We have all heard people refer to self-storage facilities as being first, second, third or even fourth generation. Id like to talk about what might be the next generation of self-storage: small facilities with no on-site management. We normally see these types of sites in rural areas where land is readily available and less expensive. But Ive noticed a trend toward new starts that involve smaller facilities and direct construction costs of far less than $1 million. And theyre not just being built in remote rural communities. In many instances, theyre approaching major metropolitan areas.

Which brings us to the million-dollar question: Is it financially viable to build this type of small, automated facility in a major market like Los Angeles, for example? I think the answer is yes. Following is a demonstration of why.

A Sample Site

Lets take a look at a sample project and potential income using two different approaches: replacement cost and direct capitalization. We have a 15,000 square-foot facility on a 40,000-square-foot site. Instead of on-site management, it has a kiosk and heavy electronic security. The unit mix is designed to serve the specific needs of the local market. The facility has 150 units ranging in size from 50 to 150 square feet, with the average unit size being 100 square feet.

Cost Approach. To estimate the cost to develop this hypothetical facility, I relied on Marshall & Swift Valuation Services for estimates of direct construction costs. The base building specifications are:

The final direct cost (base cost multiplied by the current cost adjustment multiplied by the location adjustment) is $19.81 per square foot.

In addition to direct building costs, there are indirect costs: real estate taxes, legal and accounting fees, lease-up, facility setup, and technology (kiosk and state-of-the-art security). Of these, lease-up is the largest. It represents the revenue lost during the time between when the doors first open and stabilized occupancy is reached. In this scenario, I assumed lease-up would take approximately six months. The estimate for setup and security takes into consideration the added cost of a kiosk and its monthly fees as well as extra security cameras and alarms.

Income Approach. To prove the financial feasibility of this hypothetical project and model the direct-capitalization approach to value, I used third-quarter 2004 operating performance reports for Los Angeles, produced by Self Storage Data Services Inc.:

Development Yield

Using a cost approach, our facility value is $1,437,000, or $95.80 per square foot. Using the income approach, the value is $1,816,000, or $121.13 per square foot. These leaves a 26 percent spread, providing an additional entrepreneurial cushion of about $380,000. That brings the profit to higher than 50 percent, more than twice the profit on traditional facilities.

Development yield (net income divided by total construction costs) is 11.4 percent ($163,405 divided by $1,436,807), which suggests the project is, in fact, feasible. When we go back into our examples and use a more realistic vacancy rate, add modest late fees, and consider sharing expensessuch as advertising, maintenance personnel and administrativewith other facilities, projections get very exciting. The point is if our hypothetical project can work in Los Angeles, where land costs are $15 per square foot and real estate taxes are more than $1.50 per square foot, it should work most anywhere.

A Final Solution

At this point, not all of you are convinced of the feasibility of this innovative concept. But there are markets in which it will work. In fact, it has been working for some operators.

Small, unmanned facilities may be an additional source of income to supplement existing self-storage operations. They can also be a source of revenue for professionals in other industrieswithout a need to invest large amounts of capital. Finally, they could be the answer to those first-generation facilities trying to compete with the sizzle of newer sites.

Charles Ray Wilson, CRE, MAI, is president of Charles R. Wilson & Associates Inc., a firm specializing in the valuation of self-storage facilities nationwide. Mr. Wilson also owns Self Storage Data Services Inc. (SSDS), a research firm based in Pasadena, Calif. For more information, call 626.792.2107; e-mail [email protected].