Owners of multifamily facilities tend to notice tenant and lifestyle trends long before others — such as whether people are recycling more, what type of cars they’re driving, whether they’re receiving more mailed packages via e-commerce companies.
Tampa’s Phillips Development has definitely taken note of another recent trend: Tenants asking where they can find nearby self-storage facilities.
“As apartments get smaller, the need for storage grows,” said Glen Stygar, acquisitions director at Phillips Development, owner and builder of multifamily developments across the Southeast. “There’s less storage in units.”
Diversification opportunity
The increased tenant need for storage largely explains why Phillips Development has recently teamed up with Memphis, TN-based Jernigan Capital to start developing self-storage facilities across not only the Southeast, but also, possibly, in Chicago, Kansas City, Philadelphia and metropolitan areas outside its traditional development footprint.
“We saw the need, the demand for it,” said Stygar of his company’s jump into self-storage. “It’s a good addition to our [business)]. It’s the same demographics as multifamily.”
To date, Phillips now has four self-storage developments in various stages of construction or planning – located in Raleigh, NC and in Largo, St. Petersburg and Tampa, Florida – and three more properties under agreement in Chicago, KC and Philly.
The general strategy: Phillips builds, Jernigan provides the capital, and third-party self-storage companies, such as CubeSmart or Extra Space, handle operations.
If all goes well, Stygar says, the goal is to build about five facilities per year, for a combined $50 million in developments per year.
Making the jump
Phillips Development is certainly not the first non-storage developer to jump into the current hot market to build new self-storage facilities, says James de Gorter, co-founder of New York’s Union RealTime, a data analytics and software firm for the self-storage industry. Other multifamily developers are now building self-storage facilities, including college student-dorm developers, he says.
But what makes Phillips Development’s foray into the field notable and impressive is how it’s integrated its goals with others with interests in the self-storage business – Jernigan Capital, which specializes in self-storage financing, and third-party operators, such as CubeSmart.
“It’s easier to get things done this way,” he said. “It helps bring down the barrier to entry in these markets.”
Perfect symbiosis
Warner Russell, director of business development at Jernigan Capital, said his firm’s interest in dealing with firms like Phillips is obvious: It’s in the business of providing financing to self-storage developers. Founded two years ago by Dean Jernigan, the former CEO of CubeSmart and founder of Storage USA, Jernigan Capital has already closed on $487 million in investment loans to self-storage developers – for a total of 48 projects.
But Russell said Phillips brings an added benefit to projects: It knows the needs of apartment dwellers, prime customers for many self-storage facilities, especially those in dense urban areas.
“There’s kind of direct correlation” between the multifamily and self-storage businesses, he said. Knowledge of the tenant side of the equation helps Phillips identify good prospects for self-storage development sites, said Russell, whose company plans to take equity stakes in facilities built by Phillips Development.
Finding underserved markets
Phillips Development’s Stygar said his firm will obviously focus some of its attention on markets where it already has multifamily facilities, as is the case in the St. Petersburg area, where it now owns multifamily units and where it’s currently building a 100,000-square-foot self-storage facility.
But Phillips Development isn’t going to be constrained by focusing exclusively on markets where it has, or is thinking of building, multifamily dwellings, he said. The firm will go where market demand dictates – in this case sites it believes are underserved by self-storage facilities.
Both Stygar and Jernigan’s Russell said they’re keenly aware that there’s been self-storage overbuilding in some markets. But that only increases the need to conduct thorough market research before jumping into projects, they say.
Borrowing Dean Jernigan’s often used baseball metaphor toward self-storage development, Russel said the current self-storage construction cycle is still “only in the six or seventh inning” nationally and should remain strong through at least early next year.
“We’re encouraging them [Phillips] to go into markets that they feel good about,” Russell said. “We have to be more selective. But there’s still a lot of opportunities out there.
