Top Five Mistakes Made by New Self-Storage Developers: Know What They Are So You Can Avoid Them
|Copyright 2014 by Virgo Publishing.|
|By: Jamie Lindau|
|Posted on: 07/02/2010|
New self-storage construction has been down for nearly two years, but we’re now seeing improvements in occupancies and net income per project. As builders and entrepreneurs see demand exists, they’ll pull the trigger on new facilities. The huge opportunity created by the current economic climate is you can get a self-storage project approved in an area where it would’ve been deemed impossible just a few years ago.
If you’re ready to make this leap, don’t make the same mistakes other developers have made in the past. To be successful, you must start by doing your homework. The great land opportunity you discovered might have a willing planning board that leaves you feeling good about your prospects for approval, but there could be pitfalls ahead.
You may have your site approved, but the question to ask yourself is: “What problems exist that I don’t yet know about?” This is a loaded question with many potential answers. Some of the issues you may need to address include:
To avoid as many of these problems as possible, it’s best to think of all potential obstacles and get a feel for if there could be anything wrong with the site up front. Address all dilemmas as soon as you discover them. Too many developers assume problems will just work themselves out. In reality, they don’t, and they can cost you a lot of time and money.
This doesn’t refer to getting the maximum square footage out of your land, it refers to creating the most square feet of rentable space. Some developers squish as much storage space as possible on the site and fail to consider who would actually want to rent such a unit or size.
For example, in some markets, tenants may not be interested in lugging stuff upstairs or into wide, single buildings, instead preferring drive-up units. In other markets, customers have no qualms about accessing units on upper floors. You may need to re-evaluate your site plan and determine potential income based on what you can actually rent, not theoretically rent. This may mean your gross potential is lower, but your project’s rentability is higher.
Failing to come up with enough money to fully finance your facility is a huge error. In today’s market, lack of financing kills many projects. You need money to get into this industry. If you can’t get it on your own, consider entering a limited partnership.
Many business owners might shy from investors or partnerships; however, if you’re sitting around waiting for the 85 percent loan-to-value ratio the industry touted a few years ago, it’s going to be awhile. In a perfect world, it’s best to minimize partnerships; but in this environment, you may have no choice.
Mistake No. 4: Not Phasing the Development
Here’s another mistake many first-time developers make: building the entire site at one time. In the last 10 years, more owners have opted to build their entire site at one time. Why? Common answers included, “I can get the money, so why not now?” or “My pro forma looks better.” And for those who struggled through the city-approval process: “I never want to talk to the city ever again.”
Today, we’re seeing the consequences of all these 60,000-square-foot or more facilities built at one time. They take a long time to rent up, particularly if there’s plenty of nearby competition.
Owners often forget self-storage facilities only rent 1,500 to 2,500 square feet per month even in a good economy. These owners were delusional about how fast their facilities would fill.
Phasing a site minimizes the downside (loan amount) and offers the greatest flexibility to fix mistake No. 2—building the wrong size units for the marketplace. Each market is different, but later phases are your opportunity to fine tune your unit mix and build what customers need.
The last mistake often made by many new self-storage operators is not being 100 percent ready on opening day. You should begin preparing to rent units long before you actually pull your occupancy permit. The list of items that should be addressed is plentiful and includes: