Time to talk about the competition. You must identify every existing facility within the target market. I don’t care if it’s just 50 or 100 units with no manager, no security and unpaved, or the Taj Mahal of self-storage. They all must be identified and then examined, not just for their rates and occupancy but for their strengths and weaknesses.
There’s roughly 7.5 square feet of self-storage space per capita in the United States. At the present time, industry occupancies in many markets are running 80 percent to 85 percent and higher. The REITs are reporting 90 percent-plus occupancies, for example.
I look at households when considering the storage-demand potential within a target area. The SSA’s Self Storage Demand Study 2013 Edition, conducted by national analysts, reported that 8.96 percent of households, or approximately 10.8 million, are using storage. Using one of those baseline figures—per capita or households—you can make a determination of demand potential within a given area.
If your calculations indicate a market-demand potential of 375,000 square feet and you have identified 1 million square feet of existing storage space, I would look somewhere else. If the calculation is at or near the demand potential, then the issue of competition quality comes into play. I might be willing to go into a market with multiple first-generation projects and build a quality facility to attract the upscale customer.
The Site Details
As we walk down the path past the big sign that reads, “The Demographics and Competition Are Not Deal-Killers,” we advance to the “Mountain of Site-Specific Details.” More homework. At the start of the trek up this mountain, you get into these questions:
- How much net square footage can I build?
- What should my unit mix be and what will it cost?
- Have I considered all the Americans With Disabilities Act requirements?
- Will I be facing development impact fees?
- What about insulation standards?
- Security is vital. What will it cost?
- What rental rates can I charge?
- What will it cost me to operate?
- How big of a construction loan can I get?
- How fast will I lease up?
- How much working capital will I need?
After answering all those questions and making the various calculations, you arrive at the question from the very beginning of this process: What rate of return are you willing to accept? If after everything is calculated the indicated rate of return is 14 percent and you wanted 20 percent, you have your answer. For you, since the development doesn’t meet the desired return, the project is not feasible. For someone with lower return expectations, it could be a green light.
If you started reading this article several minutes ago because you thought you would find the magic formula, I’m sorry to disappoint you. My goal was to get you thinking about the feasibility process. There’s so much information now available online and from a variety of industry resources. Seek guidance, ask questions—do your homework—before moving forward with your next self-storage project.
Jim Chiswell, aka "The Storage Coach," is an industry veteran and owner of Chiswell & Associates LLC. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. He is a frequent speaker at the Inside Self-Storage World Expo and various association events. He is also a moderator on selfstoragetalk.com. To reach him, call 434.589.4446; e-mail firstname.lastname@example.org; visit www.selfstorageconsulting.com .