Though the thirst to invest in and develop self-storage has never been stronger, record-high construction costs may give sticker shock to would-be builders and dampen some of that enthusiasm. In March, industry suppliers revealed that project costs were at the highest they’d seen since the beginning of the coronavirus pandemic. Thanks to lingering effects from inflation, supply-chain woes and ongoing labor shortages, the pricing forecast calls for clouds.
Though there are indications that some material costs are stabilizing, price relief isn’t expected to occur anytime soon. The good news is that despite the increased capital now necessary to build, pursuing self-storage development still makes sense in many markets, according to those in the know. Let’s see what some industry insiders have to say and what may be the silver lining in current industry dynamics.
While the price of steel has stabilized, high self-storage construction costs will likely continue for a while, according to Angie Guerin, vice president of business development for MakoRabco, a steel-building supplier that specializes in design and installation. “We’ve been at kind of a static high point since the beginning of the fourth quarter of last year,” she says. “But I'm being told that now all the other trades, like masonry, concrete, sprinklers and electrical, are starting to tick up at a rate that’s exponentially higher than 2021.
“When it comes to the escalation of overall construction costs, I don't think it’s over, not by a longshot. The steel-building component is probably stabilized at this point, but stabilized at a high price. We’re seeing some indication that pricing may start to soften, but I don't think it’s going to go low as fast as it went high. However, conflict in eastern European countries and Russia could blunt some of the decreases.”
Even the mobile-storage sector is experiencing increases, particularly when it comes to shipping. “Although manufacturing costs have gone up over the past year or so, the real increase in cost is in freight charges,” says Lisa Maloney, director of strategic accounts for Boxwell LLC, a provider of relocatable self-storage units and portable-storage containers. “This is especially true with products manufactured overseas. Ocean freight rates are higher than they have ever been, with rates doubling and even tripling to some destinations. Shipping costs began to rise late in 2020 and have continued to shoot upward until today.”
Though Maloney expects portable-storage prices to fall somewhat, if freight costs remain high, the overall cost for developers will remain above that of previous years.
Location can also impact construction costs. “Declining prices for steel are going to change on a geographic basis because there are so many regional producers of steel,” says Guerin. “They're all moving numbers, increasing incrementally in different ways. Right now, the cost of steel has dropped, yet consumer prices are staying high due to strong demand. Prices will stay high until demand drops, which we certainly hope doesn’t happen.”
Labor will also contribute to high construction costs high this year. “I don't care whether you’re a manufacturer or anything in the construction trade, labor will not go down,” says Jamie Lindau, self-storage product manager for Trachte Building Systems, a manufacturer of buildings and components. “Though steel-building costs went down, labor went up.”
Minimum-wage hikes have occurred in most major U.S. markets, with many moving toward $15 per hour. In some areas, like the Pacific Northwest, labor costs have been escalating for the last 18 months, notes Guerin. “What that means, in addition to the raw cost of a changing labor market, is increased insurance premiums,” she says. “It means increased costs of renting construction equipment—that’s probably doubled over the last two years. I don't see any future compression in labor cost, and I think that’s going to be true for, really, every construction trade.”
With volatility affecting materials and labor, the best short-term scenario for builders may simply be for markets to calm down.
“My best hope right now is that 2022 is a year of stabilization,” says Ted Culbreth, vice president of sales and marketing for SBS Construction, a construction-management firm with 25 years in the self-storage industry. “I foresee the price of steel coming down, but if oil continues to go up, then what’s that going to do to trucking, the price of manufacturing and inflation, with everything else that goes into it? My steel might go down, but the other components of actually getting it into my jobsite will not.”
A Silver Lining?
Despite the dramatic increase in development costs, it’s still possible—and profitable—to push forward with new self-storage facilities. “As one of our largest clients said, the only thing that has outpaced escalations in construction costs is the valuation of his asset,” notes Guerin. “Many developers are still very bullish on continuing to construct new self-storage facilities because you can build them—even at this dramatically higher construction cost point—far cheaper than you can buy them.”
Lindau concurs, noting that the flip side to escalating costs is higher rental rates once a facility is operational. “Even though you’re paying more, rental rates can offset construction costs,” he says. “You’ve just got to make sure the project still works out on paper and that consumers in the market you’re going into can absorb the true costs of developing today.”
Katherine D’Agostino is the founder of Self-Storage Ninjas, a self-storage feasibility-consulting firm. A former marketing-communications executive turned sensei, Katherine has a background that includes 24 years of creating and implementing business plans for a wide range of companies. A self-storage owner herself, she focuses on delivering unbiased reports that enable investors to make informed decisions. To reach her, call 402.570.5021; email [email protected].