Why Cities Need Self-Storage

THE SELF STORAGE REPORT — EPISODE TRANSCRIPT Episode: Why Cities Need Self-Storage Guest: Stephen Mirabito — President and Founder, StoragePRO Management, Inc. Host: Chris Berg — Abernathey Development Recorded: March 7, 2024 Video: https://www.youtube.com/watch?v=iF2_CmlFwd8 Key topics: California self-storage moratoriums and a possible Indio repeal; Mirabito's 1985 start and first facility in Tracy, California; the 1986 Tax Reform Act; Public Storage as early mentor and rival; Jerry Mooney's Rolodex; StoragePRO's roughly 150 managed stores from Denver west to the Pacific; storage as last-mile logistics and small-business incubator; office vacancies in the 50% range; average home size down about 20% in a decade; REIT teaser-rate discounting and antitrust talk; the Mini-Storage Messenger article and SSA Las Vegas 2023; construction cost from $14 to $110 per square foot; $750 billion in state coffers and a $1 trillion infrastructure bill; rental rates at the bottom with 3% mortgages freezing moves. 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: Why cities need self storage — that's the subject of much more of today's the Commercial Real Estate Report, empowering you to build generational wealth with real estate. I'm your host Chris Berg, head of Business Development at Abernathey Holdings. We build Class A self storage sites in California, Arizona and soon to be beyond. Uh, very special guest today, been involved in storage for a long time. Steve Mirabito — he is the president and founder of StoragePRO. And Steve, it's great to have you on the show. Stephen Mirabito: Hey, thank you so much Chris for welcoming me. Chris Berg: So I know we want to dive into this conversation around the moratoriums that are happening in California. Perfect timing for you and I, because we've been trying to set this up for a while. Tonight in Indio there is the possibility of Indio lifting a moratorium, which would be incredible. Before we dive into that, I just — talk to us about your background. Like how did you end up in self storage? Tell us more about StoragePRO. Stephen Mirabito: Sure. Um, great, great, um, story I think. 1985 graduated from college and moved west and started working for a development company. And quickly within a year there was a 1986 Tax Reform Act, and um, that basically took passive losses and, um, made them — you had to capitalize the passive losses. That was beyond my pay grade at that time. All I know is I walked into the office building one day and everybody was laid off except for myself. And why? Because I was in the process of building our first self-storage facility. And thanks to Public Storage — they were acquiring a piece of property that we owned — they taught us um all the uh tips and tricks as to how to build the storage, and you know the underwriting and what needed to be done, and all the um uh feasibility and viability reasons um that you need to look out for. And um, we're starting to build our first storage facility and it was a uh income producing business rather than a loss, so they wanted to keep anybody that was doing self storage, and I was the only guy doing the self storage. I got to keep my job. So fast forward, um, worked there for uh probably 4 more years and uh built 12 or 13 uh properties with them. Moved on, and I said you know what, I'm tired — because I was uh, I was fighting with Public Storage every day. They, you know, they'd find out where I was traveling, more or less, and before I knew it I could come home to the office and say hey, I found a property. Public Storage was buying that property and they were in contract. So it was a war zone for a couple of years and I was like, I'm done with self storage, I'm not going to do it. Well, you know, when I left the company um I had already made a decision to get into the property management side of the business, and um uh started a management company and we did feasibility and viability studies. And um, luckily at the same time there's a gentleman by the name of Jerry Mooney — he was the first self-storage consultant on the west coast — and he said Steve, I'm retiring, you're young, here's my business, here's my you know Rolodex of all my clients, it's yours. And the rest is history. Chris Berg: That is incredible. All right, so let's back up for a minute. So you said you moved out west in '85 — where did you move from? Stephen Mirabito: I grew up in Upstate New York. Chris Berg: All right. And then where was the first site? So you're doing this one site back in '86 — where was that at? Stephen Mirabito: Tracy, California. Chris Berg: It's now — really? [attribution inferred] Stephen Mirabito: Yes. Chris Berg: Yeah, oh my gosh. What a godsend to be in self storage that long ago. So I can only imagine the things you've seen, the changes. So you get into — what a blessing too, to have this show, we go hey, here's my business. So tell us a little about StoragePRO, and what are you currently doing right now at StoragePRO? Stephen Mirabito: Sure. In 1990 when I left the company everybody said, you know, why are you running from this, you know, great business model? And as I said, I was a little tired of doing real estate development, and uh started my company. And it was MBO, Mooney and Associates, and uh doing feasibility studies, consulting and management. Uh, and then about 3, 4 years later uh one of my clients said hey Steve, you want to be building storage facilities? And I said well, you find the sites and I'll build them. And um, so for the last, what, 30 years, this is what we've done, is um my partner finds the sites and um I build the sites and then we manage the properties. Chris Berg: You see, you didn't tell me that when we first met, because I was under the impression that StoragePRO was ultimately mostly a third-party management system. So you're doing development and the third-party management piece? Stephen Mirabito: That's correct. Yeah. And then probably about um, yeah, 2000 we owned you know 3 or 4 properties and realized that, you know what, we have to brand it. And we branded it uh the property StoragePRO. And fast forward another 10 years, 2010, I realized, I'm like wow, there's a lot of consolidation going on in the industry, and very similar to what I grew up in — the grocery business. My dad owned a small grocery store and he was inundated with massive competition from the big public companies, um, and this is back in the early 70s when there's a lot of inflation, you know, protests. You know, I remember people picketing out in front of my dad's grocery store because meat prices, you know, went up. And um, you know, like my dad had anything to do with it — it's out of his control. But what was happening there as a result of inflation was there's a lot of consolidation in the grocery industry. I think the grocery industry is one of the worst industries you'd ever want to get into, because um there's compression from all different angles. Um, you know, building size, um, competition — you know, look at the competition in grocery industry, you've got it from you know a drug store to a liquor store, to everybody sells food and is competing with you. So um, I saw what happened in the 70s um with my dad's grocery store, and he realized, he said Steve, he says, I need help and I need technology. Fast forward 2010, I'm like wow, the self storage industry is just like the grocery industry. I need technology and I need help. And I recognized the help was not just more people — we had great people working at StoragePRO — but I needed to bring on third party management in a big way, so that it would help my property succeed and at the same time we would help the third party clients succeed. And it's been a wonderful masterpiece. As a result of that, uh, my clients have succeeded beyond their expectations, and um we've been able to grow a model that provides customers with the latest technology, the best-in-class management, the systems, the procedures, everything that um is needed to be competitive in today's market. Chris Berg: How many — how big is your portfolio? Like how many stores are you currently managing for? Stephen Mirabito: We're closing in on um close to 150 right now, everywhere from uh Denver west to the Pacific. Chris Berg: Perfect. So I want to get into that in a moment, but I got to share with you, like, you have no idea how much I wish I could take your 1985 to today experience and somehow just download that into my brain. So um, the reason we wanted to do this podcast — we'll get into what you're hearing from across the country with the people you're managing sites for, but let's start with the cities and why they need self storage. We see these moratoriums happen, as I mentioned a moment ago Indio may actually lift theirs. Um, if I was a city committee or a planning commissioner, what would be your pitch to me if, like, I'm saying to hey Steve, you know what, there's no real taxes, you guys don't really employ anybody, like I don't need any more self storage? What's your pitch to me on why I should change my mind? Stephen Mirabito: Well, nor do we need more retail. And most cities are thinking and dependent upon retail — larger cities on office space — and all of a sudden in the next couple of years I think they're going to face some economic challenges because of relying strictly on retail and office, especially when office vacancies are in the 50% range. There's going to be a reassessment of tax rules, and there's um going to — and fewer people are going into the stores, so there's fewer needs for dry cleaners, there's fewer needs for you know car repair because you don't need to go drive your car anymore. Um, so going to suggest that the cities need to rethink their future. And where self storage comes in vitally important is that we are a logistics driven society today. We've got Amazon at our fingertips, everything we want, we want it immediately and we can't wait. Well, the self storage industry is providing the ingredients for that logistics type business. I look at storage as a logistics business. We are providing, you know, last mile uh um accommodations for storage needs within um a city. So a city should be questioning why is self storage so popular and in such high demand, and they might find that there's a lot of businesses that we are serving, and there's a lot of home businesses that we're serving. And this is their first opportunity to be able to expand outside of their homes into a credit — no credit asked — uh warehouse situation. They're able to move product into the storage industry, or into the storage unit. We're not asking for credit, we're not asking for a long-term contract, all we're asking for is a month-to-month agreement. And cities should be noticing that this is the trend — the logistics driven market and business that we're evolving into as a society in the United States — and the self storage industry is delivering and is the backbone to that service. Chris Berg: Do you have any data? Because I had this conversation recently uh with Anarita Cer, and we talked about how what's so great about self storage, it acts as like a small business incubator, which as you're alluding to — I'm from the Midwest, you know, back in North Dakota we always talked about the power of putting a dollar in the farmer's hand, because if the farmer spends a dollar it's 10x's in our community, right? So do you have any data by chance that shows hey, because we're helping incubate these small businesses, it's increasing employment or tax revenue or anything of that nature? Stephen Mirabito: Yeah, I wish I did, and that's the importance of uh Self Storage Association, is to um compile that type of information. Uh, anecdotally I can tell you, just sitting in an office and watching the types of people and businesses that pass through — um, I've got a facility, I know in the middle of the night, traffic — warehousing traffic — is coming in and going. They've got trucks coming in and going all night long, um, and they take up several of our uh large storage spaces. So it's — whether it's a residential user, they may say they're a residential user, but unless they're in the process of moving or remodeling their home, chances are they need that extra space because they've got a business that's transpiring in their household. It may be a startup business, it may be work from home situation, whatever it is. Um, a lot of business is generated because of this, um, as I call it, uh um, you know, we're — yeah, we're last minute mile business for everybody. Chris Berg: Um, any other reasons you can think of why a city should say yes to self storage? Stephen Mirabito: Well, if we're going to be a green society, pushing self storage to the next city over or outside of the urban limits um does not help, because it's going to just strictly — all our customers are coming from within a couple of miles. So if we can't build in, you know, inner cities or center city, and we're being pushed out beyond, that means it's forcing all these people living in apartments and in higher dense uh neighborhoods, having to drive, get a — have a vehicle, drive you know further miles to get to their product. So storage — the self storage industry is basically the extra room that you don't have at your house. I think one big statistic that the home industry doesn't want to tell you, or the home building industry doesn't want to share with you, but their — the average home size is down about what, 20% I believe, um, in the past decade. Well, that's uh called shrinkflation according to our president, and nobody's accommodating that shrinkflation in homes other than the self-storage industry. Chris Berg: That was so well said. It's not just your Wheaties that are going through shrinkflation, it's the home as well. But I like what you said about multifamily. Marcus & Millichap recently did an interesting presentation around how Millennials use storage versus uh you know the Baby Boomers, and Millennials, for them it's like an extra closet. So for multifamily developers in cities you think hey, I would want storage close by so I don't have stuff strewn all over my porches or the driveways. And so I think there's a really nice amenity to have the self storage there to keep things looking clean and fresh. So you mentioned you're managing about 150 or so um storage units across the — not units, but stores — across the country, mainly the western part of the states. There is a big conversation happening — well, let me ask it this way: what's the most pressing problem, or the thing you're hearing the most from the people that you're managing? Like what are their biggest concerns right now in the storage world? Stephen Mirabito: I think uh digital relevance and presence is extremely important, meaning a website that is working and is dynamic and um is designed to attract customers. We were the first in the nation — uh, when the pandemic struck, I made the decision probably 6, 8 months ago before that to um change website technology, and we became the first in the nation to have um full rental leases all the way from — a customer could just log on and rent their unit without even dealing with a customer— Chris Berg: Wow. Stephen Mirabito: We turned that button on and the following week COVID hit, and one of my clients said Steve, this is great technology but we won't need it for years to come. And they love me today because we implemented that technology. Chris Berg: Now how robust is what you're offering your clients? Is it down to the point from an accounting standpoint that hey, I can just send all this data to my accountant, he can give me my K-1s, my depreciation as well? Or is that not part of your software? Stephen Mirabito: We — yeah, it's a fully integrated accounting service, so we do everything, distribute, all the way paying the bills to distributions on a monthly basis to all the partners. So we're pretty much tracking the uh entire partnership of each property, and then we deliver to their accountant um the uh GL at the end of the year um with the trial balances, and let him or her uh prepare the K-1s and audit through if they wish. Chris Berg: Wow. Um, what are you hearing from clients in regards to the big conversation right now? There was a webinar today, thanks to Yardi Matrix, they're talking about it too — but where you see the REITs just slashing uh public rates from a standpoint, you know, because they want to obviously acquire customers. I get it, their strategy. But they acquire the customer, once the customer gets in then they start to, you know, rapidly increase the rates. What are you hearing from some of your clients about that? Stephen Mirabito: Uh, I have not heard one good thing about that, and I'm extremely concerned about that behavior. I think Wall Street should be scared and frightened uh by these tactics and practices that are happening by the larger operators that happen to be corporate or publicly owned. Uh, and I wrote an article in the uh Mini-Storage Messenger magazine last fall regarding this matter, as I walked away from the Self Storage Association conference in Las Vegas last year in 2023 and I heard so many independent owners complaining about that practice. So I did a little bit of studying and I ultimately ended up writing um the article for uh for the magazine. Uh, I look at it this way: I grew up, you know, in a grocery business in Upstate New York, and my dad was not a big operator, he's a small independent operator, he didn't have the sophistication and the technology and all the widgets and what have you. But what I learned from that is, you know, for every action there's an equal and opposite reaction. And I'd ask him, I said Dad, how come this is happening, or why is this law — that's wrong and you shouldn't have to do this. He says Steve, he says, people in New York City, you know, are causing problems, and as a result of that what happens in New York City ends up becoming a law for the entire state of New York. And the same thing is happening in the self storage industry. Uh, if the big operators and REITs don't clean up this practice, we are going to have — I believe they will have lawsuits in litigation um as well as a lot of attorney generals looking down their uh throats. Chris Berg: Wow. Back up to your comment around Wall Street should be concerned — what do you mean specifically? Stephen Mirabito: Why are they being complicit in allowing and not recognizing these business tactics and how they're impacting the industry? Every other industry in this country is regulated. Why would they not — why wouldn't any government association, any government agency, not look at what they're doing and come after the large public REITs? Chris Berg: I mean, yeah, to speak to what you're sharing — um, I didn't peruse the article, but I did see a headline in the regards to, you know, in Texas of all states uh there was the potential of some legislation coming forth around trying to cap what the rate growth could be and things like that. So I mean, the more you can stay out of the legislature the better, so I definitely don't want any of us going down that road. Anything else you want to add there? Stephen Mirabito: Well, you're right. And why would you — you got to put yourself in the customer's shoes. And yes, they are absolutely correct, they can — you know, the operators can definitely increase occupancy by not uh acknowledging or footnoting that this is only a temporary rate, because they're offering it at a, you know, at 50 cents on the dollar. Any consumer would say yeah, absolutely, I'm going to go buy that, because it's, you know, I'm getting it at 50 cents on the dollar. The challenge and the problem is, by not disclosing it up front, it puts the smaller operators like myself, who disclosed that hey, this is — we're going to give you a screaming deal for the next 6 months, but this is your normal rate and you will be paying this normal rate, you know, come the end of the 6-month period. What's going on right now by these large operators, I find it disgraceful. And yeah, it's legal, but it's legal until um it gets challenged, and it will get challenged. Chris Berg: Boy, I hope that's not the case. And you know, I remember being at SSA as well, and a gentleman from Extra Space was there, was right after the big merger, and he's like look, this is what we're doing, this is a way for us to acquire customers, we can lower the rates. I will share this from an anecdotal standpoint: there was some conversation around — some independent uh owners were like, you know, they started to say the words antitrust, and I was like okay, that's an interesting perspective on it, but that's where some people were headed. Um, if you want to comment on that, great; otherwise I just want to talk a little bit more about development with you. Stephen Mirabito: I'm a very opinionated person, but I don't see it as antitrust. I see it as just poor business practices um that will beg for legislative action. Chris Berg: Fair. Okay, let's talk about development. So how many uh sites over your incredible career have you developed? Stephen Mirabito: Wait, um, that's a good question. Probably 25, 30 properties. Chris Berg: So uh, through your experience and all the numbers you've seen and the stuff you've built, what are the top 1 or 2, maybe 3 metrics you focus on as you make a decision about okay, we're going to buy the dirt, we're going to build here? Like what are the most important aspects for you? Stephen Mirabito: Sure. It's um, uh, it's gotten so much more complicated and more sophisticated over the years, but I'd say the top 3 is our investment yield. You know, we're going to leverage the property, but um, you know, where is the yield. And um, I've seen those yields, you know, compress over the years — every year it got, you know, smaller and smaller. And um, it's challenging to make deals really work today. That's probably the top um uh key right there. Chris Berg: And would you say it's mainly construction cost, the price of the dirt, like — what, the competition? What do you think is most affecting the compression of the yields? Stephen Mirabito: Uh, construction costs skyrocketed. Uh, I'm embarrassed to say that uh when I started in the industry, I believe that Tracy, California facility cost $14 a square foot to build, okay. And today, you know, that same property is probably easily $110 a square foot. That's hard cost, that's just the building, the sticks and bricks of getting it built. But yeah, the um, the price of storage construction has gone up, what, 10 times, right? Chris Berg: Yeah. And then one of the things we talked about here before in the show, which I'm sure you're aware of this, but like, I talked to some GCs and a lot of people are wondering hey, when are these costs going to come down? And then he and I were having a good conversation about, you know, there's $750 billion sitting in state coffers that's going to go a lot towards infrastructure, there's $1 trillion out there from the infrastructure bill. So when you think about building that many roads and bridges and whatnot, like construction costs aren't going down anytime soon. So it's going to continue to make it challenging to make things pencil. Stephen Mirabito: I've never — I've never seen in 35 years in this business construction costs ever drop. Okay, maybe labor costs, if there's a uh recession and you're building in the middle of a recession, yeah, you can — there are a lot of subcontractors out there just buying a job. But in terms of material cost, you know, we're in a global market for materials, so it's not just a regional cost for buying concrete or buying uh rock. It's a commodity — these are all commodities. Copper — I'm, you know, I'm always looking at price of copper, what's going on, or the steel, um, to understand, you know, are there going to be some constraints in it. So um, we're in a global market for raw materials, and prices don't drop. Stephen Mirabito: I also think that that's uh some of the inflation that does not get reported. You know, when we see 2 or 3 or 4% inflation rates, we're not reporting the fact that, you know, cost of raw materials for new buildings um are going up at, you know, 10 or 15%, you know, overnight. [attribution inferred] Chris Berg: So I'm curious, as you're looking at — I don't know how much data you see from your clients, but even from your own sites — you know, there's this big conversation in regards to where rates are at, from a people moving standpoint, right? I mean, if you've got a 3% mortgage, 4% mortgage, there's not a real big incentive for you to move when rates are at 7, 7.5%. So you see demand dropping dramatically throughout many parts of the country. Do you believe that we have hit a bottom at these rates, or is there still more room for them to go down? Stephen Mirabito: That's uh — I'm not an economist, but my concern is um that hopefully they won't go up. But you know, I just look at the 10-year treasury— Chris Berg: I apologize — when I mean rates, I meant, I should have been more clear, I meant like the rental rates, because there's people out there right now that are saying hey, I think, you know, we're seeing the low on these rental rates for self storage. I think we're going to start to see more people moving, they're going to get more acclimated to where uh mortgage rates are at. Do you think we're at a low point here for rental rates for self storage? Is there more room for them to go down? Stephen Mirabito: I think we're at the bottom. It's the discounting — so our new customers are coming in at lower rates, promotional rates uh for a much longer extended period of time they're getting. So you need storage, rent it now, because you can get a whale of a deal on storage. I don't think they're going to bottom any further. Um, there's no race to the bottom. It's just, uh, as you said, when you've got a 3% home loan, why move? You can't afford to move. And um, that really has stalled out uh the storage demand in most communities as a result. Chris Berg: Yeah. Steve, it sounds like you might be building your own self storage site right there on location. So uh, I want to give you a chance — I want to give you a chance to just give the last word. If people want to reach out to you and find more about StoragePRO, how do they do that? Stephen Mirabito: Sure. Uh, be happy to. It's StoragePRO Management, we're based in Walnut Creek, California. We're one of the largest — number 10 operator of storage facilities in the nation — and we'd love to talk, at www.storagepromanagement.com. Chris Berg: Great stuff. Steve Mirabito again, president, founder of StoragePRO, a big part of California Self Storage Association. We just appreciate the time and the insight, so thank you very much. Stephen Mirabito: Hey, my pleasure, thank you. I appreciate the opportunity. — END OF TRANSCRIPT —