Development Potential in Self-Storage

David Blum Comments
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There are those in the self-storage business who claim the market is getting “overbuilt.” While there are geographic pockets in which this appears to be true, we may actually be seeing some upward movement in national storage development. Ours is a real estate business, and its primary drivers are similar to those of other property-based investments: site selection, market analysis, construction and competition. Though each is important, they must all be considered when embarking on any self-storage project.

Site Selection

We all know the intensity with which so many developers have descended on the hot self-storage markets. In some instances, one “ideal” location may be presented to 10 prospective buyers or more. But the truly great sites are not those picked over like fruit at the market but like those ripening on the tree, hidden from view and available only to those who reach for them through exploration and discovery. Doubtful but creative locations will be the harvest for our future.

Consider the opportunities created by urban-infill conversions, joint ventures with retail developments and secondary parcels on primary projects. High-growth areas are drawing interested developers like available land did in the 1800s, and futuristic analysis will surely come into play. Maps from statistical projections—including key demographic components, supply calculations and industry analysis—will help target areas of possibility. Creative and innovative tools will replace hours of driving and scouting.

Market Analysis

Getting an objective opinion about any site is easy. Finding a qualified person to provide it is not so simple. In some markets, good data has become more difficult to gather, as some operators feel sharing information is counterproductive to their objectives. This is false and dangerous thinking. Failure to provide sound information to qualified analysts will lead to poor decision-making on behalf of many developers. There is nothing worse than a novice building new sites based on bad advice. The results are not only bad for the party in question, they hurt every operator in that market.

The success of a development does not end with selection of the land parcel. When choosing a site on which to build, ask your consultant if he has ever discouraged a project—this will tell you something about the reliability of his counsel. A stamp of approval means nothing if the project doesn’t make good investment sense. An analyst who gives the thumbs up to every site may not be discriminating or trustworthy.

Construction

Before building, you must know your market and all of its obstacles. Barriers to entry come in many forms. Some will be legal and legislative. Zoning and community review boards are playing larger parts in the approval process. Site coverage, water retention and landscaping—not to mention stricter building codes and the rising cost of materials—all impact the cost of construction. Many new developments look to set themselves apart from the competition with design and features not seen on older facilities. These, too, will add to costs.

Competition

Another (and perhaps more frustrating) obstacle to development success is existing competition. Whether attempts to derail a project are overt or covert, we have all heard “war stories” about competitors’ attempts to block new facilities. Sometimes current owners or managers appear at town meetings to oppose a project. Other times they work behind the scenes to sway committee members.

I once heard of an owner who paid phony “residents” to voice dissent at community council meetings, thwarting a proposed site for two years before it was dropped from the table entirely. I also attended a meeting at which a lobbyist, who was hired and paid $25,000, made attempts to block a project. He eventually succeeded in limiting the size of the facility the new developer could build. I also have also seen a lone community resident pose so much opposition to a project that the developer scrapped it rather than continue the lengthy fight through the courts.

These roadblocks come in many often unforeseen forms. Be aware how previous developers have fared in an area before making an attempt of your own.

What Is Overbuilt?

Finally, it is important to fully comprehend an area’s level of absorption. One industry benchmark claims average absorption should be no more than 4 to 5 square feet of storage per capita. On a national level, this may be a good guideline, but it’s not necessarily true for all markets.

For example, a new project was proposed for a 5-mile trade area with nine existing competitors. Even though the absorption rate was close to 7 square feet per capita, the market had great income averages, and the proposed site was off a main highway. Storage was a widely accepted service in the area, as few of the existing facilities were new. There was minimal evidence of discounting, and occupancy was at capacity across the board. This market could easily support another site without damage to existing businesses.

In another situation, however, two new sites were proposed for an area. Though the market demonstrated a lower rate of absorption, rents at existing facilities were heavily discounted and occupancy hovered in the mid-80 percent range. It was a bad time to add more storage to the mix.

Prospective developers should understand every market is unique. The only way to determine the likelihood of a project’s success is to investigate from all angles. Get a truly independent analysis and a clear picture of what is happening in the area you want to develop. Examine all mitigating factors and projections, then decide if the project makes good economic sense—not only for the investor, but the overall market.

David Blum, an industry consultant, is president of Blum Management Services Inc., based in South Florida. He is also past president and founder of the Florida Self-Storage Association. Mr. Blum has more than 10 years of experience in self-storage and more than 35 years of business experience. For more information, call 954.255.9500; e-mail dblum@blumms. com; visit www.blumms.com.

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