By Jim Chiswell

Conducting a feasibility study should be looked at as morethan just determining the viability of a specific location ormarket area. It should also be viewed as a complete process ofdetermining if you really want to be in the self-storagebusiness, and if you are suited for it. The study should end upproviding you with a road map to self-storage success or awarning telling you not to select that location.

Webster's New Collegiate Dictionary defines feasibilityas "1) capable of being done or carried out; 2) capableof being used or dealt with successfully: suitable; 3)reasonable, likely--synonym: see possible." When youconsider this definition, it really captures the essence of doinga feasibility study for a self-storage site. Consideration needsto be given to whether you are capable of completing the projectand carrying out all of the steps necessary to successfullydevelop a facility in today's competitive environment.

You must determine if the site is capable of being used forself-storage or if the obstacles standing in the way can beovercome successfully. And finally, ask the question: Is itlikely that you will meet your investment objectives when theproject is leased to a stable occupancy?

While some of you are reading this article, there are timesthat you might be thinking, "What is he talking about? All Ineed to know is if I can I build the project on this site; therest of it will take care of itself." I used to think thesame way, but I no longer think that is true. Yes, 15 or 20 yearsago you may have been able to pick a "C"-gradelocation, build a project with no thought to design, traffic flowor security, and still get customers.

Today, you must not only look at every aspect of a location,but consider the general and specific market conditions, alongwith the demographic trends and traffic patterns. The details ofthe level of market occupancy, relative square-footage size,rental rates and the professionalism of the competition'soperation must be reviewed. In addition, you need to lookcarefully at the potential of competition building on vacant landand converting existing buildings into self-storage business.

Also, something that I ask all of my clients to considerbefore they make the decision to move forward with a specificsite is: What is your exit strategy? If you think about a plan toget out of the business before you get in, it will help you tomake sound business judgements about the project you seek todevelop. For example, if your goal is to simply flip the siteafter it has been rezoned for self-storage, you will have adifferent mindset than if you are building a project to be placedinto a trust for your children to operate.

Let's Get Started

Enough introduction, let's get to the meat of conducting afeasibility study. Please keep in mind that you cannot do enoughhomework. This holds true whether you are a"Do-It-Yourself" person or if you plan to retain anindustry professional to conduct the study with you. Notice Isaid "with" and not "for" you. Yourinvolvement in the process is vital. Any consultant will welcomethe opportunity to spend time with you, sharing his knowledge ofthe industry and involving you directly in conducting the study.Your need for information is critical to making an informedinvestment decision. Make sure that you ask a lot of questions.

If the self-storage bug has bitten you, get in your car andstart driving. Armed with a camera, notepad, the current YellowPages and a big cup of coffee, start to find all of theself-storage properties in your marketplace. Chart them on yourmap and photograph them for future reference. I suggest that youvisit each office personally. You can either explain that you arethinking about building a project in the community or be amystery shopper. The choice is yours. Yes, I know that manyowners out there are getting mad about the fact that you arewasting their manager's time, but most of them have forgottenthat they did exactly the same thing when they were consideringtheir first project.

Pay special attention to the manager's style and appearance ofthe office. Note the facility's office and gate hours. Are theycharging a security deposit or administrative fee? How much arethey? What is the curb appeal of the facility? If you are a man,think about your reaction to each facility from a women's pointof view. What would be a woman's reaction? Does the officepresent an appealing retail appearance or is the only officewindow a single square of glass in the steel door guarding theentrance from imaginary intruders? If, as a man, you can see andthink through the eyes of a potential female customer, yourproject will be better designed, the construction of your officewill be more appealing and the security system you select willhave your wife, daughter, mother or girlfriend in mind. Trust me,it really does work that way.

Look for vulnerabilities in the competition. You are lookingfor that market niche that can set you apart and for other areasof opportunity, such as the lack of available climate-controlledspace. It is hard to quantify all of the factors that you shouldconsider. After visiting hundreds of facilities across the UnitedStates as I have done over the past 14 years, I have developed agut-level reaction, as well as a factual reaction, to certainthings during a facility-shopping trip.

How Much Competition?

There are several ways to determine the estimated size of thecompetition. The first is to simply ask the manager. If you learnthat a project has 400 units, you can estimate the size of atraditional single-story facility at between 36,000 and 46,000square feet. I use a range of 90 to 115 square feet as an averageunit size. This obviously varies from project to project. Aconverted building in an urban environment, for example, willusually have a much smaller unit size than a similar ruralproject.

If a project has no security fencing and gates, you can drivethrough the property and count the units, estimating the variousbuilding sizes and calculating the net-rentable area. If thereare interior hallways, remember to deduct the common areas fromyour calculations. In some jurisdictions, you can also obtain thesquare footages from the building departments or tax-assessmentrecords.

Back in your office, look at the distribution of thecompetition on your map. What are the "flying crow"distances from your proposed location and the actual drive-timedistances. They are two totally different measurements. Duringyour drive, make sure to pay special attention to natural and manmade barriers that prevent a free flow of traffic. A river orinterstate can create commuting obstacles that your potentialcustomers will have to navigate. These barriers will usually havea negative impact on the effective population density in yourreal market area.

Remember to consider what streets your target-marketpopulation will use to get to your proposed location. Will theybe driving by another new facility that just opened? For mostpeople, self-storage is the same from facility to facility. Howyou design, build and manage the facility will differentiate youfrom the rest of the pack.

You need to know what the traffic counts are on the streetsthat will directly impact the facility. The state highway or cityplanning departments should have the latest road counts. Also,remember to ask about any upcoming highway projects in the area.There is nothing worse than finding out that the main roadserving your market will be under construction for six to ninemonths after you open your doors.

Don't just consider the street where the facility is to belocated. After years of doing feasibility studies and acquisitiondue-diligence assignments, I am no longer a purist on the minimumtraffic counts that are needed to make a project successful. Itis possible to be on a dead-end street and still beat theexisting competition because of some unique location factors,such as facility visibility from an adjoining street or ease ofcustomer access. It also may be that your dead-end site is in themiddle of hundreds of apartments and condos with no competitionwithin five miles. Each location is like a snowflake--no two areever alike.

Demographics

One question that can never be left to chance is, "Whatis going on in the immediate market area?" You need to lookat the demographic trends taking place in the area. There are allkinds of "freebie" sources for general demographicinformation. The area chamber of commerce, real-estate brokeragefirms, local newspapers and the communities themselves will havesome information. Do yourself a favor: You are about to spendhundreds of thousands of dollars on an investment; spend themoney to purchase specific facts and figures for your location.

For a few hundred dollars you can have the exact data you needto consider. My personal favorite for this type of information isNational Decision Systems. Its reports will provide you with allof the historic and trends information that you require. Thesedemographic pages are also useful when approaching your banker.The report is an effective tool in explaining to the bank whyself-storage can work on this particular site. It will help toshow the lender that you have done your homework and know themarket you intend to serve.

With the demographic information in hand, you can now performthe highly overrated "square footage demandcalculation." For years, people have made their buildingdecisions based almost solely on the following mathematicalformula: Take the population figures for the three- or five-mileradius of the proposed location (corrected for any negativenatural barrier impact) and multiply that number by the magicalself-storage demand factor. I am currently using 3.5, or 4 squarefeet per capita in most markets. Some consultants are morecomfortable using 1.5 to 2 square feet, while some others areusing 4 to 5. The resulting answer gives you a range ofanticipated square footage demand.

My tongue-in-cheek explanation of these calculations isbecause I'm not sure anymore if they really work or if they everworked. In places like Phoenix, Dallas, Atlanta and many othermetropolitan areas, the upper limit of this magical demand indexfigure of so-many-square-feet per person, is constantly beingtested. There are so many factors that impact market demand. Theratio of owners to renters in the housing-stock figures, theturnover ratio of people moving into and out of housing unitsannually and the economic growth in the market will all play arole in determining demand. The number of small businesses andhome-based entrepreneurs can impact demand, as can homes withoutbasements, attics and garages. A significant number of militaryfamilies or students can also affect the demand curve for rentalspace.

Yes, you need to look at the square-footage demand figures,but they alone do not predict future success. I have seenfacilities developed with positive demand factors, only to seethe project never reach its full potential because of poor sitedesign coupled with poor property management. Don't be misledinto building or not building a project because of thiscalculation.

How Is It Zoned?

You've mapped your competition. You know the relative levelsof unit occupancy and the rental rates other people are charging.You've looked at the traffic counts. But do you know if your siteis capable of being used for self-storage? Many of the peoplethat I have talked to over the years say to me "noproblem--the owner or the realtor told me that the site is OK tobuild on." This is the biggest red flag ever. Do not evertake someone else's word on the issue of site suitability when itcomes to property zoning. You have to find out for yourself.

Yes, I know that means another trip to the municipal buildingor city hall. And it may mean dealing with staff people whoreally don't care what you want to build, but it cannot beavoided. You have to get the facts about the location from thehorse's mouth.

Not only if the zoning is OK, but you also need to discoverwhat the attitude is of the local building and code officialsconcerning the development of another one of "thosethings" in the community. Find out if there are anypotential wetlands problems. Ask the staff for suggestions for agood local engineer. You'll quickly discover that in manycommunities there are only one or two engineering firms that dothe bulk of the work in the city. Don't try to bring in somehigh-powered, out-of-the-area engineering firm that doesn't knowits way around the personalities and political land mines of yourarea.

A side benefit of your visit is that you can find out if thereare other projects in the approval pipeline. It sure would benice to know if that other piece of dirt you were looking at downthe street has just been approved for an 80,000-square-footproject. Also, remember to find out about the sign ordinances.Signage is critical and you want the most you can get from thesystem.

You will also need to conduct a Phase 1 environmentalassessment of the site. Many times you will eat this cost, butlenders will require it to even consider making a mortgage loanpackage. One point of negotiation with the seller may be that ifyou pay for the study, the results belong to you and could bemade public. However, if the seller pays, the report belongs tohim. In either case, eliminating any possible environmentalconcerns can produce peace of mind if you move forward to apurchase.

Can I Make a Profit?

Let's recap: You have looked at your competition. You'veconsidered the demographic trends. You have done themagical-demand index calculations and the municipal officialshave given you the green light on the site's suitability. Sowhat's left? How about finding out if you can actually make aprofit building the project. Let me give you the followingassumptions in connection with our proposed facility: We aregoing to build a single-story, 60,000-square-foot net rentableproject, which will include 26,500 square feet ofclimate-controlled space. Approximately 44 percent of the totalsquare footage is in climate-controlled space. There will be 530units with an average unit size of 113.21 square feet and ouraverage rental rate will be $10.35 per square foot annually.

Operations will generate miscellaneous income of 2 percent ofthe monthly gross-rental income in late fees, lock sales and thesales of moving-and-storage supplies. In some cases, this extraincome will be much higher, but let's use a conservative 2percent. We will be charging our new tenants a $10 administrativefee at lease inception. Our operational expense load will be $3per square foot. This will allow us to cover a seven-day-a-weekoperation in a high property-tax community. Expenses typicallyrun in the 30 percent to 45 percent of total rental income range.

We will have both a 500-square-foot office and a900-square-foot apartment. The debate about having or not havingan apartment on site is an entirely different story. I've assumeda lease-up rate of a net 5 percent per month. Therefore, ourproject will reach 85 percent occupancy in 17 months. Noinflation is projected for the expenses or income for ourcalculations. (This is obviously not the real world, but it helpsin making the example easier to understand.)

Estimated construction costs--including land and workingcapital--will be $30.43 per square foot. Please keep in mind thisis just an example. I can guarantee that your experience willvary--higher or lower--from these examples, depending on yourlocal market conditions, type of construction and siterequirements.

Based on the factors above, the project would produce netincome (before corporate taxes and any debt service) of $358,086at the end of year three. This is considered a mature propertywith a stabilized occupancy of 85 percent. If you had investedall cash into this transaction, you would earn a 16.5 percentcash-on-cash return at the end of the third year. Depending onthe amount of money you borrow, fixed operational expenses andyour debt level, you will probably be kept in a negative cashposition for maybe a year or longer. An internal rate of returncan also be calculated from this information for the real mathwizards.

At a 10 percent capitalization rate, the project would have amarket value of $3,580,860. If the project were sold at the endof the third year, it would produce a gain of $1,754,860 over theoriginal investment. OK, so this is why you want to build aself-storage facility? Now is the time for you to make the valuejudgment of the risk vs. reward in making the final investmentdecision.

The painful reality is that many projects will not achievethese results. I have been at many facilities that never haveachieved above a 60 percent occupancy. The project, simply,should never have been built. The owner--the one before the bankforeclosed on it--did not do his homework. He got caught up inthe allure of the potential rates of return and positive cashflow. He loved the fact that the number of employees necessary toproduce that level of income is one of the lowest of any retailbusiness in America. He was not objective in the consideration ofthe facts. This is especially true when the person already ownedthe land. He lost sight of all the other negative factors fromthe feasibility study that should have told him not to build.

It is for that reason that I urge you to do the income andexpense calculations last. Make sure the market is not saturatedand that it is really practical to buy the site, even if the landis properly zoned. Make sure you really want to be in thisbusiness. It is not as easy as it looks. Yes, it can be a greatbusiness and hundreds of entrepreneurs, just like you, areenjoying success in our industry every day.

Despite some of the prophets that preach of industryconsolidation doom and gloom, there is still time to enter theindustry. Not all of the good sites have been taken. Not all ofthe growth has gone out of the industry. However, it will requiremore attention to the feasibility study details, more attentionto the subtleties of the industry and to how you operate thefacility once it is built to ensure success.

Jim Chiswell is the president of Chiswell & Associatesof Williamsville, N.Y. Since 1990, his firm has providedfeasibility studies, acquisition due diligence, professionalwitness services and customized manager training for theself-storage industry. In addition to contributing regularly to InsideSelf-Storage, he is a frequent speaker at Inside Self-StorageExpos. Mr. Chiswell can be reached at (716) 634-2428 or viae-mail: [email protected].