Seven Myths of Self-Storage Development and Operation
|Copyright 2014 by Virgo Publishing.|
|By: Kent Flake|
|Posted on: 07/02/2009|
When it comes to developing and operating a self-storage center, there are a few myths that, if believed, may divert you from your investment goals. Steer clear of them, and you’ll be on your way to success.
When formulating plans for a new store, it’s tempting to add 30,000 square feet to an average-sized facility to boost the projected rate of return, particularly when we read about a superstore with 150,000 square feet of rentable space. Sometimes facility size is determined by the size of the land parcel, with little regard to what size the market can accommodate. While there are economies of scale to be considered, bigger is not always better.
I recently asked an acquaintance about the performance of one of his 120,000-square-foot stores in the Midwest. After four years of operation, he had finally achieved 75 percent occupancy. In regard to the facility’s size, he says he would “never do that again.” While a superstore may look good on paper, it’s exponentially more difficult to achieve full occupancy.
Do you know the amount of supply in your trade zone? How much is too much? There is no magic formula. I’ve seen successful stores in parts of Southern California where the supply in a 3-mile radius is more than 20 square feet per capita. That’s outrageous considering the national supply averages between 5 and 6 square feet per capita.
The bottom line is you need to know your market and allow it to dictate the facility size. If you build too big, every time you look at your vacancy report, you’ll be reminded that bigger isn’t always better.
Twenty years ago, there was a lot less self-storage supply. If you built it, customers would come. But that’s not true today. It doesn’t help that a new storage facility in a good location does create additional demand, contributing to this myth. I’ll explain.
Consider the example of a new restaurant opening in town. Let’s say that on your way home from work, a “Now Open” banner caught your eye, letting you know The Greasy Spoon was ready to satisfy your food cravings. Let’s further assume that prior to seeing the banner, you had no plans to eat out that evening, intending to feast on leftovers.
After a brief discussion with your spouse, it’s decided you’ll try the latest in culinary delights at the new eatery. By being new and located in the right place—on your way home from work—The Greasy Spoon created a demand that otherwise wouldn’t have existed.
A new storage facility can similarly create new demand. Some customers would be content to let their stuff pile up in their garages or attics until you conveniently build a new facility just down the street. However, “created” new demand alone will not fill up a facility. Unmet demand must exist in the marketplace to justify a new site. Simply put, other stores in your market must show high occupancy to justify a new one.
The Internet does amazing things. I can use it to check my bank balance or find out if my beloved Sun Devils won their last game. Web advertising is the grease that makes the system work. When it comes to self-storage, however, the Internet is not enough. That pair of pants you bought from your lounge chair will be delivered to your front door in 10 days to two weeks, but good luck getting that extra bedroom set to a storage facility without leaving the house.
That’s why location, location, location are still the three most important considerations in storage development and advertising. Odds are that a customer will choose a storage center that is close to home or the office or along his commute. Building a store on a high-traffic street with great visibility is an advertising cost you only pay once.
Although many customers use the Internet to find places, there are still many who thumb through the Yellow Pages before making a selection. A great advertising program makes use of a top-notch location, the Internet, and a print YP ad, linking it all together with a manager who can close the deal.
When it comes to putting food in your stomach or gas in your car, full is good. Having a full self-storage facility is also good ... to a point.
I’ve heard some managers proudly proclaim their facilities are “full.” Some say without apology that they have been 100 percent occupied all summer, or haven’t had any 10-by-10 units available in six months. In these cases, the facility is not being managed to its greatest potential. The key to success is to manage net operating income, not occupancy.
Let’s say I own a facility with 100 10-by-10 units rented at $100 each and I’m at 100 percent occupancy. A new customer may be willing to pay more for one of my units, but it doesn’t matter if I don’t have one to rent. The market is clearly telling me that a 10-by-10 is worth more than $100, but I’m not listening because I’m just happy to be full.
This same facility at $110 per unit and 95 percent occupancy produces more operating income than at $100 per unit and 100 percent occupancy. I should methodically raise my rents until occupancy begins to drop, using total revenue as my goal. Ideally, even a “full” facility should always have a few of each unit available to be rented at a higher price to the next customer. That’s how you constantly raise your revenue without an across-the-board rate hike.
I’ve visited hundreds of storage facilities across the United States and Canada and seen a few that were doing so well they may as well have had an extension of the U.S. Mint in the back room cranking out dollar bills. But those kinds of stores are the exception, not the rule.
There are many older facilities that have long since paid off the mortgage and earn a good stream of cash. However, the owner who wants to build a facility today should beware the lure of the “cash cow.”
Frankly, it’s a load of bull. For today’s investors, the trick is to find a location that will provide a solid and satisfactory return on investment. To use a baseball analogy, if you can build three or four stores that hit a “single” or a “double,” you won’t need to wait and worry, trying in vain to find the one location that’s a “home run.”
Let’s face it, there’s nothing exciting about three walls, a roof and a roll-up door. Since there’s not much differentiation of product, customer service and people skills become vital in the selling equation. We spend millions of dollars on state-of-the-art storage facilities, then pay someone a wage below the poverty line to operate it. It seems prudent to make an investment in your facility by finding a quality manager, even if that means paying a little more.
When you find a manager who does his best to look appealing, who knows the storage product, and who promptly meets customers’ needs with kindness and respect, you’ve found someone worth keeping. Even if it means paying a higher wage, a manager like that will pay dividends all year long.
Finding the right unit mix is more of an art than a science. The combination that works in one location may be wrong for another. As you design a new facility, determine your target customers because it will affect unit mix. Are there a lot of high-density uses? What is the mix of single- and multi-family residential? Is there a university or college nearby? What’s the potential for business customers?
A unit mix should be shaped something like a bell curve, with 10-by-10s at the top, then sloping down for smaller and larger sizes. At an urban location in a dense infill market, the bell will be skewed toward small units; in a suburban market, larger ones. I’ve seen downtown stores with an average unit size of less than 75 square feet, and rural stores with an average of 150 square feet or more. Generally speaking, somewhere between 100 and 150 square feet per unit is average for a suburban location.
The efficiency of the unit-mix layout is extremely important if you have storage with interior corridors. One way to improve efficiency is to always use double-loaded corridors and place the narrow side of the unit along the corridor. By following a few simple layout concepts, unit-mix efficiency can often be improved by 1 percent or 2 percent. That doesn’t sound like much, but 2 percent of 60,000 is 1,200 square feet. How would you like to have an additional 12 10-by-10 units to rent without increasing development or operating costs?
Avoid the temptation to believe any of these seven myths and your chances of success will increase. If you have concerns about avoiding these pitfalls, hiring a knowledgeable and experienced self-storage consultant may be the smartest money you’ll ever spend.