Now Is a Good Time to Build Self-Storage
|Copyright 2014 by Virgo Publishing.|
|By: Terry Campbell|
|Posted on: 06/28/2009|
Conventional wisdom has taught those in the self-storage business that while the business isn’t recession-proof, it’s certainly recession-resistant. That said, self-storage is experiencing the impact of the current downturn for two reasons:
However, even under these circumstances, self-storage is still a viable business. In spite of the naysayers, there are strategies you can employ during uncertain times to ensure success. In fact, the smart investor knows how to turn a negative situation into a positive one.
During tough times, some people look for opportunities to actually make money, while others are losing it or trying to break even. For example, some investors buy up depressed stocks or commodities during a recession, hold onto them until the economy improves, and then sell them at a substantial profit. This is a sound strategy, if you have enough discretionary money to participate, and if you’re in no hurry to make revenue.
Then there are instances in which a recession creates circumstances that are beneficial to certain businesses, if they are poised to take advantage of them. This is precisely what’s happening in self-storage today. There are compelling reasons for those not in the business to take the plunge now and for those already in the business to expand.
Building materials and land costs. The uncertain economy has forced building prices lower than they’ve been in years. If you consider materials costs are one of the single largest expenses an owner will incur in building a facility, you can assume bargains simply don’t come along except in unusual times. And you can bet these are unusual times.
The same can be said for the cost of land, although it will vary depending on location. Land costs in some areas of the country continue to appreciate; some are holding steady, but most continue to fall. Therefore, on balance, there are bargains to be had.
Finding financing. Even though interest rates are low, banks are requiring higher down payments. This is a problem for some investors because they have to come up with more upfront money than in previous years. But there are ways to get around this through partnerships. In other words, there is strength in numbers.
If an investor can’t come up with 100 percent of the down payment necessary for a construction loan, there are others in similar circumstances who are perfectly willing to step up and participate in a limited-partnership arrangement. And there are those in the business—manufacturers, consultants and commercial real estate brokers—who are in a position to help locate suitable partners.
Design considerations. Before construction can proceed, buildings must be designed. During prosperous times, a good design team may be hard to find—and expensive. In contrast, tough times usually finds designers more available, which means they are probably less expensive and may require less time to turn plans around.
The same is true of manufacturers; a weak economy will likely present opportunities to save on manufacturing-production time because fewer jobs will be in the pipeline, which will translate to faster scheduling.
Permitting and zoning. Once plans are complete, they must be submitted to the proper city and county authorities to obtain the necessary permits. Once again, time and expense come into play in this process. When times are good and there is a lot of construction going on, self-storage projects can expect higher costs and increased time in obtaining zoning and permits. That’s because there are so many projects in progress that permitting, which may normally take a month or so, can be protracted into many months. It’s also because city and county officials are overworked, which could extend approvals even longer.
But in a difficult economy, the process is sped up. Why? Due to limited submittals, there are fewer competitors taking up city and county staff time. This could result in approval times being cut considerably.
Poor economic times can actually create advantages for the construction process. During good times, if construction superintendents or contractors want quality, they should anticipate higher costs and increased production time because everyone is busy and can charge more for their services. The reverse is true in down times. If you want quality, you can realize lower costs (more qualified workers available) and shorter production time (better workers means faster building erections).
Finally, an owner or prospective owner should not be discouraged just because the economy goes south. Traditionally, the very nature of the self-storage business means owners take fewer risks than most real estate developers, so a declining economy is no reason to stand on the sidelines and wait to see what’s going to happen. There are plenty of reasons to be proactive and make things happen on your own terms.