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Self-Storage Feasibility: A Critical Step in the Investment Process

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By Jackie and Jim Chiswell

In 2015, 15 million to 18 million square feet of self-storage space (give or take a few million) was shipped from metal-building suppliers for new projects and facility expansions. While that’s probably not a record-setter, it still marks the biggest jump in industry construction in almost a decade, and the pipeline for 2016 could be just as strong.

From the outside looking into our industry, the process of developing and managing a self-storage business looks simple. But today, it’s anything but, especially with community regulations, zoning requirements and the highly competitive climate. If you’re considering the purchase of an established facility or building a new complex, having a qualified third-party firm perform a feasibility study has never been more critical. An objective study is important because, all too often, people without a self-storage background miss critical pieces of information that could mean the difference between failure and success.

What the Study Should Include

A feasibility study should provide you with insight to answer to a whole range of questions. It should include:

  • A review of the characteristics of the proposed site. Visibility is still critical to future success, however, I’ve seen people build on dead-end streets with no drive-by traffic and still be successful because theirs was the only properly zone land in an underserved market.
  • An understanding of the market you’ll be serving. Many times a detailed demographic report reveals hidden pluses or minuses about an area.
  • An examination of the quantity and quality of established facilities with which you’ll be competing for market share. Today’s customers are demanding convenience, security and good customer service. Many current facilities are older with deferred maintenance and no onsite management. First-generation sites can sometimes be eliminated as competition altogether.
  • A possible layout of the project and the resulting potential unit mix, along with recommendations on phasing the project and development-cost assumptions.
  • Lease-up assumptions and pro forma results projected out at least five years.

If you’re buying an existing facility, the study should include:

  • A unit-by-unit analysis of the rent roll
  • A statement on the reasonableness of current facility expenses
  • An analysis of the current customer profile
  • An understanding of existing maintenance issues
  • A review of operational upside potential
  • An examination of the competition

The results of the study should provide you with a clear understanding of the facility’s future financial performance. You can make it look pretty, but the value of a self-storage business has always been the net operating income it produces. Finally, the feasibility or acquisition due-diligence study should reveal a recommendation to move forward or a negative outcome on the potential site or purchase.

What If You Get a Red Light?

What if the recommendation is negative? While investigating self-storage sites nationwide, my research often reveals a fatal flaw or series of problems that makes a location infeasible. The potential owner then says something like, “Can’t the rental rates be forecasted higher? Don’t you think it will lease up quicker? I know I can build it for a lot less than you projected!” My absolute favorite is, “But I already own the land, so doesn’t that make it feasible?”

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