Inexperienced developers often think a sites success is a sure bet if all competing self-storage facilities in a market are renting at or near capacity. Others think that if there are no climate-controlled facilities in a market, theyll strike gold by building one. Potentially worst of all are those who have land they dont know what to do with, and having heard self-storage is a cash cow, enter the industry hungrily.
Its not a secret to even the casual observer of the self-storage industry that our business has matured and become increasingly competitive. The Self Storage Association recently reported approximately 2 billion square feet of self-storage existing in the United States. In addition, while it took roughly 23 years to develop the first billion square feet, the second billion popped up within the past seven years.
In light of statistics, we can no longer afford to assume unmet demand in a given market will last. Yet, our industry still offers incredible opportunities to enjoy one of the best businesses anywhere. The key is to choose your next development site with great care and research.
Site selection is the process of determining which markets will produce the greatest opportunity for profit and success, and than handpicking sites within a specific area. By having a superior location within a given submarket, a storage operator will be less prone to suffering competitive pressure.
Quality locations also produce large dividends when it comes time to sell a facility. Your site should be superior to those of the competition, highly visible and accessible. Most institutional investors favor businesses on major or arterial roads, knowing potential customers will drive by frequently. Find a site least vulnerable to future competition; seek out markets with limited land supply and stringent zoning codes to assure restricted development. Also, the presence of credit-rated or national retailers in the immediate market is highly desirable.
Investors pay premium prices for facilities in superior locations. The better the site and competitive position, the less risk for an investor. Moreover, the risk is directly related to the ability of a location to compete in the present and future.
Buyers of investment properties base their offering price on market capitalization rates or cap rates. A cap rate calculates the value of real estate based on the expected or desired annual rate of return, expressed as a percentage of expected income over purchase price. Market cap rates can be determined from comparable sales of recently sold properties. If a property produces $400,000 in net operating income (NOI) and sells for $5 million, it generates in an 8 percent return on investment ($400,000 divided by .08 = $5,000,000).
Consider two different facilities with the same physical characteristics and annual operating income of $400,000. One is built in a good location, the other is not. Lets say facilities in the good market have been selling at a cap rate of 8 percent, as in our example above, while facilities in the bad market have sold at a cap rate of 10 percent. The sale price for the former would be $5 million; the sale price for the latter would be $4 million.
The disparity in value between the two facilities is attributable to differences in the quality of the site. That pricing differential would be even more extreme if the inferior location did not perform as well and produced a lesser NOI. What were seeing in capitalized self-storage value today is the spread between institutional-quality and inferior locations is widening, bringing even greater rewards to well-located facilities.
After finding a market with suitable sites based on competition, traffic patterns, population growth and barriers to entry, the developer must evaluate site-specific attributes of potential locations. Critical site-selection elements relate to zoning and land-use controls (imposed by local authorities), topography and site configuration.
Development expenditures go far beyond the cost of the dirt when all these elements are factored. Thus, a less expensive site may not be cheaper in the long run. For example, if a property needs additional fill or extension of utilities, the costs increase proportionately. The final bill for needy properties can be significantly higher then a site that already has some or all the critical elements necessary for development.
Better Shop Around
When shopping for a site, examine local zoning ordinances specific to the locations you have in mind. Are the properties suitable for self-storage or will they require a use variance? What are the required setbacks and site-coverage requirements? These zoning requirements determine the amount and type of development that can be supported on the site.
Often, developers discover that regulations wont allow enough of a building footprint on ground level to meet the design theyd planned for a specific site. In such cases, designs are often redrawn with multi-story structures to accommodate more square footage. This resolves the space issue, but not all markets support multi-story building. Zoning may prevent it, or tenants may not like the inconvenience of having to navigate hallways and elevators.
In other words, each market is different and must be evaluated individually. Words of wisdom: Things are not always as they seem. Shopping for a self-storage site is no exception. Consider working with an experienced industry consultant, who can conduct a feasibility study or market assessment to assist you in landing the best spot for your new self-storage venture.
Jeffrey Supnick is president of Supnick Real Estate Co. and is a 25- year veteran of the self-storage industry. He has formerly served as a real estate officer for Public Storage Inc. and Storage USA. During his career, he has been responsible for the development of more than 30 self-storage sites. Supnick Real Estate is a full-service firm devoted exclusively to self-storage brokerage, consulting and property management services. For more information, call 856.722.1414; e-mail [email protected]; visit www.supnickre.com.