Top 10 Challenges Facing Self Storage Operators

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Scott looks at the top 10 trends and obstacles shaping the industry from economic uncertainty and rising operational costs to labor challenges and sustainability pressures.

He also offers actionable strategies for staying ahead, emphasizing innovation, adaptability, and customer focus.

With insights from his 5-million-square-foot portfolio and 29,000 units nationwide, this episode will help self-storage investors and operators gearing up for a successful year.

WHAT TO LISTEN FOR
6:06 - The importance of technology and automation in 2025
15:00 - Cybersecurity threats and protecting customer data
22:25 - Labor market challenges and hiring Rockstar managers
26:01 - Strategies for proactive, customer-focused operations

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Chapters

• 6:06 The importance of technology and automation in 2025
• 15:00 Cybersecurity threats and protecting customer data
• 23:28 Labor market challenges and hiring Rockstar managers
• 27:04 Strategies for proactive, customer-focused operations

Transcript

Announcer (00:03):

This is the Self-Storage Podcast with the original self-storage expert, Scott Meyers.

Scott Meyers (00:11):

Hello everyone and welcome back to the Self-Storage Podcast. I am your host, Scott Meyers, and on today's episode, what we're going to be focusing on are some of the challenges that we're seeing from a macroeconomic standpoint in 2025 as self-storage investors both actively and passively. And really whether you're a developer, whether you're purchasing existing facilities, you're going to become an owner operator. And so we're going to cover the gamut again from a macro level as to some of the trends in the things that we're seeing not only in our research, but also reporting what we are seeing from our own portfolio of properties. And now as we've celebrated achieving a milestone over 5 million square feet of cell storage all across the country and peaking at over 29,000 units that we have either purchased, developed or converted all across the country. We are in a most states now, which provides us with a lot of data and a lot of experience.

(01:01):

And so what I've done is I've created the top 10 trends, if you will, the top 10 factors and challenges that I think that we're going to face so that you're prepared as we head into 2025 with the best ammunition to be able to grow and succeed in self-storage. So coming at it, number one, there's always, and you could say this almost every year, is that there is an economic uncertainty and we do have, our success in real estate is primarily tied to interest rates anyways, whether they're going up or down and how we maneuver, how we take advantage and let that work to increase the value of our facilities. We're always keeping an eye on interest rates and what is happening in the economy because that's going to affect our strategy as, and especially our exit strategy and the timing of that. So the impact is high interest rates and economic uncertainty.

(01:51):

They're going to dampen consumer spending to a degree. And so it's all about how the consumer views the economy and if they view it as a good time right now, regardless of where interest rates are to be able to buy a house, even if rates they are perceived as being extremely high, even if you're purchasing a house right now, you can refinance 'em one to two years. However, people do stay in their own home and they're not likely to go out and purchase. And so the acquisition of homes and residential home sales does have an impact on approximately, depending upon our facilities and the industry in general, about 30% of our new rentals come from people that are moving. And so if there's fewer people that are moving and buying houses, yeah, our performance of our facilities to a degree, to a percentage is tied to what's going on in the marketplace.

(02:39):

And so it reduces the demand for self-storage. You can't look at it any other way. And the rising cost of debt increases our operating and the refinancing expenses of our own facilities. And so we're constantly looking at the timing. And so if we look at, again, on a macro level, there are many owner operators, some folks that maybe didn't have a good crystal ball or didn't even know to look to the future in terms of when their loan was going to either have a rate reset or was going to become due. Well, that's going to have an impact on what these owners and operators have the ability to do at this point. If they haven't built up enough value in their facilities, as we've talked about many times in the past, then they're going to be in trouble when it comes time to refinance. If they had a 4% interest rate at 80% loan to value and now they're refinancing at 65% loan to value and a seven and a half percent rate, while some of these deals don't pencil out any longer, they may have to either give the keys back to the bank or they're going to have to sell the property one or the other.

(03:38):

Hopefully people have prepared and they've been paying attention, they've been listening to our podcast. I can assure you the folks that are in our mastermind weren't blindsided by what's happening in the economy with interest rates and they're not in trouble, but there are some many folks in our industry that are being faced with those decisions. And so it is very important as you're looking at exit strategy and the timing, what is going on in the economy and what's going on with interest rates? And if you're planning to sell your facility within three to four years from now, when you build value into it, what do you perceive? And looking at economic trends as where are interface going to be and what is your exit cap rate going to be in the ultimate value? And do you have the ability to either weather that or be able to hit your marks?

(04:19):

So number two, and we could take a deeper dive into that, but we get 10 to go through in our time together here. So number two is market saturation. There has been a lot of building even with the increased interest rates recently and the increased cost of construction. There are many projects that were started two years ago, two and a half years ago in the planning stages where the developers continue to move on through. They either had their funding secured or they had no other choice because they had so much invested than to go forward. And even though there is less demand because there are fewer people that are moving in terms of residential home sales and therefore less demand of self storage, we may be hit in some areas in which the market is saturated. So yeah, the impact is many of these markets, especially in the urban areas, they're experiencing currently in oversupply of self-storage and which creates intense competition as you can imagine, which drives down the rental rates for all of the rest of us and as well as occupancy levels.

(05:17):

And so those of us that have existing facilities, when these new facilities come on, we're all being stretched because everybody's competitive lowering rates and doing their best to fill up their facilities and it sometimes hurts the market the rest of the competitors for a while until we get to that place where gradually those facilities are filled up and brought back to not only a breakeven but also up to the stabilization at 85% occupancy or a greater, and then the rest of the market, all of us can begin to push rates. So the strategy for those of you that are looking to get into the business is to target these underserved or emerging markets and focus on the value added services and facilities so that you can stand out above the rest and not be a victim to the slower lease up and or price wars that occurs in some of these markets.

(06:06):

The third threat facing self-storage facility investors, owners and operators in 2025 is the technological adaptation and automation and whether you adopt those or not. So obviously the impact is that customers expect seamless tech-driven experiences such as online bookings and automated kiosks and operators who fail to adopt the advancements in technology and our sector. Well, they risk not only losing customers but losing potential prospects. If you don't have the ability for somebody to be able to lease a unit online or at the very least reserve a unit online, you will lose out to your competition. If you have a person who is manually answering the phone and you do not have a waiver for somebody to be able to reserve a unit or rent online, this is a commodity no matter how you slice it. People are not shopping for school systems, they're not shopping for like an apartment complex, one that has a pool or other amenities, a gym attached to it.

(07:03):

They just need a place to store their stuff that's close to home, that's safe and secure and that they can check this off their to-do list to be able to handle the rental of the storage unit to put your extra stuff in it right away. So the owner operator that has a website that is mobile friendly, which because that's where 80% of our rentals are coming from, that is appealing. It shows a nice, clean, safe, secure facility and the ability for somebody to rent or reserve a unit online immediately, that's who's going to win going forward. Number four, we are seeing folks that are changing their preferences. Our customers are changing the ways in which they are looking to their decision-making process into where they're going to store their goods. They're now, even though we're flexible, we're month to month, some of these folks are looking for more short-term storage options and coupled that with the sustainable practices, which we'll touch on in a minute, and facilities that don't cater to these demands are going to struggle to retain customers.

(07:58):

So it really involves the entire package of being extremely flexible to our customers. And so yes, we have short-term rentals, but the offers de concessions that we sometimes offer is a free month with a three month rental, and some folks don't think they're going to be there three months, even though we know that the average is going to be to a year to a year and a half, they want to come in and they want to make sure that it is flexible, that they don't need storage after a couple of months, that they don't lose out on these discounts, and they want to know that they're working with somebody who's not only flexible but also is maybe like them, and that is eco-friendly. And so offering short-term rental options and implementing eco-friendly practices to align with consumer values is going to be more prevalent in 2025 and up moving forward.

(08:43):

Sitting in number five halfway through our list of the challenges that will face our industry in 2025 is rising. Yes, continued rising operational costs. The impact of that is on cost related to utilities, labor and maintenance are rising, squeezing our margins and inflationary pressures are exacerbating the issue as well. And add on to that, the unknowns when it comes to insurance, as many of you have described or experienced, I know we certainly have regardless of where our facilities are located, but especially those that are in hurricane areas or in tornado alley or are susceptible to some of these natural disasters that have been occurring over the past couple of years. We've seen some extraordinary increases in insurance premiums. Many times when we go to get a policy on a new acquisition, we'll see what the customer was paying before if they hadn't renewed their policy recently with many of the changes that have happened recently, we will be surprised and we have been surprised and shocked by the increase in insurance premiums, sometimes a double, sometimes triple, and obviously in underwriting that may kill a deal because this is one of the highest second or third highest line item expense behind salary and property taxes.

(09:54):

And so insurance is a challenge. And then also for those of us that have employees, one to two, one and a half, three employees on site with the recent increases in labor costs and both minimum wage going up and also at the executive level being very competitive in our industry, all of this needs to be taken into account as you underwrite and set your projections going forward for your facility, but also during due diligence, making sure that you understand just exactly where property taxes are going and how they're assessed heading into the following tax year upon and acquisition, what is your payroll and overhead going to look like and more importantly, what is insurance going to look like? Because those three, the ones that can move the needle the most, if all of them are going to go up significantly, then it may be time to pull out of this deal before the end of a due diligence.

(10:43):

So the strategy then is just that. It's to make sure it's awareness first of all, but then implement energy efficient technologies where you can exploring automation to lower the payroll dollars and streamline operations and as you grow and scale to be able to get economies of scale across your facilities and just be striving to reduce your expenses at all costs. That means appealing property taxes on a regular basis, shopping for insurance, making sure that you are not underinsured, that you have the adequate amount of insurance with the right company and that there isn't anything in your policy that is unnecessary to keep those costs down. Number six, which is always in our top 10 list, is a regulatory and zoning challenges. As we continue to navigate the development side of the business and conversions and adding new self-storage facilities, we continue to get to new ways that neighborhoods as well as the municipalities are pushing back on self-storage even though it is an essential service and has a very low impact.

(11:42):

We are nice quiet neighbors that provide an incredible service that keeps people's junk their stuff off of the balconies and a multifamily and out of their yards, and it provides a service that is included in many master plan, however many areas that don't view it that way and they think that is a haven for bad activity, but again, only from bad operators who allow things to happen without security and lighting can bad things happen in our facilities. So the impact is clearly local governments, they're imposing stricter zoning laws and regulations on new self-storage developments, particularly in the residential areas, wanting expensive gates, wanting walls that are 30 feet tall and split lock and have a marble built into it so that it looks good and that you can't see the self-storage doors and taking down all lighting at night so that there isn't any light pollution.

(12:31):

I mean, you name it, they're pushing and I'm exaggerating, but they're pushing for many other stipulations to be imposed upon in self-storage to make sure that they're an even more quiet and enjoyable neighbor. And as we head into these meetings, we've shown them many times what this looks like when I'm meeting across the table from the municipality and the homeowners association to say, well, you see this ground that we're looking to develop for self-storage, which has, and I show traffic studies and the averages and the noise and the drag on utilities, which is a very little drag and all the reasons why we are a quiet neighbor. I show them that, well, it's currently zoned right now they have a car dealership. Do you notice the light pollution that those put off? Do you have any idea what kind of traffic that has or the consumption of electricity or anything else?

(13:18):

And also this piece of ground. In one instance we had, I could put a carnival here, so if you won't allow self storage, I'll run it out and I'll put a carnival up here. Do you think that has some noise pollution or some issues? Of course, I don't say it in that manner, but when you compare to virtually all other asset classes and what could be developed, how about a Walgreens? Everybody loves Walgreens as long as it's on the corner over there, not near my neighborhood, convenient for me, but I want it over there because look at the traffic, look at the light pollution, they're open late, all these reasons that all these other neighbors are not quiet neighbors to be able to just enjoy that space. They many times will come back around and say, okay, well, we don't want to see the doors.

(13:58):

We want it to be safe and secure. Great, well, we do this anyways. So it makes it very easy. However, it is, and I do mean this in a kind way, it is the ignorance of the folks to understand truly what it's like and the least impact on their neighborhood and from all standpoints is to have a neighbor like a self-storage facility. There's very quiet, goes about our own business and has very little traffic. We don't draw much water except for maybe the bathroom in a sink in the office if we have a site that has an office on it. Many times our sites are unmanned and we don't have a restroom on it. We don't have to. There's no need to. So just recognize that you, you're going to need the strategies to engage with local governments early in the planning process to find out what kind of hurdles you're going to have to overcome and then adapt the projects to meet any regulatory requirements and or do your due diligence to make sure that any of their requirements that they have is not going to be too egregious and the budget required for you to be able to meet those doesn't surpass what you've already slated for the project.

(15:00):

Coming in at number seven, cybersecurity threats, never thought that this was going to be a challenge, but at the end of the day, anytime you have an organization, a company, a service in which you are storing clients' records, just name and address, and sometimes driver's licenses, social security numbers, there is a threat that if that is a breach, that is a huge issue and it may become an issue for you as an owner. And so with an increasing reliance on these digital systems and online software operators are faced with heightened risks of a data breach and cyber-attacks just like any place else. And if you're looking for a cyber-attack to create one, you might want to look at self-storage to think, well, they're probably unsophisticated and they probably don't have a whole lot of systems in place to be able to make that happen.

(15:43):

We were the target of one in which a couple of records, and when I say a couple, literally only a couple before our software and all of the services and the safeguards that we have in place stopped us from happening and with a no impact. But if you do have folks that, especially if they have credit card information or a debit card and that is hitting once a month on an autopay, you need to make sure that you do have safeguards in place, that you have the proper firewalls and ways to be able to show your clients that their personal data is safe and secure behind your firewall. So the strategy to mitigate this and head it off at the pass is to talk with your property management software provider and ask them what safeguards do they have in place? What do we need to put on top of this to strengthen the cybersecurity measures and do conduct then regular audits afterwards to be able to stress test this thing to make sure that nobody can break in and then ensure compliance at a bare minimum with the data protection laws that exist in your state And on a federal level.

(16:49):

Coming in to number eight, environmental sustainability pressures. Yes, we are now seeing a pressure, a growing emphasis on sustainability. It's going to lead to increased scrutiny in some areas of facilities, and there are environmental impacts such as energy consumption and the construction materials that we use to build our facilities. And so we've seen this creep into some of our projects. We're certainly doing our best to minimize our carbon footprint and to minimize the overall impact of our facilities because it's costly to do so. And so the green movement doesn't always have to mean it costs more to get less benefit as an owner, an investor, and an operator in many instances, it benefits all of us if we're able to do things out more efficiently and helps out the environment in many cases, again, in the self storage industry, it's very easy to do. So if we minimize the traffic and even from a standpoint of not having a lot of staff onsite utilizing technology, then obviously that reduces our footprint, the ability to have this done by way of technology automating when the lights come on and off equipping our facilities with LED lighting and just wall packs and really mapping this out as much as possible without having a huge drag on the grid utilizing solar, which powers our facility and that can be sold back to the grid.

(18:07):

We are adding in many of our facilities now, which is growing. We're adding EV charging stations for electric vehicles in a market where folks can park and they're inside of the fence, so they're going to become a paid customer to be able to use our charging stations. And this, we see is a huge opportunity for us and the self-storage hub business to create kind of a second business and a hub as we grow out where our facilities are located and having 5 million square feet, that's the number of facilities around the country where we're creating, if you will, our own branding of these EV charging stations at our own sites. And so people can get on and know that they can come to these areas. Plus we're adding those sites onto the aggregators of the apps in which people can find that they can charge a vehicle, whether it's on a regular basis in our industrial parks or where we're located or amongst other businesses, and they can come in and charge while they're at work or if they just need to charge overnight or for a short amount of time.

(19:00):

We're seeing that that not only helps us when it comes to any scrutiny by the local governmental agencies, but also it's a marketing peace force as well to show that we are committed to green measures at our facilities. And again, we start from a place where we don't have a huge drag on the economy. We don't have a large carbon footprint in running and operating our facilities. So again, the strategy as we mentioned, is to incorporate solar panels, LED lighting and just always looking for ways to be able to reduce the consumption of our resources at your facilities. Number nine, we're also seeing, and I can't say that this is even a threat, it's we're seeing a shift to multi-use properties, which means that mixed use of developments which combine retail, residential, and storage, they're gaining in popularity and putting pressure on standalone self-storage facilities.

(19:47):

And so when I say pressure on the way I look at this is there's existing facilities where we felt that there was a moratorium on self-storage developments coming into a market. Well, in order for this particular new development to work, the developers come in with a model that shows that it has cell storage, mixed retail, which mixed with residential or commercial, and those projects are gaining favor and gaining ground, and the city sees again the need for it then. And if there is demand for storage, then we're seeing these projects be approved and then therefore adding more competition to a market. So long as we're in a market that isn't overbuilt or saturated, that's a good thing. However, we don't enjoy that exclusivity that we thought we had when we developed this facility and when that moratorium was put in place. And so that is putting pressure in some areas and in some markets on existing facility owners.

(20:40):

So the strategy is to well head 'em off of the past, explore some partnerships to integrate self-storage into these mixed use projects and seek them out so that if you have a facility in particular market and you know that there's high demand and you're full and you're raising rates, that's great, but before other competition is created, you might as well be your own competition to work with those other developers and to utilize that angle to be able to show the city that even though there's a moratorium on storage, hey, there's this piece of ground over here that I think could be used for residential and some retail. And the market will only absorb so much of that residential and that other commercial or retail. And so with this extra 20,000 footprint, we'd like to be able to go up three stories and build a 60,000 square foot facility in addition to this as well.

(21:26):

So being opportunistic in your own market and finding other ways to be able to get approval for self-storage where the individual standalone self-storage investor may not know how to go about achieving that. Number 10, labor market challenges. I touched on this in terms of operations, but this probably is the biggest challenge that we have right now, and it continues to be. So recruiting and retaining skilled staff, especially for customer facing and maintenance roles, it remains difficult in a tight labor market. And that's what we're faced with right now. And many facility owners, existing facility owners are already stretched with the increases in other operating costs. And so to be able to put a rockstar manager in place, if that is your business model, if you're not an automated, fully automated facility and you have a staff member, one and a half, staff members, two, keeping those folks in place, keeping them motivated, having competitive pay and creating a work environment that is challenging, which keeps people there and helping them to feel part of a team is a little bit difficult in our industry just because of the nature of the product.

(22:25):

It's not really dynamic. It doesn't change very much. Even though we do put competitions in place, we have bonus structures, all the things that we do, inviting our staff to go on mission trips with us to feel again a part of something bigger. Those are some of the things that we have done to attract the most qualified talent and to help us to grow our team and to grow our business. But it is a challenge. The strategy is obviously to offer competitive wages and then professional development. And that's what we've seen. If you look at all the studies, if you've done a deeper dive into hiring, it isn't about pay. You have to start there with competitive wages, but people want to grow. So giving them professional development opportunities, even if they're going to go off and do something different, but to give them training to improve them as an individual, as a human being, even if they are going to, you're going to release them to go out into work into another company, well good.

(23:17):

I mean, that's what you should do. You can't stifle them and hold them back. If you're not training them, then they're not going to be efficient and effective in your business. So we do our absolute best to make them better human beings and to make them better employees, staff members, team members. And if they do happen to leave us, well, there's nothing we can do to stop that anyways. And we are, whether we like it or not, a training girl and for folks that are go on and to do bigger and better things and we like that, that is our role and that is our place, and we accept that. And that also includes a working arrangement. If somebody can scratch a niche somewhere else and they're working for us and we can accommodate that, that's great. Many times it's less expensive than having a full-time employee and it's hard enough and expensive enough to be able to hire folks on, not necessarily at our level.

(24:02):

One of the studies that we ran showed that at the higher, not at the facility level, but at the higher level in our organization and others, the average cost of a bad hire, if you will, is roughly $120,000. Which means that once you've hired somebody and trained them and they're not producing anything for you yet in terms of an income or contributing to the bottom line of the business or the top line, it's about 90 to 120 days before you recognize that perhaps this person isn't a fit or perhaps they recognize that they are not a fit, and if they move on or we free up their future to pursue other career opportunities. Well, in that time that we paid them a salary and we utilized all the resources of the trainers, of the additional resources we paid for insurance and all the benefits that go with the loaded salary and then release 'em, well, we start all over again and now we've got another 120 days or so before somebody can produce.

(24:57):

Yeah, that equates to roughly $120,000 on average for making a bad hire, somebody that doesn't get up to speed and doesn't begin up producing. So to be able to provide a great environment and a team of people who are dedicated to the community that we have built within our organization, and for you to be able to do that in yours is going to set you head and shoulders above the other folks, not only so storage competitors in your market, but also other employers as well. So always be looking at that. One of the mistakes that I've seen, the greatest threat, if you will, it's really a mistake or a pitfall, is that we see sometimes these owner operators that get into the business, they buy a facility. The flip side of that is we see many folks that get into the business and they think they only view that position of the facility manager as overhead and they let the person go that was in there, whether they were good or not, and they hire their hairdresser because he or she is really friendly and they will work for less money than the previous person or any of the competition, and they put this person in charge of their million dollar or multimillion dollar asset and expect them to perform.

(26:01):

And that is really the opposite. And so that itself is a threat. So don't take that approach. You want the rock stars and you want to pay them accordingly and offer them a great environment in which to work in. So in some reads, to navigate the challenges facing us in that 2025, operators need to be proactive and need to be innovative. They got to be customer focused and staying ahead of industry trends and embracing adaptability, all these things are going to be critical in the competitive and evolving market that we find ourselves operating in that 2025. So gang, hope that was helpful. As we head into 2025, which we are very much excited about and looking forward to, this is going to be an incredible year. So with that gang, this wraps up another episode about the Self-Storage podcast. I'm your host, Scott Meyers, and I look forward to seeing you on the next one. Take care.

Announcer (26:53):

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