In today’s competitive self-storage environment, the old real estate axiom "location, location, location" needs to be amended to include "homework, homework, homework." The challenges to building a self-storage facility from the ground up, repurposing a vacant building, or buying an existing business have never been greater.
In an era of low interest rates and very high occupancies at established facilities, there are some folks who mistakenly think things must be easy in our industry. I remember talking to a prospective owner who said he had a fabulous site for development, with just four competitors within a 5-mile radius. My quick research turned up 20 existing facilities in the area. He had gotten so caught up in the idea of getting into the business that he unintentionally donned blinders. He had not done all his homework.
With an industry that in many parts of the country is running at 90 percent-plus occupancy levels, and with positive economic data flowing from the storage real estate investment trusts (REITs), the temptation to rush forward and jump in with both feet is real. However, just like you learned in Girl Scouts, Boy Scouts or at a summer camp, always investigate the right place to enter the water.
My first admonition is to take a step back and get a big-picture perspective on the entire process. Whether you’re planning to build, convert or acquire, the practice of conducting an objective feasibility analysis is vital to your future success. This is especially true if you already own the land or building under consideration.
Your End Goal
Let’s go over some basics you need to consider in conducting your feasibility due diligence.
I first encourage you to answer two questions:
- What rate of return on your investment are you willing to accept?
- What is your exit strategy for your equity?
I could write thousands of words on just those two topics. These are important questions only you can answer, and those responses will help frame your decision-making.
If you’ve read this far, you’re likely serious about getting into the self-storage business. Perhaps you already own a piece of land, have identified a building for conversion, or made an offer on an existing facility. Or maybe you just want a refresher to remind you of all the feasibility steps.
I won’t get into a long dissertation about land zoning. Suffice it to say you have to verify all the facts yourself. Just because a seller or broker said you could build self-storage on the property doesn’t mean you can. You have to verify that to your own satisfaction. That is just one of the factors that make it essential to obtaining a minimum 90-day due-diligence period for any real estate acquisition. If you’re going to have the land rezoned or a special-use permit will be necessary, you shouldn’t be required to close on the property until you know the project is approved. The last thing you want to own is a “park.”
With the site/building/business selected, you can identify the target market you’ll serve. You need to completely understand the demographic profile of the area you’ll be competing in for customer market share. While there are several good sources for this type of information, I’ve used The Nielsen Co.’s demographic services for years. You’ll find the company’s SiteReports at www.claritas.com/sitereports/default.jsp.
Here’s something else noteworthy: National research conducted on behalf of the national Self Storage Association (SSA) shows that storage customers come from all household income levels. However, you certainly would rather build in a more prosperous area than a community in economic decline.