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Self-Storage Feasibility: Site, Investment and Market Considerations for New Projects

By Benjamin Burkhart Comments
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The best feasibility studies start emphatically with one word: Stop!

Sometimes a self-storage developer gets an idea he thinks is great and, well, it’s not. Markets get overbuilt. A site is just plain bad. A good property has a poor site plan. That leftover parcel won’t work for self-storage. Rental rates are soft or declining. You can’t build enough to be competitive. The site is just too small. The setbacks are too wide. Zoning doesn’t allow storage. It could be a million things.

Oh, I’ve gotten some pushback over the years when I’ve advised someone to put a stop on a project, but mostly, I get a “thank you.” The best developers are usually pretty good business people, too. It’s better to spend a little up front and find out the bitter truth early than to spend a lot and learn it later.

In this industry, we do a feasibility study to measure investment quality. Sometimes the market is great and the site is terrible, or the site is great and the market is terrible, or the returns are just marginal. The best developers will find a better site or move to another micro-market. However, some people don’t do their homework. That’s why we hear stories about the guy who never leased up that facility he built in the back of the industrial park, or that 300-plus unit self-storage facility with all 5-by-5s! Read on to uncover why a feasibility study is a must when developing a self-storage property.

Market Feasibility

When I was a self-storage lender, some of the market measurements I’d see in feasibility studies just didn’t make sense because I knew every market was unique. I would see studies that used national benchmarks and averages as a forecasting tool. Statements like, As long as you don’t exceed x square feet per person in the market, you’ll be OK,” don’t make sense for predicting an equilibrium supply in specific micro-markets. It’d be like saying, “Well, the average temperature across the country is 60 degrees.”

Just as you can’t forecast the weather in your city by looking at the average temperature across the nation, neither do averages and benchmarks help you determine if your market will absorb more self-storage. If a market is demanding 60,000 additional square feet, your lease-up percentages will look different if you build 20,000 square feet versus 80,000.

When we study micro-markets, we want to gain a good understanding of how demand ebbs and flows across the year, and how newer, established and older competitors are performing. All markets are unique. Some have two square feet per person and are stable, while others have 20 square feet per person and are growing. Some markets have seasonal occupancy fluctuations of 30 percent to 40 percent, while others see only nominal changes. Our goal during a feasibility study is to identify specific micro-market dynamics so we can accurately forecast the potential for expansion, contraction, busy/slow seasons, rental-rate shifts, unit-size demands, etc.

Markets experiencing growth are usually targets for self-storage developers, but beware of investing strictly on forecasted expansion. Some developers jumped into storage several years ago and experienced slower than projected lease-ups when residential growth came to a screeching halt. Just because the city or county predicts growth doesn’t mean it’s going to happen.

Part of your market analysis should be a close look at what’s coming up on the development horizon—in residential and commercial. You also want to know if the storage supply is already expanding among existing or new operators.

Investment Pro Forma

The ability to develop a quality investment model relies heavily on market dynamics, prevailing rental rates, necessary competitive business models, acquisition and development/re-development costs, and investment structure. Acquisition and development costs aren’t the same across markets. A good site in the New York City area will cost more and probably require different construction elements than one in Smalltown, USA. A second-tier site might cost more to gain visibility than a Main Street site with higher acquisition costs.

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