A Common Quandary: Is It Better to Acquire an Existing Self-Storage Facility or Build New?

If you’re looking to invest in or own a self-storage facility, you have a few big decisions to make. Chief among them is whether you should acquire an existing property or pursue a new construction project. Though there are certainly benefits and considerations for either pursuit, a few key factors may determine which path is right for you.

The easiest way to grasp the differences between these strategies is to think about your own home or a personal residence. If you’ve ever built a house from the ground up, you know the process takes time—much more than is required to purchase a pre-existing dwelling. The same is certainly true for self-storage. Other differences that should be considered carefully are your budget and timeline, and the general hoops you have to jump through to reach your goal.

If you plan to retain and operate the property, a newly constructed facility is going to take significantly longer to get up and running, occupied and, ultimately, turn a profit. When acquiring an existing site, the structure and operations are already in place, so you can start earning income faster. Though the condition of the property can certainly impact this, you’ll typically have less hassle and a faster turnaround time between buying and creating cash flow.

That said, it isn’t always better to acquire than build. There are instances in which the opposite may be true. With that in mind, here are pros and cons of each option, as well as important items to consider, before pursuing your next self-storage opportunity.

Similarities Between Buying and Building

First, let’s consider the similarities between these two options. While the process and timeline differ, there are common factors every potential investor or owner should research including:

Simply put, will the area surrounding a target site be able to support a self-storage facility, and what are the odds that you’ll be able to turn a profit? Gathering the information listed above should help you determine how high your potential rental rates can be as well as what type of facility will best serve the surrounding communities.

Current Market Considerations

Understanding the current state of the market can provide clues as to how easy it is to realistically buy or build in the area. One of the not-so-secret secrets about self-storage is it’s a fragmented market, which is a great thing for those looking to break into the business. About 73% of current properties are controlled by small, private owners.

This is in stark contrast to many other industries, in which a few big conglomerates or corporations own the majority of the market share. When that happens, it’s much harder for individuals to break into the market, including by acquisition. But because most existing self-storage sites are owned by mom-and-pop shops, there are plenty of opportunities to buy a property if that’s the route you decide to take.

Over the past several years, self-storage development has risen, with about 1,555 projects completed last year. While the number of new builds is expected to remain high, the construction industry continues to face pandemic-related challenges, namely labor and supply shortages as well as rising material costs. This could push start-up costs higher and stretch timelines even further.

It’s also worth noting that a slowdown in construction projects doesn’t necessarily indicate a decline in consumer interest. In fact, the global self-storage market is expected to reach a value of $71.37 billion by 2027, with about one-third of Americans currently using self-storage space.

Building Basics

While I don’t have space here to offer a complete breakdown of the building process, it’s helpful to have a general understanding of the steps involved. Before ground is ever broken, you must research potential locations. This includes conducting a feasibility study and competitor analysis to determine if the local population can support a new self-storage facility. As with any type of business endeavor, you’ll need to develop a business plan and secure financing through investors or a bank loan. Sometimes it can be both.

Once you’ve identified a potential property, determine if self-storage is an allowable use for that parcel. If it is, great. If not, you may have to go through a rezoning process with the city planning department. In any case, you must follow the guidelines established by the local jurisdiction regarding zoning codes and property types. Zoning and permits are important since they help keep residential communities free from commercial properties.

Once your project is approved, you have to decide which type of facility to build and how it should be designed. It’s common to involve other professionals in the process including a civil engineer (to discuss stormwater mitigation and general layout), a structural engineer (to ensure the building will withstand common environmental conditions), and mechanical, electrical and plumbing consultants.

Once you have a general building plan, you’ll need to work with a general contractor to bring your vision to life. This person should be able to get bids from multiple specialists to help put together a schedule and budget. It should also be noted that throughout this process, you’ll typically be required to conduct different environmental tests as determined by local authorities.

Benefits of a New Build

To be clear, there’s plenty of upfront work involved in building new, which makes it a riskier endeavor for banks or investors to fund. But constructing a self-storage facility from the ground up is also an exciting opportunity to create something to your exact vision and specifications and potentially break into an untapped market.

Also, if you’re inclined to operate a specific type of storage facility, such as boat/RV storage, it may not be possible to acquire an existing business in your desired location, forcing you to build. Or perhaps your goal is to create a technology-driven property with all the bells and whistles, it which case, it may simple be easier to pursue a new build than try to retrofit modern capabilities into an outdated structure.

From an investor standpoint, a new build means taking on greater risk and waiting longer to receive distributions. That said, it isn’t uncommon for investors to be compensated for the long wait and higher risk with a greater rate of return than if they had invested in an existing facility.

Benefits of an Acquisition

As mentioned earlier, the process of acquiring an existing storage facility is much more streamlined than starting from scratch. In general, you present a proposal, negotiate the offer, sign the deal and then jump right into operation. As a result, the time between buying a property and turning a profit tends to be much faster.

Another advantage is cosmetic updates usually take less time and material to complete than building from the ground up. Of course, there’s always the chance of unexpected maintenance issues or costly repairs to address, but because self-storage construction is fairly simple, this tends to be less of a concern when compared to residential or other commercial properties.

An acquisition also offers you the opportunity to add value to an existing business by identifying ways to improve its profit margins. You might increase rental rates, reduce delinquency, add ancillary products and services, implement of state-of-the-art technology, hire professional third-party management, and more. These are all common, value-add strategies designed to improve a facility’s bottom line and make it a more suitable investment.

Decisions, Decisions

Now that you’re armed with insight to some of the key benefits and considerations of building vs. buying a self-storage asset, you can start to weigh your options carefully. The good news is industry demand remains high and well above pre-pandemic levels. Conduct your due diligence and research the needs of your local market. As a result, you may find that one path can better serve you than the other.

Tom Dunkel is chief investment officer for Belrose Storage Group LLC, which offers passive investment opportunities and specializes in self-storage acquisitions and development nationwide. With more than 27 years of real estate, finance and investing experience, Tom manages the firm’s financial underwriting and plays a critical role in creating winning deal structures that ensure achievable investor returns. To reach him, email [email protected].