A growth area will generally enable you to get to your desired occupancy quickly. High numbers of multi-family residences create a demand for smaller units, and these generally pay a higher return on the dollar invested. A location near the center of a dense urban area, preferably on a major artery, is also ideal for fast rent-up. A freeway location is also desirable but less so than a major artery that passes through the neighborhood the facility will serve.
What Should You Pay for the Land?
The price developers pay for land is a much-debated question. The current rule of thumb is approximately 25 percent to 30 percent of total development cost. At $1.25 per gross square foot and assuming 40 percent coverage, net cost for land is $3.13 per rentable foot of building. In many markets, land use is maximized by developing multi-story self-storage with two, three or even four stories.
Ultimately, the rental rates in the market drive the cost a developer should pay for the land. Often the most common cost/operating ratio of self-storage is in line with apartment rental rates. Depending on the location, self-storage projects can generate the same income per square foot as medium-priced apartment properties in the same area. And they can achieve this income at roughly one half the construction and operating costs.
The most common state-of-the-art facility will be about 60,000 to 80,000 net rentable square feet, cost $45 to $65 per square foot to construct (outside of existing land costs), and have break-even operating expenses in the 40 percent to 60 percent range (not including debt service) of total stabilized income. A well-designed and located facility will successfully operate in the 83 percent to 93 percent occupancy range, though there are some successful self-storage facilities with occupancy rates as low as 70 percent.
It often takes 18 to 24 months for many self-storage facilities to realize full income potential in a competitive market. Large self-storage operations could take longer, up to 36 or more months for 100,000-square-foot size facilities to achieve stabilization.
Before buying land, a self-storage developer needs to consider a number of factors including storage demand, the location of the parcel and overall building costs. Giving careful thought to these elements ensures a new project will have long-term success.
Caesar Wright is president of Carlsbad, Calif.-based Mako Steel Inc., which designs, supplies and installs steel buildings for the self-storage industry nationwide. For more information, call 800.383.4932l; visit www.makosteel.com .