The Value of Climate Control

Dan Curtis Comments
Posted in Articles
Print

A museum was planning renovations as well as a large addition to its original building, which required moving more than 11,000 pieces of art to a temporary storage facility. There was no question as to whether the facility would be climate-controlled—the museum’s collections are so valuable, its directors even thought it feasible to spend $5 million on its own climate-controlled storage. Most self-storage tenants store items of far less value than a museum collection, but they believe their possessions to be worth as much. Not all stored goods require climate control, but others will always necessitate it. For this reason, all self-storage facilities should offer at least some climate control to attract the largest number of potential customers.

The ’90s brought climate control to the front of the self-storage industry. Conventional sites were getting harder to find, and those available were expensive or on the wrong side of town. Prices of land had gone above $2 per square foot. If you happened to like big-city life, the price for raw land was often above $10 per square foot, if the land was available at all. Zoning boards were tired of giving conditional use permits to build self-storage, which was beginning to get a less-than-acceptable reputation.

Developers needed to use land more efficiently and increase income to offset the high price of land. At the same time, a higher-quality product became a constant request by renters. Security, mold and mildew, bugs and rodents, and roof leaks were becoming important issues with those storing items of any value.

At the same time, the “big box” stores—Wal-Mart, Kmart, Home Depot, Lowes and several grocery chains—began to leave behind vacant buildings. In the ’80s, these retailers had decided to occupy 60,000- to 100,000-squarefoot stores. In the 90s, the trend was to relocate to buildings of 150,000 to 200,000 square feet to handle their ever-growing inventories. These converted buildings have caused developers— from Public Storage, Shurgard and Storage USA down to the single-project developer—to seriously consider using climate control.

Definition

“Climate control” typically means keeping the temperature below 90 degrees in the summer and above 40 degrees in the winter, with humidity below 65 percent to stop mold or mildew. Most operators use 50 degrees in winter as a low and 80 degrees to 82 degrees as a high in summer. The old myth of maintaining 72 degrees in the winter and summer is costly and not expected or necessary for the average tenant. In many parts of the country, climate control is achieved by heating in the winter and only dehumidifying in the summer, since summer temperatures rarely get above 90 degrees.

Building Codes and Design

Single-story or multistory buildings are equally suitable for climate control. As land costs go up, the need for multistory buildings increases. These are more efficient and cheaper to heat and cool, and tenants don’t seem to mind loading their possessions on an elevator. Try to keep the distance from the entrance to any one unit to less than 120 feet; although many projects have been opened with distances up to 200 feet without problems.

One elevator is required for each 40,000 square feet of multistory use, with a maximum of three elevators. Out of every l00 units, only eight are visited each day. Therefore, out of 500 full units, only 40 will be visited. This represents very low or minimal use for an elevator when compared to any other building type. Access to all floors is usually not allowed by the security system, so tenants can only access the floor that houses their units.

As storage increases in height, fire and other safety codes become stricter. Fire codes are interpreted differently, depending on the jurisdiction. Work should be started early with the building officials. The cost of items such as sprinklers, fire alarms, smoke alarms, fire doors, firewalls and access windows or exits can be very high.

The average unit mix for conventional and climate-controlled storage is about the same. It varies from an average unit size of 90 square feet in inner-city locations to about 130 square feet in rural ones. Industry “experts” who claim tenants don’t rent large units are simply wrong. Over and over, climate-control projects run out of bigger units and have an abundance of smaller ones available.

Demand

Demand is generated by several demographic and market factors. High disposable income generates the demand to store electronics, furniture, art and other valuable items. The comfort factor may be an important reason the experienced storage customer selects climate-controlled storage.

Facilities in business areas have strong storage demand for items such as records, furniture, fixtures and retail inventory. Accessible sites to highly traveled roads or freeways offer a justification to store sales samples, vending supplies and semi-perishables. Salespeople with retail items such as cosmetics, pharmaceuticals and drug-store items may require a controlled environment.

Other Benefits

Climate control spreads the market appeal to a wider range of tenants, probably reducing financial risk for the owner. It serves as a draw for new customers who have never used storage because it lends a sense of security. These new tenants tend to stay longer and to have very low rent delinquency. Climate-control storage also uses land more efficiently. Multistory buildings may use more than l00 percent of the land, a fact that keeps land cost per unit low.

Financial Considerations

To determine the cost of offering climate control at a facility, add about 15 percent to the basic building cost. The extra cost is in the HVAC mechanical system and additional insulation. Liner-wall or double-wall partitions are used to protect insulation along outside walls.

Proper construction planning must be used to prevent schedules from being extended. It does not have to take longer to complete a climate-control building. Additional utility costs must not be forgotten, but they may not be as high as anticipated. A cost study was done in the South that indicated a utility cost of 25 cents to 30 cents per square foot per year, using 8 cents per kilowatt hour as the energy cost.

With the temperature range mentioned earlier, design air-conditioning loads at 1,250 to l,500 square feet per ton. This figure is about one-third of the requirement for a house or apartment. By undersizing the HVAC units, you do a more effective job of humidity control. The operator who sets his thermostat at 70 degrees to 72 degrees gets very near the dew point in summer. This will result in the humidity being above 65 percent, and mildew will cause trouble.

Energy costs in multistory buildings can be lower, as only the top floor gets heat from the roof. Two story and over-and-under buildings built into a hillside are also very efficient for heating and cooling. Well-designed buildings will be 75 percent to 80 percent efficient. If the design of unit mix indicates anything below this, the floor should be redesigned. If there is a larger percentage of smaller units, it may be difficult to reach 75 percent efficiency. Small units require more hallways, which lowers efficiency.

Revenue

Revenues from climate control vary greatly in different parts of the country. If education of the benefits has not sparked public demand, rental rates may stay low. As soon as customers realize the benefit, rates can be raised. Eventually, rates will be 20 percent to 60 percent higher for climate-controlled units. Since large units rent well, it is suggested the rates for these units be raised more than those for smaller ones.

If resistance to price is encountered, “value marketing” is suggested. In value marketing, the operator discounts the units farther from the entrance. When the facility is full, rates can be raised uniformly. Don’t be afraid to charge a premium for more conveniently located units.

Naturally, the goal of every owner is to fill his project. In this process, watch gross rental income as it nears maximum potential income. Not counting expenses, how can gross potential be reached or exceeded? An owner can increase rent, increase the amount of storage available, or add climate control.

These options allow rent to increase due to demand. It is not unusual for all three factors to double gross rental potential without raising expenses. That means these increases go to the bottom line. In turn, the value of the project—defined by dividing net operating income by the cap rate—is often 50 percent to 100 percent higher. The cap rate is net operating income divided by value of the property. Currently, cap rates are in the 8.5 percent to 11.5 percent range. Climate control adds significant value to the project.

More than any other, climate-controlled storage benefits from marketing. Professionals, business owners and sales representatives must be contacted. Apartment managers and condo agents must also be contacted regularly. Since l998, self-storage has been expanding rapidly due to the introduction of climate control. As land continues to become more expensive and difficult to find, there will continue to be an increasing market for this type of storage.

Dan Curtis is president of Atlanta-based Storage Consulting & Marketing, which provides market studies and feasibility reports, along with unit-mix and site-layout drawings. Mr. Curtis is a 30-year veteran of the selfstorage industry, a frequent contributor to

Inside Self-Storage and a well-regarded speaker as ISS expos. For more information, call 404.427.9559.

Comments
comments powered by Disqus