Public Storage Cautious : Expansion: The nation’s biggest mini-warehouse firm, based in Glendale, is growing slowly, but rivals think that may change.

The self-storage business, by most accounts, is doing nicely these days. Demand for mini-warehouse space is gradually rising, and the average facility is 80% to 90% full. Rental prices also are edging higher.

The market is strengthening because few new self-storage sites are being built. Banks and other lenders, burned lately by commercial loans that went sour, are particularly reluctant to finance self-storage facilities, of which there are already more than 20,000 nationwide.

It would seem an opportune time, then, for the industry’s biggest players to expand their market shares by aggressively buying existing properties.

That’s just what U-Haul International Inc. did this month. The company--best known for its truck and trailer rentals--paid $108 million for 125 mortgages on mini-warehouses. U-Haul bought the mortgages from the Resolution Trust Corp., the U.S. agency that’s disposing of assets held by failed savings and loans.

But the industry’s leader, Public Storage Inc. in Glendale, is sticking with a go-slow expansion. The number of warehouses operated by the privately held company has increased only 6% since 1990, to about 1,060 facilities in 38 states and Canada.

That cautious growth has negated a prediction made in 1990 by Public Storage’s chairman and co-founder, B. Wayne Hughes Sr., that the company would grow by 40% over the next two years and that most of the 400 additional warehouses would be bought from its rivals.

Instead, Public Storage spent most of the time restructuring the investment vehicles with which it raises much of its cash from the public. The company also decided that many of the properties that were available for sale were too pricey.

“We’ll take them as we go,” Hughes said last week. “We’re not averse to expanding, but our expansion has to be done in a very controlled manner. We need to buy things that are worth what you pay for them.”

But Public Storage’s rivals believe Hughes’ prediction might come true yet.

“They’ve just been laying the foundation for future fund raising” that will finance expansion, said Tim Riley, marketing director of Shurgard Storage Centers, a Seattle-based concern.

“Over the last couple of years they’ve been aiming, and now they’re ready to fire,” he said.

Public Storage, besides being the nation’s largest operator of self-storage sites with 63 million square feet of space, also is a major real estate syndicator. Since its founding in 1972, Public Storage has raised more than $3 billion from investors through dozens of private and public partnerships, real estate investment trusts (REITs) and other financing vehicles.

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But with the market for limited partnerships having soured in recent years, Public Storage has been busy converting many of its partnerships to REITs whose shares are publicly traded. The REITs appeal to more investors because they offer more liquidity than do partnerships--that is, the investors can buy and sell their holdings more easily.

With those conversions now complete, Public Storage is poised to raise more cash for expansion by having those REITs issue additional stock or debt. How soon Public Storage might do that is an open question, and Hughes is not setting any deadlines.

Of course, a lot depends on market conditions and right now “the markets are tough for fund raising because of the continuing fear mentality in the investment community” toward real estate holdings, Riley said. “You don’t see people banging down doors for real estate investments.”

Nonetheless, the self-storage industry’s improving conditions are getting noticed. A spot-check of 15 Public Storage-sponsored REITs on the New York and American stock exchanges shows the stocks have shot up an average of 30% so far this year. (It helps that several of the REITs are yielding 9% or more at a time when many fixed-income investments yield less than 7%.)

“The business is pretty good,” said Harvey Lenkin, Public Storage’s vice president. “There’s virtually no new mini-warehouses being built. Demand continues to slowly escalate, so the vacant space is being absorbed.”

As for expansion, Public Storage has bought a few properties from its competitors. And although the company bid on many of the RTC mortgages bought by U-Haul, Public Storage left empty-handed because it considered the auction prices too high.

“They just bid more aggressively than we did,” Lenkin said of U-Haul. “It just wasn’t easy to buy at the prices we think are appropriate.”

U-Haul’s bidding “frankly was a bit of a surprise to Public Storage and Shurgard,” Shurgard’s Riley said. “We always felt U-Haul viewed storage as an extension of their truck rental and packing supplies business. This showed us quite clearly that they’re very serious about storage.”

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Public Storage is by far the industry’s biggest player, with four times the rental space of No. 2 Shurgard, which has 15 million square feet over 220 locations, according to a ranking published this month in Inside Self-Storage, a trade magazine.

U-Haul placed third, with 9.4 million square feet and 600 facilities. But U-Haul also has storage space at several hundred of its truck and trailer rental sites, and the mortgages U-Haul bought from the RTC are all secured by mini-warehouses. And although there’s little new building in the industry, U-Haul says it plans to add 12,000 rooms, covering 1.3 million square feet, at 55 locations this year.

That’s the exception, though.

“The industry will not develop properties significantly in the next three years because of the financial institutions’ unwillingness to provide financing,” said Hardy Good, publisher of the Mini Storage Messenger, an industry newsletter.

In the meantime, the swelling of occupancy rates at existing warehouses is enabling Public Storage to raise rents--but there, too, it is being cautious. The company said its average monthly rent is about 65 cents per square foot, up a penny from a year ago and up from 61 cents in 1990.

Those fees will total about $400 million this year, up from $350 million in 1989, Lenkin said. The company has 506,000 tenants.

“We can’t be too aggressive on rental rates,” Lenkin said. “The recession in various markets has negatively impacted people,” and a severe rent hike would send some tenants to Public Storage’s less expensive rivals, he said.

“We have not been running our business to get the maximum dollar of cash flow,” Hughes said. Nonetheless, he added, Public Storage’s profitability has increased, in part because the company has virtually eliminated its construction division, which once employed 400 people.