3 Vital Parts of a Self-Storage Feasibility Study and What They Tell You About Your Proposed Development

Self-storage feasibility has become a hot topic as self-storage markets begin to overcrowd. Lease-up is slowing in some areas, rates are flattening, and we’ve come down from record-high occupancies. If you’re planning to build this year and want to ensure your development will succeed, your first step will be to conduct a feasibility study. Following are three vital parts of this exploration and what they tell you about your proposed development.

Self-Storage Demand

The first question to ask is whether more self-storage is legitimately needed in the desired market. The answer can vary quite a bit. Some areas are considered saturated when they reach as low as 3.5 square feet of storage per capita, whereas I’ve seen other markets go as high as 20 square feet with no signs of slowing.

There are two widely accepted methods for calculating self-storage demand: square foot per capita or square foot per household. Often, we find these methods are very close, as they’re both based on population. However, if you’re in a market where the average household is smaller or larger than the national average, you may find it’s smart to compare them.

Other factors that can influence market demand include high tourism, large universities and prisons, dense commercial development, and lack of housing. Further, these variables might not be reflected in census data. While you should consider as many factors as possible, there isn’t a widely accepted method for calculating self-storage supply needs using additional metrics outside of population.

Unit Types and Sizes

While a market may need self-storage, knowing what specific type is required is important because you want a fast lease-up and high profitability. It might be that the area could use traditional drive-up units, climate-controlled, boat/RV or high security, for example.

You need to pay attention to unit sizes, too. Let’s say you discover that your market needs more 10-by-30s, but the price per square foot to build them isn’t as good as it is for 10-by-20s. You might find that 5-by-10s are profitable, but there’s high vacancy in this size. Just because a size makes sense for your wallet doesn’t mean it makes sense for the market.

Also, just because a market lacks a certain size or type of self-storage, say climate-controlled, doesn’t necessarily mean there’s a need for it or that you can charge customers more for it. You might be tempted to fill the void, but proceed with caution. There may be a reason no one has built that specific product in that location previously. Your feasibility study should help you understand the situation.

In short, knowing what competing self-storage facilities offer in terms of unit sizes and types, as well as the current rental rates and vacancy of each, is crucial to identifying the right product to build in your chosen market. We’ll delve into that more below.

Cost to Build vs. Rent Per Square Foot

The third thing the feasibility report should help you understand about your self-storage project is how cost to build will compare to rent collected per square foot. This component is often overlooked, however, it’s arguably the most important.

Again, just because a market shows demand for self-storage, it doesn’t mean you can make a profit. Often, the recommendations that come out of your feasibility study will be contingent upon building “at a reasonable rate.” If you’re planning to do a lot of your own sitework or even to serve as your own general contractor, it can lower your construction costs and thereby allow you to build a more expensive product. On the other hand, if you’re planning to hire a construction-management company, the additional cost may make your desired product less profitable. In other words, the rent per square foot you’ll be able to charge won’t justify the development price tag.

Don’t forget, there are many costs to consider, from site excavation to building materials and delivery to hoops you must jump through to meet city ordinances. Building on flat land that’s already cleared and has great soil for drainage costs a lot less than building on out-of-the-way wetlands that require additional delivery and fuel charges.

Depending on the market, I prefer that my cost to build, including the land, falls anywhere from 70 to 130 times the monthly blended rental price per square foot. For example, if I can charge an average of $1 per net rentable square foot (NRSF) to the customer, my construction costs should be $70 to $130 per NRSF.

The wide variance is attributed to regional differences, interest rates, hold costs and the utilization of NRSF to total square footage, which is generally much easier to get near 100% on traditional, drive-up projects. If you’re converting an existing building to self-storage, your cost to build may be cheaper; but due to layout challenges, the utilization may only be 60%.

I often see areas in which the available self-storage rents in relationship to cost to build don’t make sense. Or the price of the land is so high that it increases building costs beyond what could reasonably be charged to make a profit. We’re in the business to make money, so this should be the final decision-maker on whether a site is viable.

A feasibility study examines many factors of a potential self-storage project, but the metrics addressed above are critical. While a site may show strong promise in one of these areaa, you shouldn’t move forward unless it’s strong in all three.

Charlie Kao is the principal of Twin Oaks Capital, a Michigan-based commercial real estate company specializing in self-storage and multi-family assets. Services include real estate brokerage, asset management, feasibility studies, consulting and construction management. The company and its affiliates have owned, operated or planned more than 1 million square feet of self-storage. Charlie also owns House of Kaos Real Estate School, which provides continuing education credits for licensed realtors. He can be reached at [email protected].