Lease-Based Storage in a Changing Economy

Published in Mini Storage Messenger, February 2009 – Quotes by John Gilliland

Some quotes from John:

“In the right situation, a lease can be purely a cash flow play,” says Gilliland, president of Investment Real Estate, LLC, a self-storage brokerage firm in York, PA. “We are getting 20 percent to 25 percent cash returns, whereas you typically never expect that with buying a self-storage facility. You are going to get eight to 10 percent cash and cash returns. And, we don’t have nearly the amount of dollars to lay out upfront to build out as we do when we are building.”

“We have looked at the portfolios of several major shopping center developers to see if they had a vacant big box store or an extra parcel where we could build self-storage or do a land lease,” Gilliland says. “The numbers haven’t worked for the last three or four years, but that is changing.”

The reason the numbers haven’t worked, he explains, is because landlords can generate more revenue from the space by doing a long-term lease than by selling it to a mainstream retailer than a self-storage facility operator. But now, with more big boxes sitting empty…

“I think we’re going to see more consolidation in the retail industry and shopping center developers will suddenly knock on our door asking if we’d like to do self-storage in an empty 60,000 square foot store,” Gilliland says. “And, I think the numbers will work.”

Case in point: Gilliland is currently operating a self-storage facility in the basement space of a shopping center in Harrisburg, PA. He’s renegotiating his lease with them now and lowering the lease rate because of the economic downturn. Hi occupancy is running lower than in the past years and he is ready to vacate if the landlord doesn’t lower the rent.

Gilliland is also anticipating a hybrid on the leased retail space trend. He’s been in talks with shipping center owners about a condo-type situation where each business owner owns a parcel of the land and everyone pays into a general maintenance fee for the upkeep.

“We can overcome the leasing issues by subdividing these shopping centers,” Gilliland says. “Sometimes those centers are owned by two or three different owners. The pad out front might be owned by a McDonald’s® franchise, the Target® site might be owned by another individual and the shops in the middle by someone else. You can split those up, sell the land to businesses, and form a condo association. The opportunities are out there in urban areas. You just have to look for them.”

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