In todays competitive self-storage environment, the old real estate axiom "location, location, location" needs to be amended to include "homework, homework, homework." The challenges to building a self-storage facility from the ground up, repurposing a vacant building, or buying an existing business have never been greater.
In an era of low interest rates and very high occupancies at established facilities, there are some folks who mistakenly think things must be easy in our industry. I remember talking to a prospective owner who said he had a fabulous site for development, with just four competitors within a 5-mile radius. My quick research turned up 20 existing facilities in the area. He had gotten so caught up in the idea of getting into the business that he unintentionally donned blinders. He had not done all his homework.
With an industry that in many parts of the country is running at 90 percent-plus occupancy levels, and with positive economic data flowing from the storage real estate investment trusts (REITs), the temptation to rush forward and jump in with both feet is real. However, just like you learned in Girl Scouts, Boy Scouts or at a summer camp, always investigate the right place to enter the water.
My first admonition is to take a step back and get a big-picture perspective on the entire process. Whether youre planning to build, convert or acquire, the practice of conducting an objective feasibility analysis is vital to your future success. This is especially true if you already own the land or building under consideration.
Your End Goal
Lets go over some basics you need to consider in conducting your feasibility due diligence.
I first encourage you to answer two questions:
- What rate of return on your investment are you willing to accept?
- What is your exit strategy for your equity?
I could write thousands of words on just those two topics. These are important questions only you can answer, and those responses will help frame your decision-making.
If youve read this far, youre likely serious about getting into the self-storage business. Perhaps you already own a piece of land, have identified a building for conversion, or made an offer on an existing facility. Or maybe you just want a refresher to remind you of all the feasibility steps.
I wont get into a long dissertation about land zoning. Suffice it to say you have to verify all the facts yourself. Just because a seller or broker said you could build self-storage on the property doesnt mean you can. You have to verify that to your own satisfaction. That is just one of the factors that make it essential to obtaining a minimum 90-day due-diligence period for any real estate acquisition. If youre going to have the land rezoned or a special-use permit will be necessary, you shouldnt be required to close on the property until you know the project is approved. The last thing you want to own is a park.
With the site/building/business selected, you can identify the target market youll serve. You need to completely understand the demographic profile of the area youll be competing in for customer market share. While there are several good sources for this type of information, Ive used The Nielsen Co.s demographic services for years. Youll find the companys SiteReports at www.claritas.com/sitereports/default.jsp.
Heres something else noteworthy: National research conducted on behalf of the national Self Storage Association (SSA) shows that storage customers come from all household income levels. However, you certainly would rather build in a more prosperous area than a community in economic decline.
Time to talk about the competition. You must identify every existing facility within the target market. I dont care if its just 50 or 100 units with no manager, no security and unpaved, or the Taj Mahal of self-storage. They all must be identified and then examined, not just for their rates and occupancy but for their strengths and weaknesses.
Theres roughly 7.5 square feet of self-storage space per capita in the United States. At the present time, industry occupancies in many markets are running 80 percent to 85 percent and higher. The REITs are reporting 90 percent-plus occupancies, for example.
I look at households when considering the storage-demand potential within a target area. The SSAs Self Storage Demand Study 2013 Edition, conducted by national analysts, reported that 8.96 percent of households, or approximately 10.8 million, are using storage. Using one of those baseline figuresper capita or householdsyou can make a determination of demand potential within a given area.
If your calculations indicate a market-demand potential of 375,000 square feet and you have identified 1 million square feet of existing storage space, I would look somewhere else. If the calculation is at or near the demand potential, then the issue of competition quality comes into play. I might be willing to go into a market with multiple first-generation projects and build a quality facility to attract the upscale customer.
The Site Details
As we walk down the path past the big sign that reads, The Demographics and Competition Are Not Deal-Killers, we advance to the Mountain of Site-Specific Details. More homework. At the start of the trek up this mountain, you get into these questions:
- How much net square footage can I build?
- What should my unit mix be and what will it cost?
- Have I considered all the Americans With Disabilities Act requirements?
- Will I be facing development impact fees?
- What about insulation standards?
- Security is vital. What will it cost?
- What rental rates can I charge?
- What will it cost me to operate?
- How big of a construction loan can I get?
- How fast will I lease up?
- How much working capital will I need?
After answering all those questions and making the various calculations, you arrive at the question from the very beginning of this process: What rate of return are you willing to accept? If after everything is calculated the indicated rate of return is 14 percent and you wanted 20 percent, you have your answer. For you, since the development doesnt meet the desired return, the project is not feasible. For someone with lower return expectations, it could be a green light.
If you started reading this article several minutes ago because you thought you would find the magic formula, Im sorry to disappoint you. My goal was to get you thinking about the feasibility process. Theres so much information now available online and from a variety of industry resources. Seek guidance, ask questionsdo your homeworkbefore moving forward with your next self-storage project.
Jim Chiswell, aka "The Storage Coach," is an industry veteran and owner of Chiswell & Associates LLC. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. He is a frequent speaker at the Inside Self-Storage World Expo and various association events. He is also a moderator on selfstoragetalk.com. To reach him, call 434.589.4446; e-mail [email protected]; visit www.selfstorageconsulting.com .