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Before the Formal Feasibility Study: Homework for New Self-Storage Developers

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By Andrew Kelly

Welcome to today’s best real estate investment for your money: self-storage! After many years of oversupply, the market is now filling pent-up demand. Banks are becoming aggressive with lending, and everyone from real estate investment trusts (REITs) to regional operators are looking to buy or build.

This article is intended to help industry newcomers understand the bank’s requirement for a feasibility study and what’s needed for this evaluation. The study is performed to assess many facets of a proposed site, whether for new construction or conversion. Just about every lender requires a study to gauge the demand for additional storage in the market as well as the project’s financial viability.

The market-study portion will evaluate the demographics of the area, including average household income, population growth, excess square-foot demand (if any), existing competitors, traffic counts and local economic conditions. If this information shows sufficient demand, the second part of the study begins. It examines the financial feasibility of the project, such as lease-up, income and expense projections, and unit mix.

Though a lender will ultimately expect an experienced self-storage professional to interpret the data unearthed by the study and provide a determination as to whether the project will succeed, much of the preliminary work can be done by a novice. If you’re considering a new self-storage development, the following will help you tackle the initial feasibility homework before you engage a professional to dive deep into market specifics.

Identifying Potential Sites

How can you zero in on a potential self-storage location? The decision of whether to build in a major Metropolitan Statistical Area or a smaller town is up to the individual and based on investment criteria. As a rule, the larger the market, the higher the product demand and returns. However, the same can be said of secondary and tertiary markets if no storage exists or the properties are outdated.

The most important factor to success is location—this can’t be over emphasized. Following are important factors to consider when choosing potential parcels. Each could affect a property’s ability to draw tenants.

  • If possible, the site should be on main streets, between retail shopping and residential neighborhoods.
  • The site should have high traffic counts of 25,000 cars per day at a minimum.
  • The site should be on the “going home” side of the street whenever possible (backed-up traffic gets to look at your site while waiting).
  • Three to 5 acres is a good size, but storage can be built on a plot as little as 1.5 acres if a multi-story design is allowed by zoning.
  • The site should be easily accessible from major streets with visibility, not hidden behind buildings or in areas considered unsafe or industrial in nature.
  • Look for community growth with newer homes and retail vs. the older part of town—unless there’s no storage in the area and the demographics are favorable.
  • Look for land that’s zoned for self-storage. If you need a conditional-use permit rezoning, or there are obstacles to getting approval, these are critical items to consider.
  • Generally, a storage facility will attract customers within a 3- to 5-mile radius. Consider whether your proposed site is in an urban, suburban or rural area in which the area may be larger or smaller.
  • Consider the drive time to the site, not just the mileage. For example, is the site surrounded by natural barriers such as a lake or mountains, or physical boundaries like train tracks and highways?
  • Is the area growing or declining? Annual population growth is needed to ensure the region isn’t stagnant. Any negative or immobile population numbers for the proposed site area or city should be carefully evaluated.
  • Is the population employment based on a single enterprise such as a mine, oil and gas, fracking, or a military base that could be downsized or closed overnight? Growing economies with multiple areas of employment make banks excited about a proposed site.
  • What’s the amount of renters vs. homeowners in the area?
  • What’s the average household income?
  • Is the area close to a college, landmark or shopping area? Areas around colleges and universities need to cater to the students and families of those institutions. Landmarks and retail centers also see increased traffic.
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