State of the Self-Storage Industry 2010, Part II: Finance and Construction

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Kliebenstein: Yes, and at better prices than in past years. With a weakening market, land owners are not quite as proud of their overinflated values as they used to be. More realistic values are being driven by cash buyers who can be selective in taking down only the land purchases at drastic discount or at hyper premium locations.

Buyers and sellers can also look to potentially softened hearts at the municipal level as well. As tax bases drop with declining values and development continues to be absent, cities and towns may become more open to development, which leads to employment, a property-tax base and, in some venues, gross-receipts taxes. Municipalities are cutting back on expenses like salaries to meet declining budgets, and eventually, that may equate to relaxing some restrictions on building and development as they look for ways to generate revenue.
 
Vestal: Land for self-storage development is very plentiful, with several pieces of land with city approvals in hand just sitting stagnant and likely to stay that way for several years. With the availability of construction financing being almost nonexistent, it has made these pieces of land almost worthless in today’s market.
 
Wilson: Yes, there’s land available and it probably costs less today than it did a year ago. However, self-storage, like all other property types, is at the bottom of the real estate cycle, and that means the real opportunity today is in acquisitions, renovation and remolding. Construction financing for new starts will probably remain tight for some time.
 
Will green building and LEED play a bigger role in the future?

Campbell: It will to a degree. There has to be a happy medium there, a return that’s acceptable. For example, solar panels are not cheap, so there has to be a realistic return on investment that will make it feasible for the builder. Insulation R-values and similar things will play a bigger role. Most everyone would like to be greener, but unless there’s a payback, most aren’t going to be green just for the sake of being green.
 
Will conversions be more prominent in the next couple of years?

Barry: It’s typically less expensive to convert a building to self-storage than build from scratch, plus there will be plenty of properties that may be acquired at deep discounts. I would expect to see this segment be one of the first areas developers seek out when financing improves, especially in urban areas.
 
Chiswell: Many property owners sitting on empty “big box” retail stores that have gone dark are considering self-storage as a possible alternative. However, I caution these owners to pay close attention to the internal travel distances that could result from the conversion. Access for unloading typically can only be designed in one location, and many times it’s around the back of the building with no visibility to potential customers. The resulting travel distances can be 250 to 400 feet. Once you get beyond that 150- to 200-foot travel distance, potential customers feel the space is inconvenient. Owners are increasingly being forced to discount these distant units beyond the upper-floor discounts already in place.
 
Kliebenstein: Conversions have always been a great development tool. With businesses closing, higher foreclosures and weakened economic prospects, more buildings will become available for conversion. If the municipalities relax retail zoning standards and see self-storage for the valuable contribution it makes to a community, greater numbers of conversions may become possible.
 
Vestal: Over the next few years, well-located urban conversions may be the only new development of self-storage facilities. This is because of the high barriers to entry that some highly dense urban locations offer to developers that will bring the risk/reward in line with some self-storage developers’ risk tolerance.
 
Wilson: Absolutely and without question there will be conversions, restoration and modernization of older facilities. Now that the level of supply has satisfied pent-up demand, the free ride that many first-generation facilities have enjoyed is over. Those poorly located facilities that have functional incurable obsolescence will be razed, and the land will be put to a higher and better use. Well-located facilities of inferior construction quality or those that suffer some curable obsolescence will undergo restoration, renovation or modernization, or they will be razed and replaced with a modern facility.

What does the future hold for self-storage development?

Campbell: That’s a great question. Between fears of the economy, lack of financing and steel prices that keep changing, it’s anybody’s guess. But we are being optimistic and doing everything we can to find and work with anyone who’s willing and able to build. The ones who build now will have a leg up once things turn around.
 
Wright: The future for self-storage development this year is positive. We have many clients with sites that are ready to go. Grant it, a few things need to fall into place, but without question there’s opportunity out there. I see a general consensus among developers that they’re still very eager to build. Right now patience is the name of the game. It's important to touch on this again—construction prices are the lowest I've seen in 15 years. Do your proper due diligence on your parcel and take advantage of these costs! 

To learn more about self-storage finance and construction issues, take advantage of the comprehensive education program at the Inside Self-Storage World Expo. Click here for details.

Related Articles:

State of the Self-Storage Industry 2010, Part I: Real Estate

Self-Storage Financing: Facing the Break Point and Predictions for 2010

Five Challenges Faced by Today’s Self-Storage Owners and How to Maximize Your Asset

Self-Storage Talk: Owners, What Are Your Goals for This Year?

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