By Jim Chiswell
Conducting a feasibility study should be looked at as more than just determining the viability of a specific location or market area. It should also be viewed as a complete process of determining if you really want to be in the self-storage business, and if you are suited for it. The study should end up providing you with a road map to self-storage success or a warning telling you not to select that location.
Webster's New Collegiate Dictionary defines feasibility as "1) capable of being done or carried out; 2) capable of being used or dealt with successfully: suitable; 3) reasonable, likely--synonym: see possible." When you consider this definition, it really captures the essence of doing a feasibility study for a self-storage site. Consideration needs to be given to whether you are capable of completing the project and carrying out all of the steps necessary to successfully develop a facility in today's competitive environment.
You must determine if the site is capable of being used for self-storage or if the obstacles standing in the way can be overcome successfully. And finally, ask the question: Is it likely that you will meet your investment objectives when the project is leased to a stable occupancy?
While some of you are reading this article, there are times that you might be thinking, "What is he talking about? All I need to know is if I can I build the project on this site; the rest of it will take care of itself." I used to think the same way, but I no longer think that is true. Yes, 15 or 20 years ago you may have been able to pick a "C"-grade location, build a project with no thought to design, traffic flow or 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, along with the demographic trends and traffic patterns. The details of the level of market occupancy, relative square-footage size, rental rates and the professionalism of the competition's operation must be reviewed. In addition, you need to look carefully at the potential of competition building on vacant land and converting existing buildings into self-storage business.
Also, something that I ask all of my clients to consider before they make the decision to move forward with a specific site is: What is your exit strategy? If you think about a plan to get out of the business before you get in, it will help you to make sound business judgements about the project you seek to develop. For example, if your goal is to simply flip the site after it has been rezoned for self-storage, you will have a different mindset than if you are building a project to be placed into a trust for your children to operate.
Let's Get Started
Enough introduction, let's get to the meat of conducting a feasibility study. Please keep in mind that you cannot do enough homework. This holds true whether you are a "Do-It-Yourself" person or if you plan to retain an industry professional to conduct the study with you. Notice I said "with" and not "for" you. Your involvement in the process is vital. Any consultant will welcome the opportunity to spend time with you, sharing his knowledge of the industry and involving you directly in conducting the study. Your need for information is critical to making an informed investment decision. Make sure that you ask a lot of questions.
If the self-storage bug has bitten you, get in your car and start driving. Armed with a camera, notepad, the current Yellow Pages and a big cup of coffee, start to find all of the self-storage properties in your marketplace. Chart them on your map and photograph them for future reference. I suggest that you visit each office personally. You can either explain that you are thinking about building a project in the community or be a mystery shopper. The choice is yours. Yes, I know that many owners out there are getting mad about the fact that you are wasting their manager's time, but most of them have forgotten that they did exactly the same thing when they were considering their first project.
Pay special attention to the manager's style and appearance of the office. Note the facility's office and gate hours. Are they charging a security deposit or administrative fee? How much are they? What is the curb appeal of the facility? If you are a man, think about your reaction to each facility from a women's point of view. What would be a woman's reaction? Does the office present an appealing retail appearance or is the only office window a single square of glass in the steel door guarding the entrance from imaginary intruders? If, as a man, you can see and think through the eyes of a potential female customer, your project will be better designed, the construction of your office will be more appealing and the security system you select will have your wife, daughter, mother or girlfriend in mind. Trust me, it really does work that way.
Look for vulnerabilities in the competition. You are looking for that market niche that can set you apart and for other areas of opportunity, such as the lack of available climate-controlled space. It is hard to quantify all of the factors that you should consider. After visiting hundreds of facilities across the United States as I have done over the past 14 years, I have developed a gut-level reaction, as well as a factual reaction, to certain things during a facility-shopping trip.
How Much Competition?
There are several ways to determine the estimated size of the competition. The first is to simply ask the manager. If you learn that a project has 400 units, you can estimate the size of a traditional single-story facility at between 36,000 and 46,000 square feet. I use a range of 90 to 115 square feet as an average unit size. This obviously varies from project to project. A converted building in an urban environment, for example, will usually have a much smaller unit size than a similar rural project.
If a project has no security fencing and gates, you can drive through the property and count the units, estimating the various building sizes and calculating the net-rentable area. If there are interior hallways, remember to deduct the common areas from your calculations. In some jurisdictions, you can also obtain the square footages from the building departments or tax-assessment records.
Back in your office, look at the distribution of the competition on your map. What are the "flying crow" distances from your proposed location and the actual drive-time distances. They are two totally different measurements. During your drive, make sure to pay special attention to natural and man made barriers that prevent a free flow of traffic. A river or interstate can create commuting obstacles that your potential customers will have to navigate. These barriers will usually have a negative impact on the effective population density in your real market area.
Remember to consider what streets your target-market population will use to get to your proposed location. Will they be driving by another new facility that just opened? For most people, self-storage is the same from facility to facility. How you design, build and manage the facility will differentiate you from the rest of the pack.
You need to know what the traffic counts are on the streets that will directly impact the facility. The state highway or city planning 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 road serving your market will be under construction for six to nine months after you open your doors.
Don't just consider the street where the facility is to be located. After years of doing feasibility studies and acquisition due-diligence assignments, I am no longer a purist on the minimum traffic counts that are needed to make a project successful. It is possible to be on a dead-end street and still beat the existing competition because of some unique location factors, such as facility visibility from an adjoining street or ease of customer access. It also may be that your dead-end site is in the middle of hundreds of apartments and condos with no competition within five miles. Each location is like a snowflake--no two are ever alike.
One question that can never be left to chance is, "What is going on in the immediate market area?" You need to look at the demographic trends taking place in the area. There are all kinds of "freebie" sources for general demographic information. The area chamber of commerce, real-estate brokerage firms, local newspapers and the communities themselves will have some information. Do yourself a favor: You are about to spend hundreds of thousands of dollars on an investment; spend the money to purchase specific facts and figures for your location.
For a few hundred dollars you can have the exact data you need to consider. My personal favorite for this type of information is National Decision Systems. Its reports will provide you with all of the historic and trends information that you require. These demographic pages are also useful when approaching your banker. The report is an effective tool in explaining to the bank why self-storage can work on this particular site. It will help to show the lender that you have done your homework and know the market you intend to serve.
With the demographic information in hand, you can now perform the highly overrated "square footage demand calculation." For years, people have made their building decisions based almost solely on the following mathematical formula: Take the population figures for the three- or five-mile radius of the proposed location (corrected for any negative natural barrier impact) and multiply that number by the magical self-storage demand factor. I am currently using 3.5, or 4 square feet per capita in most markets. Some consultants are more comfortable using 1.5 to 2 square feet, while some others are using 4 to 5. The resulting answer gives you a range of anticipated square footage demand.
My tongue-in-cheek explanation of these calculations is because I'm not sure anymore if they really work or if they ever worked. In places like Phoenix, Dallas, Atlanta and many other metropolitan areas, the upper limit of this magical demand index figure of so-many-square-feet per person, is constantly being tested. There are so many factors that impact market demand. The ratio of owners to renters in the housing-stock figures, the turnover ratio of people moving into and out of housing units annually and the economic growth in the market will all play a role in determining demand. The number of small businesses and home-based entrepreneurs can impact demand, as can homes without basements, attics and garages. A significant number of military families or students can also affect the demand curve for rental space.
Yes, you need to look at the square-footage demand figures, but they alone do not predict future success. I have seen facilities developed with positive demand factors, only to see the project never reach its full potential because of poor site design coupled with poor property management. Don't be misled into building or not building a project because of this calculation.
How Is It Zoned?
You've mapped your competition. You know the relative levels of unit occupancy and the rental rates other people are charging. You've looked at the traffic counts. But do you know if your site is capable of being used for self-storage? Many of the people that I have talked to over the years say to me "no problem--the owner or the realtor told me that the site is OK to build on." This is the biggest red flag ever. Do not ever take someone else's word on the issue of site suitability when it comes to property zoning. You have to find out for yourself.
Yes, I know that means another trip to the municipal building or city hall. And it may mean dealing with staff people who really don't care what you want to build, but it cannot be avoided. You have to get the facts about the location from the horse's mouth.
Not only if the zoning is OK, but you also need to discover what the attitude is of the local building and code officials concerning the development of another one of "those things" in the community. Find out if there are any potential wetlands problems. Ask the staff for suggestions for a good local engineer. You'll quickly discover that in many communities there are only one or two engineering firms that do the bulk of the work in the city. Don't try to bring in some high-powered, out-of-the-area engineering firm that doesn't know its way around the personalities and political land mines of your area.
A side benefit of your visit is that you can find out if there are other projects in the approval pipeline. It sure would be nice to know if that other piece of dirt you were looking at down the street has just been approved for an 80,000-square-foot project. Also, remember to find out about the sign ordinances. Signage is critical and you want the most you can get from the system.
You will also need to conduct a Phase 1 environmental assessment of the site. Many times you will eat this cost, but lenders will require it to even consider making a mortgage loan package. One point of negotiation with the seller may be that if you pay for the study, the results belong to you and could be made public. However, if the seller pays, the report belongs to him. In either case, eliminating any possible environmental concerns can produce peace of mind if you move forward to a purchase.
Can I Make a Profit?
Let's recap: You have looked at your competition. You've considered the demographic trends. You have done the magical-demand index calculations and the municipal officials have given you the green light on the site's suitability. So what's left? How about finding out if you can actually make a profit building the project. Let me give you the following assumptions in connection with our proposed facility: We are going to build a single-story, 60,000-square-foot net rentable project, which will include 26,500 square feet of climate-controlled space. Approximately 44 percent of the total square footage is in climate-controlled space. There will be 530 units with an average unit size of 113.21 square feet and our average rental rate will be $10.35 per square foot annually.
Operations will generate miscellaneous income of 2 percent of the monthly gross-rental income in late fees, lock sales and the sales of moving-and-storage supplies. In some cases, this extra income will be much higher, but let's use a conservative 2 percent. We will be charging our new tenants a $10 administrative fee at lease inception. Our operational expense load will be $3 per square foot. This will allow us to cover a seven-day-a-week operation in a high property-tax community. Expenses typically run in the 30 percent to 45 percent of total rental income range.
We will have both a 500-square-foot office and a 900-square-foot apartment. The debate about having or not having an apartment on site is an entirely different story. I've assumed a lease-up rate of a net 5 percent per month. Therefore, our project will reach 85 percent occupancy in 17 months. No inflation is projected for the expenses or income for our calculations. (This is obviously not the real world, but it helps in making the example easier to understand.)
Estimated construction costs--including land and working capital--will be $30.43 per square foot. Please keep in mind this is just an example. I can guarantee that your experience will vary--higher or lower--from these examples, depending on your local market conditions, type of construction and site requirements.
Based on the factors above, the project would produce net income (before corporate taxes and any debt service) of $358,086 at the end of year three. This is considered a mature property with a stabilized occupancy of 85 percent. If you had invested all cash into this transaction, you would earn a 16.5 percent cash-on-cash return at the end of the third year. Depending on the amount of money you borrow, fixed operational expenses and your debt level, you will probably be kept in a negative cash position for maybe a year or longer. An internal rate of return can also be calculated from this information for the real math wizards.
At a 10 percent capitalization rate, the project would have a market value of $3,580,860. If the project were sold at the end of the third year, it would produce a gain of $1,754,860 over the original investment. OK, so this is why you want to build a self-storage facility? Now is the time for you to make the value judgment of the risk vs. reward in making the final investment decision.
The painful reality is that many projects will not achieve these results. I have been at many facilities that never have achieved above a 60 percent occupancy. The project, simply, should never have been built. The owner--the one before the bank foreclosed on it--did not do his homework. He got caught up in the allure of the potential rates of return and positive cash flow. He loved the fact that the number of employees necessary to produce that level of income is one of the lowest of any retail business in America. He was not objective in the consideration of the facts. This is especially true when the person already owned the land. He lost sight of all the other negative factors from the feasibility study that should have told him not to build.
It is for that reason that I urge you to do the income and expense calculations last. Make sure the market is not saturated and that it is really practical to buy the site, even if the land is properly zoned. Make sure you really want to be in this business. It is not as easy as it looks. Yes, it can be a great business and hundreds of entrepreneurs, just like you, are enjoying success in our industry every day.
Despite some of the prophets that preach of industry consolidation doom and gloom, there is still time to enter the industry. Not all of the good sites have been taken. Not all of the growth has gone out of the industry. However, it will require more attention to the feasibility study details, more attention to the subtleties of the industry and to how you operate the facility once it is built to ensure success.
Jim Chiswell is the president of Chiswell & Associates of Williamsville, N.Y. Since 1990, his firm has provided feasibility studies, acquisition due diligence, professional witness services and customized manager training for the self-storage industry. In addition to contributing regularly to Inside Self-Storage, he is a frequent speaker at Inside Self-Storage Expos. Mr. Chiswell can be reached at (716) 634-2428 or via e-mail: JChiswell@adelphia.net.