To build or not to build is the biggest question facing today’s self-storage developer. When considering a plan, he has to examine a number of critical issues to ensure a viable and profitable project. Some considerations are whether the area can support more storage, how to find the best location, and what to pay for land.
In today’s self-storage market, it’s more important than ever to conduct thorough research before building . You have to do preliminary work to see how well competitors in the proposed market are faring . Your best bet is to hire a professional to evaluate the area’s untapped potential. It will cost you, but it will be to your advantage.
If you discover that existing self-storage projects—even older sites—are running with more than 90 percent occupancy, you may have uncovered a viable market. On the other hand, if you find that high-quality sites older than two years are still sitting at 70 percent occupancy, the area may be saturated.
Site Location and Zoning
Once you find a good market, you need to accomplish the most difficult task of all: finding a visible site on which the city will allow you to build. Visibility is extremely important. Customers often choose a self-storage facility after driving by rather than searching through the Yellow Pages. Therefore, it’s essential to have a site on a well-traveled road. If you’re stuck with a less noticeable location, you’ll need to compensate by offering better amenities such as high-tech security and climate control.
The permitting and approvals process is always a challenge. To begin, find out what land is available with the proper zoning. You can purchase a zoning book for the county, which lists the status of every parcel. Many great sites have been found using this method, even when they were not originally for sale.
If you approach the local authorities with plans for the correctly zoned land, you greatly increase your chances of getting support. If you find yourself in a situation where you need to secure a zone change, you’ll need to do a lot of work. A zone change is a scary, lengthy process with no guarantee of a successful outcome. If you pursue it, consider hiring a local professional who specializes in getting plans through the city. If you make no headway after the first few official meetings, you may need to move on to another location.
How much you should pay for land is a difficult question to answer, as it involves many factors. The first is what you’ll be able to charge for rental rates. Second, consider how many netrentable square feet you will have. This is where you have to determine if you’re going to offer all drive-up access or go multistory. Third, determine how much it will cost to build the project. A basic facility might only cost $20 to $25 per square foot to build, while an upscale site could cost as much as $45 per square foot. Finally, think about how you will run the property. Will you have resident managers? Will you hire a property-management company?
Take a look at the following Investment Calculator. It uses a simple formula that helps determine whether a potential project will be profitable. By plugging in items like land cost, rental rate, development cost and management expenses, you can estimate potential income and a breakeven point. The calculator subtracts annual debt service and total operating expenses from total gross income to determine annual cash flow. Obviously, gross income changes as occupancy rates change.
Note: To determine the average rental rate, first establish the going rate on a 10-by-10. For our example, I’ve assumed a 10-by-10 will rent for $75, or 75 cents per square foot per month. Multiply that by 12, and you get an average rental rate of $9 per square foot per year.
|Net-Rentable Square Feet||63,000|
|Development Cost Per Square Foot||$31|
|Total Development Cost (Including Land)||$2,703,000|
|Average Rental Rate||$9 per square foot per year|
|Gross Income||$567,000 per year (Rentable Square Feet x Average Rental Rate)|
|Gross Operating Expenses||Between 23% and 35% of Gross Annual Income at 100% Occupancy|
|Annual Operating Expenses||$164,430 (Gross Income x Average Gross Operating Expenses of 29%)|
|Annual Debt Service||$188,607|
|Assumption for Debt Service||Borrowing 75% of Total Development Cost @ 7% interest for 20 years|
|Cash Flow @ 100% Occupancy||213,963|
|Cash Flow @ 90% Occupancy||157,263|
|Cash Flow @ 80% Occupancy||100,563|
|Cash Flow @ 70% Occupancy||43,863|
|Cash Flow @ 60% Occupancy||-12,837|
|Breakeven Point||62.3% Occupancy|
The investment calculator helps determine if a project’s land cost is within limits. It also provides a guideline for how much you can spend per square foot to build a project and still make a profit. A breakeven point at 60 percent occupancy or lower indicates a viable project.
It’s best to build a single-story project with as many drive-up units as possible. However, it’s sometimes necessary to build a multistory project on a smaller parcel. The cost to build a multilevel site is usually higher because of the necessity for elevators, stairs, interior corridors, etc. These projects are also more difficult to market, as some customers are averse to hauling their goods to upper floors. For these reasons, you must be extremely confident in the site’s viability before committing to a project. Evaluating the components of a successful self-storage site isn’t easy. I hope these guidelines help you make the critical decision of whether to build.
Jamie Lindau is the sales manager of Trachte Building Systems, one of the largest national suppliers of self-storage buildings. He oversees 10 regional managers who sell buildings throughout the United States and abroad. Over the past 20 years, Lindau has worked with more than 700 self-storage owners with the acquisition, layout, feasibility, building design and purchase of their sites. He is also the joint owner of an 850-unit, 95,000-square-feet facility in Lauderhill, Fla. For more information, visit www.trachte.com.