3300 N.E. 2nd Ave. in Miami, Fla., was recently sold to Sentry Self Storage. Sentrys owner will operate the 670-unit, 44,449-square-foot facility along with his other property in Coral Springs, Fla. Red Storage, which was 55 percent occupied at the time of sale, was opened via conversion in 1998.

The seller was represented in the transaction by Steve Mellon, vice president and director of the Self Storage Group at Grubb & Ellis Co., a Houston-based real estate services and investment firm. Mellon was joined by Grant Savage, senior vice president of investment services.

According to Mellon, Red Storage is in a great location that stands to benefit when the economy strengthens. The sale was the result of a referral from Dixie Walker, executive vice president of institutional capital markets in the Grubb & Ellis Newport Beach, Calif., office.

During the past six months, the Grubb & Ellis Self Storage Group has closed self-storage assets in Florida, Tennessee and Texas with a total value in excess of $20 million.

Grubb & Ellis employs more than 5,200 professionals in more than 100 company-owned and affiliate offices. The firm provides real estate transaction, management, consulting and investment services as well as investment products to property owners, tenants and investors.

The early-bird registration deadline for the Inside Self-Storage World Expo in Tacoma, Wash., is just one week away, but attendees can still save up to $300 through Aug. 5. The event at the Hotel Murano and Greater Tacoma Convention & Trade Center, Oct. 4-6, will feature 38 seminars, four workshops, two days of product and service exhibits, and multiple networking events. By registering before the early-bird deadline, attendees will save:

• $200 on the standard Education Package
• $245 on the Premium Package, which includes the Education Package plus a choice of two workshops
• $150 on individual add-on workshops

The standard Education Package includes access to all seminars, the exhibit hall, and networking events including the popular Self-Storage Q&A, cocktail reception and Buyers & Sellers Meeting. Self-storage owners, managers, developers and investors will have access to five comprehensive education tracks covering the industrys hottest topics including online marketing, collections and lien sales, manager incentives, facility design, and much more. The expos four add-on workshops delve deeper into the critical areas of online marketing, legal issues, development and site operation. The exhibit hall will feature more than 50 of the self-storage industrys top suppliers representing a highly diverse range of products and services.

Attendees can also take advantage of discount room rates through Sept. 9 by calling 888.862.3255 and mentioning the expo.

Details about the conference and tradeshow can be found at www.insideselfstorageworldexpo.com. Registration can be completed online or by calling 800.230.2311.

Several tanks of anhydrous ammonia were discovered in a unit at a self-storage facility in Evansville, Ind.

Firefighters removed the tanks from a unit at Infinite Self-Storage and submerged them in water to dissipate them and release the ammonia. One firefighter was injured during the process, receiving chemical burns. He was taken to the hospital, but his injuries were not life-threatening.

A firefighter spokesman said the tanks appeared to be homemade and used to manufacture methamphetamine. According to Wikipedia, anhydrous ammonia is a colorless gas with a pungent odor.  

By Greg Moore

When the Gilroy family set out to build their third self-storage facility in Washington, a residential design in multiple stories coupled with high-end features allowed them to make the most of a smaller building footprint. The developers faced restrictive site conditions as well as design and zoning challenges, but persevered to create a characteristic addition to an already busy market.

The Gilroys chose the site for Stor-House Self Storage & Wine Storage, their first multi-story facility, because of its proximity to downtown Bellevue, an affluent Seattle suburb. Through the years, the Gilroys witnessed the citys growth firsthand, and capitalized on it by opening single-story in-fill projects surrounded by residential neighborhoods. This was a major facet of the familys branding process, leading to an overall design concept thats residential in nature.

When the right property came up for sale, adjacent and visible to1-405 and less than half a mile from a downtown off-ramp, the family purchased it right away. The 2.29-acre parcel was zoned light industrial and located within a Transition Area Overlay District.

The feasibility study found six other storage facilities in the immediate market, four of which are owned and operated by Public Storage. All told, the competition had 4,181 units between them and was maintaining occupancies of more than 90 percent. The study showed the market could bear another an additional 90,000 net square feet of storage.

Due to restrictive site conditions, careful consideration was made to maximize the building size and minimize construction costs. The development team designed a building footprint of 39,640 gross square feet that would reach four stories. The project would ultimately contain 120,980 square feet and 735 climate-controlled self-storage units.

After examining geo reports and building loads, it was decided the building had to be split into two sections. The south portion became a three-story building with a basement, as described by building codes and sloping grades. The north portion became a two-story building with a mezzanine. This actually facilitated the construction sequencing, as the contractor was able to maneuver equipment and materials in an ordered manner throughout the construction phase.

Preliminary Design, Zoning and Pre-Development

When the Gilroys purchased the property in June 2006, it was vacant. It also came with permits to construct a 140,000-square-foot office building with underground parking, but the Gilroys had other plans. In September 2007, they used the already-permitted plans to grade and clear the site. Pre-loading was necessary to prepare for the self-storage construction.

More than 3,000 cubic yards of material was dug out of the hillside along the south edge of the property and placed throughout the northern portions of the site for surcharge purposes. The development was also affected by two sensitive areas: steep slopes of approximately 35 percent to 40 percent throughout the south and southeast parts, and wetlands on the state-owned property to the north of the site.

The steep slope and wetland areas remained largely undisturbed, but each carried a building setback imposed by the city75 feet in the case of the steep slopes, and 60 feet for the wetlands. Since the steep-slope buffer was very low in quality due to the activities of the previous property owner, a storage yard for a construction company, the Gilroys negotiated with the city to build a retaining wall that would allow the building to be closer to the slope.

In the case of the wetlands, the Gilroys elected to restore and enhance the buffer, which had become overgrown with blackberry and other noxious weeds, with native plantings. The family was not required to this, but thought it would add to the overall street appeal.

Due to its proximity to residentially zoned property on two sides, the project was limited in terms of height and appearance. The Gilroys had to complete a nine-month design-review process, during which every item of site planning and construction design was highly scrutinized by city planners. Thanks to the residential nature of their branded style, the project was approved with few changes and in a relatively short time. They received the green light to move to construction submittal in December 2008.

Construction Begins

Permits were released by the city in August 2009 and construction began in earnest. First, a soldier-pile retaining wall was constructed at the south end of the site to complete site grading. Complicating matters, the state of Washington had just completed a multi­million-dollar expansion of 1-405 that included a massive retaining wall immediately adjacent to the project's east property line. This necessitated driving the piles for the storage retaining wall 30 feet deeper than normal, adding more than $50,000 to the project. The poor, peat-laden soils with high-water content required 79 geopiers, or underground borings filled with rock, to support the monolithic 10-inch slab-on-grade foundation for the four-story part of the building.

Soon after construction began, the rainy season hit and the water-saturated soils on the site continued to pose a problem. Three wells were installed around the property, pumping out thousands of gallons of ground water just to keep the foundation walls dry. To fight future water intrusion, underground foundation walls were treated with an elastomeric coating and covered with drain tile before being backfilled with 100 percent free-draining rock by the site work contractor.

Since the building was so large, staging area was at a premium, which forced the general contractor to carefully phase the construction between the north and south halves of the building. This way, each contractor had space to work without stumbling over or holding up another trade.

Exterior Design

When the Gilroys entered the self-storage industry a decade ago, the goal was to create a brand with features typical of residential architecture, and this new facility is no exception. First, the building was made to appear less massive by breaking it up into two- and four-story segments. Next, the facade along the frontage was divided into modulating segments, each of which ranges from 30 feet to 80 feet long and approximately 10 feet deep. Each facade also features three recesses in the block, painted green to emulate the appearance of metal roll-up doors.

The exterior of the building consists of a primarily split-face scored and smooth-faced concrete modular block (CMU), with some vertical-ribbed metal siding. The CMU was painted to contrast the the metal siding. Along the west and east faces of the building, theres an alternation between smooth and broken-face CMU and emerald-green siding. The Gilroys chose to apply a more expensive, emerald-green standing-seam metal roof to the two- and four-story building segments, as well as the two towers. This presents a polished appearance from I-405, from which the roof is visible.

A 40-foot-by-50-foot covered loading bay was designed for the center of the building, immediately adjacent to the main lobby. There are four elevators: two in the main lobby, one at the south end of the site adjacent to a second, smaller loading area, and one that exclusively serves the wine-storage area.

Interior Design

Inside, bright, wide hallways welcome customers, while music plays on overhead hallway speakers. Extra-wide, white soffit panels pick up much of the light from each fixture and reflect it downward, and white doors reflect even more light to make the hallways brighter and eliminate dark corners.

With such a monochromatic scheme, the Gilroys anticipated customers might easily get lost among the many hallways. They installed color-coded metal strips to the header and sides of each unit to help customers navigate the floors.  Each tenant receives an access-card holder that corresponds with the color of his section.

An interior designer created a free-span office layout featuring finished materials. The area behind the front desk showcases advanced security features, including eight 27-inch LCD screens playing back images from 49 security cameras in and around the building. The desk features two manager workstations. Theres a slat-walled retail area on either side of the desk.

Wine Storage

When the Gilroys began looking for ways to diversify their facilitys revenue stream without straying too far from the core business, they turned their focus toward wine storage. A review of the immediate market showed the four existing wine-storage facilities in the greater Seattle area were virtually full. The higher-end demographics of Bellevue seemed a perfect match for such a venture.

Wine Storage Bellevue occupies 8,000 square feet of the new four-story, $7.5 million facility. A special area of the second floor sets the wine storage apart, combining elements of wine culture with security expertise. All-steel lockers with steel latches and bezel cylinder locks were chosen over the plywood and padlocks used by competitors. After extensive research, the Gilroys created 418 lockers ranging in capacity from 10 to 200 cases. At full capacity, more than 19,000 cases of wine can be stored on the site.

The wine storage is temperature- and humidity-controlled, and maintains a fairly constant temperature of 55 degrees and 65 percent relative humidity. The settings are recorded via a monitoring device connected to the Internet. The sensors also alert the manager via e-mail if the room deviates from the designated settings. Oenophiles enter the wine-storage area through a custom, hand-carved door of deep mahogany and proceed to the dedicated elevator operated by keycard.

Perhaps even more significant than the wine-storage area is the wine-resource center. Its a 1,000-square-foot, Tuscan-inspired oasis where customers can hold small, private tasting events or wine-club meetings, or simply share a favorite wine with a fellow connoisseur. It features custom leather and wood furnishings, custom stonework, old-world-style plaster walls, and custom woodwork.

In June 2010, the Gilroys opened Stor-House as a reflection of their deep commitment too their business and the community they serve. Despite development and construction challenges, they believe their residential design, combined with exceptional features, will elevate their first multi-story development in the marketplace.

Greg Moore is principal of Moore Design Associates, formed in 2002 to specialize in self-storage design services. Moore has several years of design experience including high-rise office buildings, retail design and planning, multi-family housing, and institutional design. To reach him, e-mail gmooredesign@comcast.net .

Stor-House Project Team

Owner: Gilroy Family Bellevue LLC

Architect: Peter Schroeder, Peter Schroeder Architects

General contractor: Northward Construction

Structural engineering: B&T Design and Engineering Inc. 

Landscape architect: Moore Design Associates

Civil engineer: J3ME

Storage consultant: Moore Design and Associates

Doors and hallway systems: Janus International

Building systems: Kiwi II Construction

Office design: LG Interiors

Security installation: Access Systems Plus

Landscape: Holly Moore Landscape Architecture

Site-work contractor: RPD Construction

Concrete slabs and decks: A&S Development

Masonry: Allied Masonry         

Site work contractor: RPD Construction

Extra Space Storage Inc., a self-storage real estate investment trust, released its operating results for the three and six months ending June 30.

Highlights include:  

• Achieved funds from operations of $0.27 per diluted share, including development dilution of $0.02 per share resulting in approximately 22 percent year-over-year growth for the quarter.
• Grew same-store occupancy by 290 basis points to 89.0 percent compared to 86.1 percent during the same time period in 2010.
• Increased same-store revenue and net operating income by 4.7 percent and 7.8 percent, respectively, as compared to the same period in 2010. This includes tenant reinsurance income and expenses.
• Acquired 24 properties in 11 states.
• Added 26 properties to the company's third-party management platform.
• Issued and sold 5,335,423 shares of common stock in a public offering for total net proceeds of approximately $112.5 million.
• Paid a quarterly dividend of $0.14 per share.

"Extra Space Storage's diversified growth platform has produced another quarter of strong results for our shareholders, said Spencer F. Kirk, chairman and CEO. Our solid performance resulted from better-than-anticipated core operations, robust acquisition activity and significant growth in our third-party management business. These components have combined to enhance our trajectory towards double-digit earnings growth in 2011 and beyond.

A proposal to build a self-storage facility on a 7-acre land parcel in Aurora, Ohio, was unanimously rejected by the planning commission last week. Aurora Partners II had requested a conditional zoning certificate to build 73,000-square-feet of self-storage units and 9,000 square feet of office/retail space on the south side of Route 82.

Commission members said they denied the request because the land is zoned commercial, and self-storage is only permitted in an industrial zoning district. The applicants contend that storage is not so different from current uses of adjacent property, and their facility would be more aesthetically pleasing. They say the land is not good for retail use because it does not front a major thoroughfare.

Land owners Harry Caplan and Joe Chiro are now considering an alternative plan to build a car-care facility. They can also appeal the planning commission's decision to City Council. If the Council does not overturn the decision, the property owners can take the matter to Portage County Common Pleas Court.

Caplan has suggested a possible sale of the land to the city, which could use it to expand the cemetery and service-center grounds. Mayor Lynn McGill said he'd be willing to negotiate, but noted the selling price would have to be reasonable."

A city council in Andover, Minn., denied a self-storage owners request to develop outdoor storage for trailers, RVs, boats and other vehicles.

Kraig Domogalla requested a conditional-use permit for outdoor storage at his business, ABC Mini Storage, 13624 Hanson Blvd.

In a 3-2 vote, the council denied the request, despite a need for such storage, according to some residents and at least one councilmember, Mike Knight. Three other council members said they had concerns about the aesthetics of the property, claiming its not the direction of redevelopment in which theyd like to focus.

Domogalla proposed adding plastic slats to an existing fence to screen the outdoor storage area, which is visible from Bunker Lake Boulevard and Grouse Street. Knight suggested raising the fence height and adding height restrictions for store vehicles and boats.  Domogalla agreed to these stipulations and also said he would forbid the use of tarps.

Upon further discussion, the council also determined the property didnt meet certain city codes, including parking and storage areas to be paved and have a curb and gutter. The property also didnt meet the required 20-foot setback from the parking area to the front property line on the east side of the site.