Consider the Feasibilities
|Copyright 2014 by Virgo Publishing.|
|By: Jim Chiswell|
|Posted on: 02/01/2007|
Many in the self-storage business feel they already face too much competition. Some submarkets throughout the United Sates are indeed overbuilt with occupancy rates below historic patterns. Yet, the industry still affords numerous opportunities, and owning and operating a self-storage continues to be one of the finest entrepreneurial ventures in this country.
But you must get serious about determining a location’s potential. Don’t assume you can buy anywhere or that developing a thriving store will be easy because you already own the land. Finally, don’t count on the unmet demand you discovered in a community a couple months ago being around for long.
Understand that the self-storage business is micro-market specific. Residential households within a five- to 10-minute drive will make up 60 percent to 80 percent of your customer base. Selecting a micro market to concentrate your site selection efforts is critical.
Your first step should be to examine the competition within the targeted area. This takes hard work, a local map, a copy of self-storage Yellow Pages, a computer to do an electronic search, a camera and lots of driving around. By plotting the locations of stores on a map, you'll quickly spot market holes where you can concentrate your efforts.
An Internet search can help you identify existing stores. Many of today’s search programs will return not only a listing of facility names, addresses and phone numbers, but will locate them on a map and provide website links. Double-check the Yellow Pages ads against these electronic searches to make sure you’ve compiled a complete list.
A facility’s website can yield a great deal of information, sometimes even rental rates. Also check for a self-storage association in your state; many have an online facility-search feature. One of the best websites for reference purposes is www.insideselfstorage.com, sponsored by Inside Self-Storage. In addition to a blog about the industry and educational information, you’ll find a free, searchable archive of full-text articles going back several years. The site also includes the industry’s best online “Buyer’s Guide,” a huge directory of industry vendors and suppliers.
With map in hand, a pad and pen, your camera and a cup of coffee, start the process of driving by every facility on the map. Take a few notes about your impressions of curb appeal, signage, landscaping and vehicle ingress and egress. These points will help you understand the strengths and weaknesses of those you’ll be competing against for market share.
Take the time to personally visit facility offices. You can either mystery shop them as a potential customer or just introduce yourself and explain what you’re doing. Obtaining rental rates and occupancy is important, but you should also be observing the quality of the office and the managers’ professionalism. Again, take brief notes of your impressions.
Finding a market void is your first step; only then worry about the price of the land. The real estate economics may end up precluding you from building. However, while price can never be totally ignored, don’t worry about it at the beginning of your search.
Market holes open for any number of reasons, primarily zoning considerations. Existing municipal zoning may exclude the development of self-storage in most categories or require a special-use permit. This can even be true in what appears to be a retail/commercial area. Many communities have become strict within their zoning codes about new self-storage development. The trend stems from the negative image left by older facilities that have been neglected or are overrun with outside-parked vehicles.
P & Z
During the first of what will be many visits to the local planning department, you’ll need to ask what zoning classifications are appropriate for storage and if a rezoning is needed, what your chances are of success. While many communities post their zoning codes on the Internet, make sure you meet in person with local officials.
Since you’ll be in the offices of municipal professionals many times during the site selection and building process, it’s important to build relationships and determine who’s who. Make sure they know you need their help as you consider making a sizable real estate investment in the community.
In your conversations with planning officials, also find out if new projects are already in the works within the neighborhoods you’ve targeted. The last thing you want is to work hard on a site that ends up being down the street from a new project with a superior location. Ask to see the files on any new self-storage developments. These records are usually public information and will tell you a lot about your competitors’ proposed plans as well as communications between the city staff and the owner or engineer. You can also request copies of the files for older projects, but this can take weeks because they're often in storage.
Please, don’t take the word of a Realtor about what can or can’t be built on the property he’s trying to sell you. Please, don’t tell Realtors what you intend to build, because they may have allegiances to another potential buyer. It’s really not the their job to do your due diligence on the property. That responsibility falls squarely on your shoulders.
If you’re lucky, you’ll find the market void exists simply because it has been overlooked by other developers. This still does happen, so stay positive while out there beating the pavement. Finding holes has to be the first step in site selection. You’ll want a location with minimal competition or where the quality of nearby stores is substandard, giving you the competitive advantage.
Sometimes unreasonably priced land sparks a market cavity. Rarely will a developer find the perfect 4.5- acre parcel with ideal topography, easy access and no environmental issues. Convenience is becoming more of an issue for people, and many customers will drive a bit further to reach a facility with superior egress and ingress. The price for the land may be higher, but if you discover a great site with long-term potential, you might be willing to endure a smaller return in the early years as a trade off for greater profitability later.
Many developers have attempted arbitrary, shortcut calculations to determine how much they should pay for land. But price is merely a component of your total costs. View it in combination with all the other factors in your risk/ reward calculation.
It all comes down to rental rates within the area. You can obviously afford to pay more for land in an area where average rentals are $12 per square foot than in a market with rates at $8.50.
You should also log into your city, county or state tax assessor’s website and see if real estate records are accessible online. If so, you can collect the competition’s square footages and tax levels. Sometimes property photos and detailed aerial photos are posted. This information can also be accessed with a trip down to the assessor’s office.
Let’s assume you were able to find a properly zoned, affordable parcel within a market-void area. You now need to obtain accurate demographic information for the site, available at a number of websites. A good choice is Claritas Co. at www.sitereports.com. You’ll be able to examine a given radius surrounding the site, a drive-time area, or create a unique zone incorporating geographic conditions such as interstates and mountains.
These in-depth reports will provide you with historic and future trends for a vast array of categories including population, households and income patterns. Look for a balanced matrix of factors. Household formations have become more important than simply population statistics. Plenty of people may live in a targeted area, but if 45 percent of them are living below the poverty level, do you really expect them to have the disposable income to afford storage? Compile all this information into a profile of your proposed site, area competition and the demographic trends within the target market.
Maybe you calculated average rental rates at $12 per rentable square foot (combining the standard and climate-controlled rates) and you opted to build a complex with 65,000 net square feet. Without getting into a long discussion about the calculations, let’s say you want 30 percent or 19,500 square feet devoted to climate-controlled space.
Your total project would end up being 71,500 gross square feet plus 1,000 square feet for the manager’s office. (The choice of having a resident manager is totally up to you; there truly is no right or wrong answer.) Using these factors, gross potential income would be $780,000.
At a stabilized occupancy of 85 percent and an expense load of 38 percent (there are no perfect rules of thumb for expense percentages either), your stabilized NOI, or net operating income, would be approximately $411,000. Total construction costs would settle close to an “all-in-price” of $40 per gross square foot. Without considering land costs, working capital reserves and construction interest, you’re looking at a construction budget of about $2.9 million.
Using an 8 percent capitalization rate with the NOI of $411,000, the completed and rent-stabilized facility would be worth $5.1 million. Remember this is approximately three to four years after surviving all the lease-up risks and negative cash flow months.
You need to be highly realistic and conservative with the assumptions you use. The development will always take longer, cost more than you expect and rentup may go more slowly than anticipated. Remember, finding the site and getting it built can be easier than filling up the facility with paying customers. It’s not until you reach significant occupancy that you have a chance to start making money.
Jim Chiswell is the owner of Chiswell & Associates. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. He has served for a number of years as a member of the Inside Self-Storage Editorial Advisory Board. He is a co-founder of the new Self Storage Education Network Inc., providing 24/7 online-based manager and owner education at www.selfstorageeducation.net. For more information, call 434.589.4446; visit www.selfstorageconsulting.com.