California Storage Rent Control Bill Could Change EVERYTHING

THE SELF STORAGE REPORT — EPISODE TRANSCRIPT Episode: California Storage Rent Control Bill Could Change EVERYTHING Guest: Gary Sugarman — Chief Operating Officer and partner, William Warren Group Host: Chris Berg — Abernathey Development Recorded: May 1, 2025 Video: https://www.youtube.com/watch?v=czC1axxhds0 Key topics: California Senate Bill 709 self-storage rent control; proposed cap of the lower of 5% plus CPI or 10% per 12 months; Senator Caroline Menjivar as bill author; Senator Umberg and the Senate Judiciary Committee; the May 6 judiciary hearing at 1:30 p.m.; the single San Fernando Valley constituent complaint that started the bill; the industry's promotional-rate disclosure amendment; $40 billion of California self-storage value at a 5% cap rate; a 200 basis point cap rate shift to 7% dropping value under $30 billion; $144 million combined tax reduction; $61 million annual school funding impact; Green Street data showing move-in rates down more than 45% since mid-2021; storage rates trailing inflation over 10 years; William Warren Group's 250 assets with 106 in California; the California Self Storage Association opposition coalition; 30-day renewable leases and short-term promotions; Manhattan Mini Storage and Edison Properties; Extra Space earnings call citing 35% of customers running out of space Note: Speaker attribution reconstructed from raw captions. Light cleanup of transcription errors only; wording preserved. Timestamps and YouTube chapter markers removed. Turns marked [attribution inferred] could not be attributed with certainty. ————————————————————————————— Chris Berg: Welcome to the CRE Report. I'm your host, Chris Berg. Very important conversation around some legislation being moved around here in the state of California, SB 709, talking about potential caps on rental rates in self storage. Special guest join us today. Actually had a conversation with the state senator sponsoring this bill yesterday in Sacramento. So, we're going to dive inside that conversation. To give you some background on our guest, he's the COO of William Warren Group. They've got 250 self-storage assets across the country. According to their website, 106 of those right here in California. So this conversation around the legislation very important to him and his team's portfolio. Mr. Gary Sugarman. Gary, it's great to have you on the show. Welcome. Gary Sugarman: Oh, thank you Chris. Thank you for inviting me on. Chris Berg: So, I obviously want to get into this conversation, get in the legislation, and first I'm just, for people that maybe aren't familiar with you, to give some of your background because you've got an incredible background within Wall Street, self-storage. Let's just start there. How did you end up in the self-storage asset class? Gary Sugarman: Well, sure. In a prior life, I practiced law for several years on Wall Street, immediately after law school. Did corporate finance, mergers and acquisitions and real estate, and then found my way some years later running a series of businesses. They were always entrepreneurial businesses that I was able to build and then fortunately enough exit a few different times. Did a little bit of venture capital along the way and then found myself, following one of those exits say 20 years back, after an introduction to the family patron of one of the big New York real estate companies. He ended up convincing me to come in and run their private REIT called Edison Properties. Edison held Manhattan Mini Storage as their largest asset and so that was a considerable part of my focus during my tenure at Edison. And Manhattan Mini Storage, a couple years after or several years after I departed, ended up trading — I think it's still the largest trade of a self-storage portfolio in the history of the industry — at about $3.5 billion a few years back. But prior to that, I had joined forces with an old friend of mine, Bill Hobin, who founded the William Warren Group 30 years ago, and so we have been partners. We have two other partners. There are four of us who own the company. And I was the last one in, coming in from New York, and that's been almost a dozen years now. Chris Berg: And obviously built a beautiful portfolio, and that's why this piece of legislation very, very important to you and your team. So again, for some people this might be a newer conversation. It's Senate Bill 709. Just if you can give us an overview, what exactly is in this legislation and what are you most concerned about? Gary Sugarman: Well, the legislation intends to do two things. One is it intends to cap price increases in any 12-month period to the lower of 5% plus CPI or 10%, which is — any combination of those is dramatically less than we would typically increase a customer just in the normal course of business historically. And the other thing that the bill does is requires some formalized disclosure with regard to rates, promotions and duration of promotions and so on. We're actually not terribly concerned. We're not fans of any regulation in the industry with regard to pricing or our contracts because we don't think it's warranted or necessary. But the disclosure or transparency is not as disturbing to us as any form of price control, especially given where the industry is and given how well received the industry is by the consuming public. Chris Berg: I want to get into some of the impacts here in a moment, and yet when we spoke last week — just to see if this is still accurate — you shared with me that, hey Chris, anecdotally this piece of legislation was really created from one complaint from one constituent. Is that an accurate assessment? Gary Sugarman: Yes, that was actually explained to us by the author of the bill. Senator Menjivar's office described, in my first meeting with them, that this arose from one constituent complaint in her district. So in the San Fernando Valley area, that customer reacted poorly to a couple of increases they had received after renting a storage unit, reached out to the senator's office, and then I guess that ultimately precipitated the Consumer Federation sponsoring a bill with Senator Menjivar that became 709. Chris Berg: I want people to make note of that. This was the genesis of one complaint from one constituent. I'll share with you why that's important here in a moment. But so let's go inside the conversation yesterday in Sacramento. You were in her office, I presume. Tell us what took place. What were the important points from the conversation? Gary Sugarman: Well, this was the second meeting that we had with the senator's office. She was not in attendance in the first meeting. That was with her aides. We took this opportunity and were encouraged to meet with her by the chairman of the judiciary committee in a prior meeting that we had with him, with Senator Umberg. So at Senator Umberg's request we arranged to meet with Senator Menjivar. It was myself, the general counsel from the Self Storage Association — that's the national organization — and several lobbyists. And the purpose of that meeting was to discuss an amendment that we had presented to Senator Umberg that would alter the 709. Presumably if Senator Menjivar and other members of the judiciary committee were in favor of our amendment, that amendment could be proffered and we would withdraw our opposition. So that was the tenor of the discussion. We didn't get into the details of withdrawing our opposition, but we said — I said — that this could present a way forward for us and we thought it was a fair resolution and appropriate to the industry, because to the extent that there are issues, those issues appear to relate to transparency but not necessarily with regard to pricing itself. Even the constituent complaint — while the constituent was upset about their price increase, they weren't necessarily upset about the pricing relative to pricing in the marketplace. They were upset that the price increased and they were surprised and disappointed by that because of unfamiliarity with the contract. And that could have been because of failure to read the contract, or maybe that contract wasn't a particularly clear contract, but the issue was more about disclosure and transparency, not the underlying pricing itself. Chris Berg: I think that's where most people would be at. So, what's the amendment that you were suggesting that would allow for resolution? Gary Sugarman: Well, the amendment essentially just focused on the nature of the disclosure. It's just a common sense amendment that says, if we're offering a promotional rate, we're going to disclose what it is in clear and conspicuous terms in the contract. So your promotional rate is X, the duration of the promotion is Y. And you know, then there are some other subsidiary points, but the major points are just making it very clear if and when there is a promotional rate and how long that promotion lasts. It seems like super basic stuff, but that was the nature of it. Chris Berg: So based on your conversation yesterday, are they open to changes, and are you 50/50 this thing passes as is, or where you at currently? Gary Sugarman: I don't — well, I can't speak to whether it passes as is. We are 100% opposed to the bill that was proposed in print. We have offered an alternative bill that focuses on transparency and disclosure. I described it in super simple terms. And Senator Menjivar was not resistant to that idea, but she did want to think further about and want us to revisit how we might otherwise address the pricing itself. And we're going to revisit that with Senator Menjivar over the course of the next several days. But I'm hopeful that we've convinced her that the industry — that where the industry stands today, and any issues that the consumers have, are largely based on their understanding of what they're signing up to and not with the pricing itself. And the reason for that is, adjusted for inflation, the price of self-storage today, rental rates today, are actually less than they were 10 years ago. And I see you threw that graph up on the screen. I had pulled this from Green Street. And you can see what's happened over the course of the more recent years. And this is sort of a follow-on point to my point about the last 10 years. In the last several years — so since the middle of 21, when the economy started to steer downward — self-storage move-in rates have plummeted by more than 45%, and that's what that orange through line shows you on this graph. It also shows you that it's very much tied to the home sale business. So to the extent that people are moving, demand in self storage is stronger. If people are not moving, demand is significantly impacted. So this is sort of, you know, insult to injury. The injury is that for the last 10 years storage has not even — storage rates have not even kept pace with inflation. In the last few years, over and above that, move-in rates have plummeted by 45%. So, so look, whether you agree that self-storage is inexpensive or not, it certainly is not, in the last decade, the subject of runaway pricing or the cause of runaway pricing. At the very least, we're trailing inflation and have taken it on the chin in the last several years. This is not an environment in which it makes any logical sense to be talking about price controls. There may be confusion about what I'm paying as a customer and whether the promotion is still ongoing or lapsed or what have you. That's understandable. We can address that. And that's what our language does. But nobody can say in the face of that data that there's a pricing issue. Chris Berg: Well, the other reason I'm curious if this came up, Gary, is I actually had lunch today with a buddy of mine who's in like the multifamily construction world, and I told him about this legislation. He goes, "What?" He goes, "Self storage is 30 days and you don't have to have it." So what are they trying to do? Did that come up in the conversation at all? Is that a talking point that — Gary Sugarman: It is, it is. You know, it's kind of where the conversation often begins and did begin in our first meeting with the senator's office. And that was to say, you know, look, people confuse self storage with a real estate use because it's so heavily involved in the real estate world, but the actual business end of self-storage is much more about retail than it is real estate. It's no different than, you know, a consumer's relationship with the corner Starbucks, and if they don't like the pricing they'll move next door to Dunkin Donuts. Self storage has an enormous amount of competition — especially, this relates back to the pricing issue. Over the last 10 years, supply has gone through the roof and therefore we're all fighting for the customer. We're all lowering our rates and offering aggressive promotions in order to get that customer and fill these storage facilities. It's no different. You got to sell coffee. You got to sell storage units. And the commitment when you lease a storage unit is not a whole lot longer than a commitment to buy a cup of coffee. It is 30 days of course, but compared to other real estate uses it's a different universe, which is, you know, analogous to, hey, let's go have a cup of coffee, right? Chris Berg: So, I mentioned earlier, I said hey everybody please pay attention to the fact that it was one constituent, one complaint. I want to share why I believe that is so important. Again, when Gary and I spoke last week, he was kind enough to share this information with me, and I think, Gary, this is just really, really powerful. So I want to get to some of the data here and then let you comment on it. But what you suggested says, hey Chris, if these caps were to go in place, you're going to see obviously asset values go down. The big one that jumps out to me is the school funding piece. And it's hard for me to believe that a politician is going to threaten $61 million in annual school funding over one complaint. Gary Sugarman: Well, you're — yeah, you're exactly right, Chris. These are big dollars and all of this derives from how much self-storage there is in the state of California. And today, if we use what the financial analysts or the real estate community believes is the appropriate cap rate of 5% in California, at a 5% cap rate the value of self-storage assets in the state of California exceeds $40 billion. If price controls go into effect, very conservatively, we're suggesting that there's probably a 200 basis point adjustment that occurs to that cap rate. At a 7% cap rate, that $40 billion plus value of assets drops to under $30 billion. And the impact is right there on the page in front of you. So the impact to the tax base, the base rate, is $115 million. The impact to assessments is another $30 million. Those two numbers combine to about $144 million tax reduction. And within that number is about a $61 million reduction to, or impact on, school funding. Chris Berg: So I'm curious, was this data, these data points, presented to the judiciary committee yesterday? And if so, what was their reaction? Gary Sugarman: We have circulated this data. We did not — we have not yet discussed this data with the judiciary committee as a formal body. But we have circulated this to various members. We had shared this information to the appropriations committee to see if the bill would be keyed fiscal and have to be passed on by the appropriations committee. It doesn't look like that will happen. I'm not sure why, but certainly it doesn't mean that these impacts aren't material and, you know, worth worth thinking hard about. Chris Berg: Do you know of any politician that's ever threatened $61 million in school funding over one complaint? Gary Sugarman: Yeah, that it's — look, this is all new to me. I have not spent terribly much time prior to the last couple of months in this state house or any other state house for that matter. I'm shocked that we're having these conversations with these stakes, you know, at hand. Chris Berg: So let's just talk about the future then. You said there's going to be some more conversations with the senator's office. I know that there is a judiciary hearing coming up — I believe it's May 6th, which is next Tuesday at 1:30 p.m. for people that want to, you know, tune in for that. I guess what's next here? Do you see this changing? Like what are the next steps? What can people do to get active, participate and get some grassroots going to email their senators or assembly people? Gary Sugarman: Yeah. Well, we have a very sizable coalition of other industries signing on to this opposition. You know, there's tremendous concern about the government stepping in the middle of our pricing and our contracts, particularly in this case because it's so unwarranted, inappropriate, and unnecessary. What'll happen between now and next Tuesday is there will be quite a bit more back and forth between our coalition, Chairman Umberg and Senator Menjivar, to see if we can make our way down this forward path that we discussed with Senator Menjivar yesterday. We think that it's appropriate and reasonable to move forward by shifting the focus of the bill to transparency and disclosure. She did not — the senator did not reject that approach. But there is more work to be done. Hopefully that work is completed before Tuesday. And otherwise, you know, we will continue to oppose the bill and appear in opposition on Tuesday. Chris Berg: Couple things, Gary, I just want to get you to comment on. Is one is, I think people within commercial real estate need to be aware of this because look, as Gary mentioned, this is a cup of coffee type agreement in real estate. If it can happen to this asset class, who knows what other asset class it's going to bleed into. One thing if you want to comment on that, Gary. Secondly, if this were to pass as is, for the William Warren Group — as I mentioned at the top, and correct me if my numbers are wrong, but you guys got 106 assets currently in California — do you start selling some of those assets and keeping your capital out of California, or what's your strategy if this were to pass as is? Gary Sugarman: Well, I think firstly the customer is going to feel the impact. So right now the majority of our customers are short-term. Those customers capitalize on short-term promotions that have become, you know, the rhythm and the norm in self-storage pricing. We will not be in a position to make that available anymore. We also will not be in a position, as the industry won't be, to offer the kind of flexibility that we have historically offered with 30-day renewable leases. So to the degree that we lose ability to modulate our pricing based on market conditions and what makes sense for the business and that particular property, we have to take risk out of the equation. We'd have to make the self-storage agreement look much more like a longer term agreement that you see in other real estate food groups. And so the customer loses. Most customers are short-term. Most customers take advantage of attractive promotional rates. And both of those features are at risk if price control, you know, enters into the relationship. Chris Berg: And thank you for saying that, because just today Extra Space had their earnings call and the CEO talked about, hey, 35% of our customers now are coming to us because they're just simply running out of space. You see D.R. Horton building smaller homes. I mean, storage is only going to continue to grow, but if we've now got to have handcuffs on ourselves, as you mentioned, it does obviously hurt the consumer. So, first off, Gary, thank you for the time. I really appreciate you giving us the insight into this meeting. Is there anything else that you want to add or share that I haven't asked yet? Gary Sugarman: Well, if you haven't familiarized yourself with the bill, or with the coalition that we had formed in opposition of the bill, please reach out. Please connect with the California Self Storage Association and get involved, contribute. This is a significant fight that we need to win. We cannot allow interference with the relationship that you real estate companies or self-storage companies have with their customers, you know, especially when it's just uncalled for and unnecessary. Thank you. Chris Berg: Thank you. Thank you. I'm going to get this website up here for people so they can take a look at it, and just go visit californiasto.org as Gary just mentioned, but again, californiasto.org. I want to remind you, coming up on May 6th, early next week, is going to be the Senate Judiciary Committee hearing. So we'll keep our eyes on this bill, but again, if you can start to get actively involved, reach out to this organization. I'm sure there's going to be an opportunity for you to email senators and assembly people and say, hey, we don't need this. It's not going to be good for anybody. So Gary, again, thank you for the time and the insight. We really really appreciate it. If there's anything that we can be doing to support you around this, please let us know. Gary Sugarman: Okay. Thank you, Chris. Chris Berg [attribution inferred]: Thank you. All right. This is a commercial real estate report. — END OF TRANSCRIPT —