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20 May 2024

Insights from a Self-Storage Pioneer | Alan Westfall Shares Wisdom and Industry Trends

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Dennis Sary and James McLean recently sat down with Alan Westfall, Owner of Strategic Storage Partners and storage industry veteran, to get a pulse on the industry.

Alan brings decades of experience and expertise to the table, making him a bona fide veteran and icon in the self-storage realm. Today, we delve into Alan's remarkable self-storage journey and glean valuable insights into this dynamic industry. From self-storage development to self-storage acquisition, Alan's wealth of knowledge promises to illuminate the path for both newcomers and seasoned professionals alike. Join us as we uncover the highlights and challenges shaping the self-storage landscape, and discover the strategies and wisdom forged through years of dedication and success.

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Dennis:

We're here today with Alan Westfall. Alan, we’re really glad you were able to spend a few minutes talking with us today. You are definitely one of the bona fide veterans, icons of the industry, let's say. So do me a favor: Can you please tell me just a little bit about yourself and your self-storage journey?

Alan:

When I got in the Army in 1970, I think it was 1970, I was going to go to work at a bank in New Mexico while working on a degree, completing a degree. There was a self-storage, that just started construction. And I thought, well, that'd be a good summer job. So I worked on every component from excavation to top out. And the company that was doing the work offered me a position with a 25% equity in each project I built. That company was Colonial Self Storage. I built 27 projects with them and moved up to Colorado and didn’t want to leave. So I stayed here and started a company called Secure Care Self Storage. We started principally with an acquisition. We bought almost half of all the self-storage in Boulder. That turned out to be a very good deal. At the same time, developing up and down the front range from Colorado Springs to Fort Collins. And we are where we are today.

Dennis:

Great, great. So with that in mind, what do you see as some of the highlights of the industry today and some of the challenges?

Alan:

Well, the biggest challenges today are cost and developing, both in the entitlement and the length of time. I'm working on one right now. We're just ready to start construction. It’s three and a half years. My typical has been a year in entitlement and a year in construction. We're seeing a little longer in construction by two to three months, just based on some materials, labor, etc. Our costs have gone up over 20% in the last three years. So all of those are impediments. And we also had a very, very high influx of new product in 20 to 23. We see a lot of those projects being cut back now. But it also creates opportunity in my mind, a little counterintuitive, I guess. And we're finding flat construction cost and maybe a little bit of reprieve, but not much. We tend to build in more difficult-to-acquire billing permits than maybe some others in some of the tertiary markets. But we do find them to be more profitable in fill-up curves and rates.

Dennis:

Interesting. So the challenges regarding the inflation and the interest rates, I mean, you've been through these cycles a few times. Do you see anything different in this inflation-slash interest rate cycle?

Alan:

Well, it's going to be interesting to find out because we're still, you know, at fairly high rates. You know, most of my projects have been right around 4, 4.3, 4.5. And now we're seeing 6, 6.5. But if we go back, you know, 15 years, we thought 7, 8% was pretty good. So we do see challenges there. I think going forward, it's going to be a little hard to determine. I think the upcoming elections could have an impact on whether we see some contraction in interest rates.

Dennis:

Interesting. So do you think the Fed might appease one market versus the other or one party versus the other? Or do you think one party versus the other will have a push towards the overall say of whether to cut interest rates?

Alan:

I would simply agree with what you just said. We don't know. We're going to find out come November. We'll see which way it goes.

Dennis:

As far as we deal a lot with the ECRI model, the REITs have taken initiatives that people didn't see 10 years ago. What are some of your thoughts on what the REIT model has been doing to the marketplace in the last five to seven years?

Alan:

Well, I think it's had a huge impact because although they're probably only about 15 percent of the total market, I believe that they are the driving force on rates. And of course, with their position on Wall Street, occupancy means everything. And we do see the move in rates, you know, substantially lower, which you're kind of forced to compete with. But my own belief is over the next year, we'll probably see, even with the move in rates, not more than three percent, maybe a four percent deviation in our projected curves.

Dennis:

Do you feel like the move-in rates are lower based on the general population thinking differently? Is that what the thesis here is?

Alan:

Well, I think that's a good analysis. My experience has been is probably the majority are rate sensitive, you know, when running a new storage unit. So I know at least over my lifetime, once rate increases are implemented, move out is so negligible, it's not even really measurable. To think about packing up your stuff over the weekend, using a valuable weekend to move across, you know, 10, 20 blocks or whatever, you know, to save 50 bucks or $35 a month.

Dennis:

There are some things that just never change.

Alan:

I think so. But we're in a whole new world today. Obviously, we've seen the housing market across the country is, you know, as much as 35 percent or even higher. And, you know, we depend an awful lot on homeowners moving to a new home for a lot of our occupancy. We're not seeing that right now. In the bulk of my new move-ins, and I have opened four new projects in the last two years, putting one three weeks ago, we're not seeing very much single-family residential use. It's primarily multifamily. And that's still to be determined. I'm still seeing good curves right now. I'm running about 30 a month per project, net rentable.

James:

So, Alan, with the average household size, like square footage, getting smaller and with the new apartment buildings being built, do you think that more generations and more Americans will take to using cell storage more regularly?

Alan:

That's to be determined because that's a great question. I think my experience has been that multifamily users tend to contract to what space they have available. And, you know, obviously, we've seen much smaller homes built at much higher prices. Colorado is interesting because we have a lot of outdoor activity from skiing and biking and so forth. There's just not enough room. So we pick up, you know, a substantial amount of overflow.

Dennis:

Let's talk quickly about mom-and-pop facilities in the industry. Do you feel that being, let's say, let's call it a micro operator, still a viable second career for entrepreneurs? Or is it like an addendum to what they're doing? What are your thoughts on somebody looking to own two, three, or four facilities in this type of environment?

Alan:

Well, I have seen that a lot over the years. And again, that's another really good question. My personal observation, we get calls probably two or three a month over what we call mom and pop. You don't want to do two or three. But generally, when they start that, they end up full-time in it. And there's a lot of room, I believe, still. You may not be able to pick the highest corner on first and first, you know, and pay $4 million for two acres. You might go to a tertiary market and do just as well.

Dennis:

Interesting. So you feel that somebody in a tertiary market can still perform within expectations?

Alan:

Well, absolutely. I built one about four years ago in a tertiary market. I think the population of the immediate three-mile area was less than 10,000. It's a very, very successful little project. It's not a big project. It's not a, you know, 12, 14, $15 million roundup project. You know, $2 million, $3 million. You know, we paid $4 million for two acres.

Dennis:

So how important is it at that point to have good relationships with the leaderships of these communities?

Alan:

I don't know the answer to that one. I know we often get a lot of pushback. We get a lot of pushback now everywhere we go in small communities. We often hear that, you know, you're using valuable commercial land for a non-revenue producing to the community as far as and so it takes a lot of work and we've spent a lot of time developing a strategy to present a little better looking mousetrap. We don't look like every other storage project and you're free to use, you know, any of our elevations that you'd like to.

Dennis:

What an interesting point that the community feels like it's not generating revenue for the community. How about flipping that? Do you think communities, the community leaders look well on taking existing commercial properties and then retrofitting them for self-storage?

Alan:

Well, we feel very strongly that that's a great idea, but I've had some pushback. I converted 140,000 square-foot office building into a self-storage with 1,000 units. It's at least 900 units in the first year and a half, but the community government still thought it was not a good use of the building. I've converted a former Toys R Us, and it's been full for seven years. I did a shopping center in Phoenix. It was a Sears, four-story Sears, converted that and it did really well, but we've not always had reception there. I think that Mark's attitude is probably going to change as we see more and more, you know, buildings like this. There was a $131 million building acquisition office building that was just taken back to the bank for $12.5 million. There's a significant office vacancy here in the Denver metro area. So I've only been able to convert one office building because of the structural integrity of the building or our 145-pound live load requirements for self-storage.

Dennis:

Interesting. So there are still challenges with commercial conversions?

Alan:

I think so. We use this little program called Radius, and it really helps us to filter out those. You can find a fantastic building, but it really eliminates a lot of those for us, so we spend a lot of time on that platform.

Dennis:

It's very nice of you to say. I'm curious. I'm always a glass-half-full kind of guy. Elections great. Banks have had issues in this past year. Everything gets cleaned up. What kind of view do you have for the year's second half? Let's say for Q3 and four, just give me a magic eight-ball.

Alan:

Well, we're hoping that rates will move down a little bit. I'm seeing rates right now for me at about 5.2, 5.3, which, you know, it's not near as attractive as sub five that we had a few years ago. And it’s pushed with equity requirements has pushed some people out of the business. I anticipated seeing a lot of sites that have been in an extended period of entitlement. They're just not popping up a few here and there. And so I'm still aggressive and still looking for sites. We’re just like everybody else. We're kind of picky.

Dennis:

So we've noticed a lot of people that were doing facility buyouts, switching to land. So we see a lot of people flipping land. What are your thoughts as far as, you know, let's say to South there to Sunbelt and somebody that was thinking about buying land and flipping it?

Alan:

Well, I think that there's still an opportunity there. They're contrarian investors. They're still looking for products. There are a few around right now that are aggressively looking for products. Of course, everybody would like to have a completed project, you know, remove all the risk that goes with that. But I still see that there's opportunity. It's just narrower. I've seen so many cycles in this over the last 50 years in self-storage, go up and down. But one man's problems, the next guy's opportunity.

Dennis:

How have some of the exit strategies changed in the last twenty years? So, either for development or for buying, how has the exit strategy changed?

Alan:

That's another good question. If you have institutional investors with you, they're looking at the short term. If you have other than institutional, you probably have more long-term look at investors to get behind you because there's a lot of equity requirement. We're looking at 40% equity just on every deal we do. So I think that environment is not going to change. It takes the banks and lenders a little more time to adjust than we are, but there's some strong activity in the market right now.

Dennis:

Interesting, interesting. So as far as any words of advice, what would you tell somebody that has just liquidated all of their assets in, let's say commercial property, and it was looking to get into self-storage for the first time, other than calling you and telling you, Hey, here's a hundred million. What are some good words of advice?

Alan:

Well, I just had that call yesterday. And that's exactly, why they were liquidating multifamily and industrial, and they want to be in this industry. They're mature in real estate investing, and they want something that’s just solid. They seldom give up a lot of room to fail. The only failures I've ever seen as a general statement were investors who were not solely dedicated to self-storage. They often did other things. And when they tied them all together, sometimes it got a little weak, but as a general statement, it's the go-to place to park your money and enjoy. That's the great thing about self-storage. Once you get it built, there's not a lot of operational volatility, and it's just a solid investment.

Dennis:

Now, one of your differentiators—I think it's safe to say that one of the reasons that you've had such long-term success is that you've managed to put your stamp on everything that you've purchased, right? Talk to me about that, about putting your stamp on places.

Alan:

I think we tried to build something that looked a little better. We weren't all a particular color of doors. I did work for that company back in the 80s for a short period of time, and we just tried to build a slightly better-looking mousetrap rather than your traditional minimalist construction. Now, if you're going out to a little farming community in Wisconsin, you might do that, but it takes more architectural contribution here in the cities.

Dennis:

So dig a little deeper, because last time we talked, you mentioned personalizing it. You had a great couple of points about if you're in a ski town, make it look like a ski town. If you're in a resort, make it look like a resort. Can you dig a little deeper into that?

Alan:

Well, I did build one that turned out really nice. It looked like the wind tower in Las Vegas, but it turned out to be a little bit difficult because putting that architectural stamp on it required a lot of additional engineering for wind loads. So I never did that one again, engineering and cost. But no, if we're building up near Aspen, and I built the first one in Aspen, I think in about 1979. That was in an industrial park then, and now it's a glamour park. Interestingly, it has 450 feet of riverfrontage on the river in Aspen. But no, I think building just tying it to the area makes a lot of difference.

Dennis:

And choosing materials, I mean, that's also part of it, correct?

Alan:

Well, it is. And we're kind of building all of our projects in a material design that I've worked at for a lot of years. I remember my first partners in Texas were furious at me because I included architectural elements in the business. And everyone that I did fill up faster. We still know that 80-85% of the decision to rent is made by women. And if it looks industrial or more residential, that's just the path we chose to follow.

Dennis:

Interesting. Obviously, it was a very successful path, because here you are, right?

Alan:

Working on it.

Dennis:

Do you have any parting thoughts for people who are entering the business for the first time or for people who have been in the business for 10 years? I don't want to say that they're confused, but they're not reading the temperature the same way you are.

Alan:

You know, that's a great question. Again, I really don't know a good answer to that one. If you want a simple-to-operate business, this is it. The biggest hurdles, you know, are always real estate taxes. And that's the biggest, that's our biggest expense. And it's growing, and growing. So, you know, those are my thoughts.

Dennis:

Talk to me about your gut, and we'll leave it at that.

Alan:

A lot of opportunities right now. A lot of money has contracted. But we're seeing a lot of new financial sources searching the market. And it's still so difficult to find good sites. You really have to work at it.

Dennis:

So, one time you said to me that you'd like to follow your gut. Do you still feel that way?

Alan:

Yeah, I do. It's never gotten in trouble. I'll say that. We've never built a bad project. We’ve never had one fail. And it's harder to find a good site, you know, and spend the time on it and convince the community that what you're adding is adding visual and physical value to the community. I've won some tough zoning projects, really tough ones. My latest one is in Fort Collins, Colorado, three blocks from the university. It was tough. But we've got a good team. And we knew how to meet all the needs. And we did. We worked with the community.

Dennis:

My friend, you are a true success story in this industry. We're grateful for your time. And you're a gentleman. What else can I say?

Alan: Thanks, gentlemen.

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