Storage business as real estate business
Mr. Akira Sugawara
Yano Research Institute Ltd.
This is an English translation of the original Japanese article.
In central Tokyo, there has been a rapid increase in recent times in the number of large-scale office buildings fitted with modern facilities near stations. In the same way, there is much talk lately about the development and completion of large office buildings around Osaka Station and Nagoya Station as part of their redevelopment.
On the other hand, real estate companies that own old, dilapidated buildings far from stations, or buildings such as office blocks or warehouses that require proper capital investment in electrical and IT infrastructure to make them fit for modern businesses, can face a difficult search for new tenants after their existing tenants have moved away.
Small and medium-sized real estate businesses are at high risk of losing their competitive edge in this day and age. As their name suggests, they have “immoveable assets” which they have to try to utilize effectively rather than just keep empty, so they need to either significantly reduce their rent or find extra investment for large-scale renovation work.
Some operators have therefore begun to look at other effective uses of buildings other than as offices, and around town we can now see many rental offices and service offices for SOHO businesses, rental meeting rooms, and so on. Another prominent example is storage businesses, which have increased dramatically over the last few years.
Rather than renting out an entire building or floor to one company as in the past, this new kind of real estate business takes the form of renting out meeting rooms by the hour or offering small rental offices or rental storage, thereby dispersing the risk of vacancy.
However, from the perspective of the effective use of existing real estate alone, no large market expansion is forecast at present. With the appearance of exclusive-use storage facilities that are all about greater efficiency (called self-storage in the US), if the market moves toward investment in real estate such as offices and warehouses, it is possible that much investment money could be brought in and the market become even more lively.
Business models for the storage business
First, we introduce three typical examples as business models of operators who own real estate entering the storage business.
(1) Owning real estate & developing storage services oneself
ABC Real Estate owned buildings itself in a few urban locations and rented offices to unspecified companies, but the rate of vacancy (empty floor space) had increased due to dilapidation of the buildings and the construction in large-scale redevelopments nearby.
As a new project, ABC carried out renewal work to turn empty floors into storage space and developed its own rental storage business.
(2) Owning real estate & outsourcing storage services
ABC Real Estate began a storage service using its empty floor space and outsourced the service operations to a rental storage operator *** Rental Storage Space.
ABC Real Estate only had a lease with *** Rental Storage Space so it was free from the hassle of doing business with individual users, but only gained rental income from its empty floor space. (There are a number of patterns of agreement with the operator.)
(3) Not owning real estate and developing storage services oneself
*** Rental Storage Space did not own real estate itself but began a rental storage service itself subject to a master lease agreement with XYZ Real Estate, which had empty floor space, to use that space as storage space.
Currently, nearly all rental storage operators in Japan do not own real estate. Most are specialist operators in storage services. They are ranked as the outsourcing contractors of the real estate owning operators in (2) above.
As touched upon at the beginning, there is unlikely to be any dramatic change in the pace of market expansion with the present business model as an effective use of space. As things stand now, it does not differ much from the apartment management business. More efficient management methods, reduced service prices, and improved quality are expected to progress another level due to oligopolization into the major storage service players.
Merits and demerits of the storage business
Here we lay out the merits and demerits from the point of view of the operator by comparing the office business and storage business when real estate is already owned.
If operator owns real estate & develops storage services itself as in (1) above
1. In most cases, the cost of converting office space into rental storage is less than the cost of upgrading office functions such as electricity, air conditioning, and IT infrastructure.
2. Although there is a real estate lease, the rental space is for goods and belongings so there are hardly any problems with deposits when moving out or evictions as there are with rental housing and offices. (In many cases of rental storage, no deposit is even taken.)
3. Advertised fees can easily be changed, enabling campaigns and other such activities to attract customers. (Operators can go on the offensive, not just wait for customers.)
4. Not only are the running costs of utilities (electricity, gas, water etc.) kept down, maintenance costs fall too because plumbing facilities are used less frequently.
5. As with rental apartments where there is no caretaker, storage facilities can also be managed unattended.
1. With an office agreement, an entire building or multiple floors used to be leased with one agreement, but with storage there is the extra hassle of an agreement for each storage space (100 contracts if there are 100 spaces, for example.)
2. In the same way, rent used to be collected from just one company, but with storage the number of collections is the same as number of agreements (100). Not only that but there is a greater risk of non-collection of rent.
3. Because of the increase in the number of operators entering rental storage, there are concerns that severe competition will lower rents.
4. There are concerns about a lack of management knowhow.
5. A certain period of time is required until investment funds are recovered.
6. An unspecified number of people not working in the building, though subscribers, walk in and out 24 hours a day, 365 days a year. Businesses on other floors of the building may therefore have security concerns.
To make up for the above demerits, some external outsourcing can be arranged as necessary. Regarding the non-collection of rent in 2), for example, there are operators that will manage money received and guarantee arrears. As for the lack of management knowhow in 4), there are operators that will take on management as if under a sub-lease. (This pattern is the same as (2) Owning real estate & outsourcing storage services.) And as for the hassle of agreements, there are operators who are paid a commission separate from the rent for doing the agreement paperwork.
Storage business in the US
In the US, where business is done on a bigger scale than in Japan, there are many self-storage facilities exclusively for the purpose of storage (entire buildings of rental storage space.) The top operators are already publicly listed, and have established their position as a single distinct self-storage industry within the US real estate field. As a result, buying and selling of self-storage facilities and businesses is also being carried out. (In fact, it forms one category within REIT.)
In Japan, too, business may eventually emerge in which rental storage facilities are subject to real estate trading, although there are a number of issues that would need to be cleared up first. Unlike with ordinary office buildings, recouping investment funds takes a little time but, conversely, once operations have stabilized there is little risk of vacancy and so we can expect investors to positively evaluate this as a business that generates a steady profit.
About the Yano Research Institute
The Institute conducts comprehensive research and analysis on appropriate themes from a micro and macro perspective to determine trends in market size, business share, future prospects, trends among major players, and the like in a broad range of business fields.
We focused early on the storage business field, which continues to grow, and we have provided detailed investigative reports based on thorough reporting since 2010.
We are making a significant contribution to improving transparency in the storage business industry, by analyzing the future prospects, potential, and issues in a market that had scarce information.