Webster's New Collegiate Dictionary defines "feasible" as 1) capable of being done or carried out; 2) capable of being used or dealt with successfully: suitable; 3) reasonable, likely--synonym: see possible. When you consider this definition, it really captures the essence of performing a feasibility study for a self-storage site. Consideration needs to be given to whether you are capable of completing the project and carrying out all of the steps necessary to successfully develop a facility in today's competitive environment.
You must determine if the site is capable of being used for self-storage. Or, if there are obstacles standing in the way, if they can be overcome successfully. Are you prepared to deal with the marketing and property-management challenges you will face? Finally, the study should answer the question: Is it likely you will meet your investment objectives when the project is leased to a stable occupancy?
While some of you are reading this article, there are times that you might be thinking, "What is he talking about? All I need to know is if I can build the project on this site. The rest of it will take care of itself." This may have been true at one time, but not any longer. Fifteen or 20 years ago, you may have been able to pick a "C-grade" location, build a project with no thought to design, traffic flow or security, and still retain customers. Today, you must not only look at every aspect of a location, but also consider the general and specific market conditions, along with the demographic trends and traffic patterns. The details of the level of market occupancy, relative square footage, rental rates and the professionalism of the competition's operation must be reviewed. In addition, you need to look carefully at the potential of future competition building on vacant land and the ability to convert existing buildings into self-storage business.
Another consideration to make before deciding to move forward with a specific site is, what is your exit strategy? If you think about a plan to get out of the business before you get in, it will help you to make sound business judgments about the project you seek to develop. For example, if your goal is to simply flip the site after it has been re-zoned for self-storage, you will have a different mindset than if you are building a project to be placed into a trust for your children to operate.
Let's Get Started
Enough introduction--let's get to the meat of conducting a feasibility study. Please keep in mind you cannot do enough homework. This holds true whether you are a "do-it-yourself" kind of person or if you plan to retain an industry professional to conduct the study with you. Your involvement in the process is vital. Any consultant will welcome the opportunity to spend time with you, sharing his knowledge of the industry and involving you directly in conducting the study. The need for information is critical in making an informed investment decision. Make sure you ask a lot of questions.
If the self-storage bug has bitten you, you must first identify all the existing self-storage facilities within the prospect community. Once you have these highlighted on your map, get in your car and start driving. Armed with the competition map, a camera, notepad, current Yellow Pages and a big cup of coffee, drive to each property. Make sure you have charted their location correctly on your map and photograph them for future reference. Visit each office personally. You can either explain you are thinking about building a project in the community or be a "mystery shopper." Mystery shopping is when you pose as a prospective customer to learn pertinent information about a facility. There are several companies providing these services to the industry if you would rather have a professional do the shopping. The choice is yours.
Pay special attention to the manager's style and the appearance of the office. Note the facility's office and gate hours. Are they charging a security deposit or administrative fee? If so, how much are they charging? What is the curb appeal of the facility? Does the office present an appealing retail appearance or does it have only one window, a single square of glass in a steel door guarding the entrance from imaginary intruders?
Look for vulnerabilities in the competition. You are looking for that market niche that can set you apart as well as other areas of opportunity, such as the lack of security or available climate-controlled space. It is hard to quantify all of the factors you should consider. Look at each competitor through the eyes of a potential customer.
How Much Competition?
There are several ways to determine the estimated size of the competition. The first is to simply ask the manager. If you learn that a single-story project has 400 units, you can estimate the size to be somewhere between 36,000 and 46,000 square feet. Use a range of 90 to 115 square feet as an average unit size. This obviously varies from project to project. A converted building in an urban environment, for example, will usually have much smaller unit sizes than a similar sized rural project.
If a project has no security fencing or gates, you can drive through the property and count the units, estimating the various building sizes and calculating the net-rentable area. If there are interior hallways, remember to deduct these areas from your calculations. In many jurisdictions, you can also obtain the square footages from the building departments or tax-assessment records.
You will determine the average occupancies of the facilities you visit from your conversation with the managers. Is the market occupancy in the high 80 percent to mid-90 percent range, or soft with vacancies running in the high 30 percent to 40 percent range, with stores offering a variety of discounts to entice people to rent? A warning: Just because the current occupancies of most facilities seem high does not in and of itself indicate that your proposed facility will lease up quickly. You also need to consider the seasonality of the market. In Boston, for example, when the college year ends, summer occupancies can jump dramatically.
Once you're back in your office, look at the distribution of the competition on your map. What are the radius distances from your proposed location vs. the actual drive-time distances? These are two totally different measurements. During your drive, make sure to pay special attention to natural and man-made barriers that prevent a free flow of traffic. A river or interstate can create commuting obstacles your potential customers will have to navigate. These barriers will usually have a negative impact on the effective population density in your real market area.
Remember to consider what streets your target-market population will use to get to your proposed location. Will they be driving by another new facility that just opened? For most people, self-storage is the same from facility to facility. How you design, build and manage the facility will differentiate you from the rest of the pack.
You need to know what the traffic counts are on the streets that will directly impact the facility. Although I have seen successful facilities constructed on dead-end streets, they are the exception. You normally would like to see a 24-hour traffic count of 15,000 to 20,000 cars. In some cases, a traffic count of 75,000 vehicles per day could indicate that customers will have a difficult time turning into or out of the project--traffic can be a double-edged sword. The state highway or city-planning departments should have the latest road counts. Also, remember to ask about any upcoming highway projects in the area. There is nothing worse than finding out the main road serving your market will be under construction for six to nine months after you open your doors.
Don't just consider the street where the facility is to be located. It is possible to be on a dead-end street and still beat the existing competition because of some unique location factors, such as facility visibility from an adjoining street or ease of customer access. It also may be that your dead-end site is in the middle of thousands of apartments and condos with no competition within five miles. Each location is like a snowflake--no two are ever alike.
One question that can never be left to chance is, "What is going on in the immediate market area?" You need to look at the demographic trends taking place in the area. There are all kinds of "freebie" sources for general demographic information. The area chambers of commerce, real-estate brokerage firms, local newspapers and the communities themselves will have some information. However, do yourself a favor: You are about to spend hundreds of thousands of dollars on an investment; spend the money to purchase specific facts and figures for your location.
For a few hundred dollars you can have the exact data you need to consider. Use a company such as Claritas (www.sitereports.com), whose reports will provide you all of the historic data and future-trends information you require. These demographic pages are also useful when approaching your banker. The report is an effective tool in explaining to your lender why self-storage can work on this particular site. It will help show the lender you have done your homework and know the market you intend to serve.
With the demographic information in hand, you can now perform the highly overrated "square-footage demand-potential calculation." For years, people have made their building decisions based almost solely upon the following mathematical formula: Take the population figures for the three- or five-mile radius of the proposed location (corrected for any negative natural-barrier impact) and multiply that number by the "magical" self-storage demand factor. I currently use 3.5 or 4 square feet per capita in many markets. Some consultants are more comfortable using 1.5 to 2 square feet, while some others are using 4.5 to 5. The resulting answer gives you a range of anticipated square-footage demand.
It isn't certain these calculations really work or if they ever worked. In places like Phoenix, Dallas, Atlanta and many other metropolitan areas, the upper limit of this magical demand-index figure of so many square feet per person is constantly being tested. There are various factors that impact market demand. The ratio of owners to renters in the housing-stock figures, the turnover ratio of people moving in to and out of housing units annually, and the economic growth in the market will all play a role in determining demand. The number of small businesses and home-based entrepreneurs can impact demand, as well as homes without basements, attics and garages. A significant number of military families or students can also affect the demand curve for rental space.
Yes, you need to look at the square-footage demand figures, but they alone do not predict future success. Facilities have been developed with positive demand factors, only to see the project never reach its full potential because of poor site design coupled with poor property management. Don't be misled into building or not building a facility simply because of the results of this calculation.
How Is It Zoned?
You've mapped your competition. You know the relative levels of unit occupancy and the rental rates other people are charging. You've looked at the traffic counts. But do you know if your site is capable of being used for self-storage? Many people say, "No problem--the owner or realtor told me the site is OK to build on." This is a huge red flag. Do not ever take someone else's word on the issue of site suitability when it comes to property zoning. You have to find out for yourself. This could mean another trip to the municipal building or city hall, and it may mean dealing with staff people who really don't care what you want to build. However, you must get the facts about the location from the horse's mouth.
If a rezoning is going to be necessary, be prepared to dig in--into one pocket for the costs of professional expenses--legal, architectural and engineering--and into your pocket of patience. Fighting for a rezoning is always filled with land mines. At any point in the process, a mine can be triggered and your dream turned into a nightmare. I know owners who battled for more than two years in hearing after hearing only to finally lose. If you are not prepared to take this risk, then you need to find a suitable site that is properly zoned.
Not only do you need to know if the zoning is OK, but you also need to discover what the attitude is of the local building and code officials concerning the development of another one of "those things" in the community. Find out if there are any potential wetlands problems. Ask the staff for suggestions for a good local engineer. You'll quickly discover that, in many communities, there are only one or two engineering firms that do the bulk of the work in the city. Don't try to bring in some high-powered, out-of-the-area engineering firm that doesn't know its way around the personalities and political land mines of your area.
Even if the property is properly zoned, you cannot ignore the abutting property owners. Whether you go door to door, speak at a community meeting or have your own open house at a local hotel, you must make sure the residents understand what is being proposed. I have seen several situations, even with properly zoned sites, where the political heat from upset neighbors made the process almost impossible. If you establish a dialog with the neighbors, you will know what planning issues they will raise at public hearings and be prepared to answer their concerns. Ignore the abutting neighbors at your peril.
A side benefit of your visit is you can find out if there are other projects in the approval pipeline. It sure would be nice to know if that other piece of dirt you were looking at down the street has just been approved for an 80,000-square-foot project. If there have been any self-storage projects recently constructed within the community, ask to see the file folder on the project. In most jurisdictions, this is considered public information. From the files, you can examine the project's plans and get detailed information on its unit mix and office/apartment. You can also review the correspondences in the file to see the various issues the prior applicant dealt with. You can also get a wealth of information on the attitudes and "hot buttons" of the community's professional staff and sometimes even the commissioners you will also appear in front of with your application. Remember to find out about the local sign ordinances. Signage is critical and you want the most you can get from the system.
You will also need to conduct a Phase 1 Environmental Assessment of the site. You will often eat this cost, but lenders will require it to even consider making a mortgage-loan package. One point of negotiation with the seller may be that if you pay for the study, the results belong to you and could be made public. However, if the seller pays, the report belongs to him. In either case, eliminating any possible environmental concerns can produce peace of mind if you move forward to a purchase.
Can I Make a Profit?
Let's recap. You have looked at your competition. You've considered the demographic trends. You have done the "magical" demand-index calculations, and the municipal officials have given you the green light on the site's suitability. So what's left? How about finding out if you can actually make a profit building the project?
An old friend and self-storage industry veteran, Buzz Victor, has developed the "66 Percent Rule" in considering the price of the land you buy. He maintains that you should not pay more than 66 percent of the average rental rate you will earn at the facility. So if your average rental rate were $12 per square foot, you should not pay more than $7.96 per buildable square foot for your land. If you were building 65,000 square feet store, you would be in the ballpark if you were planning to pay about $500,000 for the property. Like any rule of thumb, you must individually evaluate this in light of the financial return you are anticipating.
Here is a sample scenario: We are going to build a single-story, 60,000-square-foot net-rentable project, which will include 26,500 square feet of climate-controlled space. Approximately 44 percent of the total square footage is in climate-controlled space. There will be 530 units with an average unit size of 113.21 square feet, and our average rental rate will be $12 per square foot annually.
Operations will generate miscellaneous income of 4 percent of the monthly gross-rental income in late fees, lock sales and the sales of moving-and-storage supplies. In some cases, this extra income will be much higher, but let's use a conservative 4 percent. We will be charging our new tenants a $10 administrative fee at lease inception. Our operational expense load will be $3.25 per square foot. This will allow us to cover a seven-day-a-week operation in a high property-tax community. Expenses typically run in the 30 percent to 45 percent of total rental income range.
We will have a 1,000-square-foot office and a 1,200-square-foot apartment. (The debate as to whether or not to have an onsite apartment is a topic for another article.) I've assumed a lease-up rate of a net 5 percent per month. Therefore, our project will reach 90 percent occupancy in 18 months. No inflation is projected for the expenses or income for our calculations. (This is obviously not the real world, but it helps in making the example easier to understand.) Estimated construction costs--including land and working capital--will be $46.80 per square foot. Please keep in mind this is just an example. I can guarantee your experience will vary from these examples, depending on your local market conditions, type of construction and site requirements.
Based on the factors above, the project would produce net operating income (before corporate taxes and any debt service) of $471,120 at the end of year three. This is considered a mature property with a stabilized occupancy of 90 percent. If you had invested all cash into this transaction, you would be earning a 16.8 percent cash-on-cash return at the end of the third year. Depending on the amount of money you borrow, fixed operational expenses and your debt level, you will probably be kept in a negative cash position for maybe a year or longer. An internal rate of return can also be calculated from this information for the real math wizards.
At a 10 percent capitalization rate, the project would have a market value of $4,711,200. If the project were sold at the end of the third year, it would produce a gain of $1,902,800 over the original investment. OK, so this is why you want to build a self-storage facility. Now is the time for you to make the value judgment of the risk vs. reward in making the final investment decision.
The painful reality is that many projects will not achieve these results. There are some facilities that have never achieved above 60 percent occupancy. The facility, simply, should never have been built. The owner--the one who owned the facility before the bank foreclosed on it or it was sold at a "fire-sale" price--did not do his homework. He got caught up in the allure of the potential rates of return and positive cash flow. He loved the fact that the number of employees necessary to produce that level of income is one of the lowest of any retail business in America. He was not objective in his consideration of the facts. This is especially true when the person already owned the land. He lost sight of all the other negative factors from the feasibility study that should have told him not to build.
Do the income and expense calculations as the final step in the feasibility study. Make sure the market is not saturated and it is really practical to buy the site, even if the land is properly zoned. Make sure you really want to be in this business. It is not as easy as it looks. Yes, it can be a great business and hundreds of entrepreneurs, just like you, are enjoying success in our industry every day.
Despite some of the prophets who preach of industry consolidation doom and gloom, there is still time to enter the industry. Not all of the good sites have been taken. Not all of the growth has gone out of the industry. However, it will require more attention to the feasibility-study details, more attention to the subtleties of the industry and how you operate the facility once it is built to ensure success. Remember: Getting the facility built is the easy part. It is getting it leased up that will really test you and help you realize the anticipated financial return. Don't wait until the project is under construction to consider the management challenges you will face.
Jim Chiswell is president of Chiswell & Associates. Since 1990, his firm has provided feasibility studies, acquisition due diligence, expert testimony and customized manager training for the self-storage industry. In addition to contributing regularly to Inside Self-Storage, Mr. Chiswell is a frequent speaker at Inside Self-Storage Expos and various association meetings. He can be reached at 716.634.2428; e-mail [email protected]; www.selfstorageconsulting.com.