Adjusting to the Topsy-Turvy Construction Market: Planning Advice for Self-Storage and Boat/RV Storage

I recently spent time with four self-storage experts to gain their perspective on best development practices and expectations given the current state of the industry. They delivered words of wisdom from having boots on the ground and skin in the game. Their insights should be valuable to anyone building self-storage or boat/RV storage. Here are the folks I interviewed:

What is your advice to developers in the process of getting bids for new storage facilities?

The price of materials may appear to be similar from one provider to the next. Maloney reminds us, “It’s always good to consider all the costs associated, not just the actual buildings. Make sure you are including cost estimates such as ground prep, site layouts, full build and installation.”

Guerin agrees, emphasizing the importance of project details. “Read the fine print. What's the economy looking like? Contingencies are still really important, not just the steel-building line item, but really the overall construction project,” she says.

“Make sure that you're working with your lender. Lenders have a great experience at this point, understanding how valuable that contingency is to the developer … Budget needs to be a soft spot to land when you're dealing with rising costs,” Guerin adds. “It’s unrealistic for developers to think, ‘Hey, I’m going to lock in my pricing 18 months before I break ground.’ That’s not a realistic expectation. Know your budgets. Make sure that your loan is covering your contractor’s expectations for costs moving through the project.”

Ted Culbreth’s advice? Focus on relationship-building. Assemble a team that includes a civil engineer, architect and general contractor, and have all three in place when you start the development process, he says. “When you get to the point at which you're submitting for a permit, and you're going through the bid process, that's the number you're going to contract with. You need to have a relationship with the group at that point because that's when it's going to be crunch time.”

Culbreth suggests using a “ferreting out” process early in the design phase to ensure everyone’s on the same page, and to avoid roadblocks like unavailable materials. “You can weed all of that out before you ever get to the point where it's going to cause you a problem,” he says. Your team will be able to value-engineer the design, which helps you avoid unpleasant surprises.

“The costs are higher than [they were] two years ago, and that is the truth, and that'll be painful to watch. But the flip side is the industry is so strong, and rental rates have increased. Even though you're paying more, it'll offset itself,” Lindau says. Make sure your plans work on paper, and don’t try to cut corners, he cautions. Though it can be tempting to buy cheaper materials, especially if you’re selling your storage project to someone else, building for the long term creates better business, reputation and return on investment.

At what point should developers attempt to lock in prices for materials?

Pricing is one of the most variable aspects of any self-storage or boat/storage development. As we know, materials and deals aren’t getting any cheaper. Maloney says it’s important to take increased demand into account. “I would lock in orders for portable units as soon as you are ready with funds,” she says. “You would not want to be behind in your planning for having units on-site and with the increased demand and freight issues. Plus, you are likely to find out that the production timing is not as quick as you had originally anticipated.”

Metal-building companies may say they’ll hold their price until a certain point, but it’s really a roll of the dice. “Where you're trying to finalize your budget is once you've got your construction permit and breaking ground is on the horizon,” Guerin says. Otherwise, ask yourself what the scene may look like in six months. “Does it make sense to lock it in today? Does it make sense to have that expectation? Clarity needs to be asked for and received from a subcontractor vendor,” Guerin adds.

“We can lock in our price when we sign the contract,” claims Culbreth. “I can then turn around and lock in my price with my steel supplier. But there are a ton of contingencies on that because I'm locking it in based on a date that we're going to take delivery.”

If you can't see far enough ahead on the deal, then it’s a greater risk to lock in prices. Variables abound in the development world. Weather, delayed building permits—conditions are always shifting. “Most people don't lock anything in,” Lindau reasons. “Forget the price part. You’ve got to get the service behind you because what's happened is everybody wants to build these things, and what is the capacity of the people who are qualified to actually build them?”

The war of timing, conditions, prices and availability is rampant. “How do you win the war? You open a good facility built well, one that’s correctly laid out in a good market,” stresses Lindau. If you’ve overspent on a project, that’s no matter if it’s ultimately profitable.

What construction costs do you see rising or declining now, and what do you anticipate for later in the year?

With all the variables in the construction market, it can be near impossible to nail down potential fluctuations. However, our experts gave it their best shot.

“If there is anything that 2020 to 2021 taught us, it’s that we are not very good at predicting the future of world economics and trends,” says Maloney. “We have seen freight rates begin to drop over the last month, and we are hoping that this trend will continue. Demand for storage is still high, and manufacturers are working hard to secure employees and find ways to fill all the needs of the ever-growing self-storage industry.”

One reasonable assumption is that prices will continue to climb. “I anticipate pretty much anything and everything will keep going up,” says Culbreth. “Now, the steel thing … that’s unknown. I don’t know what that’s going to do. I foresee steel coming down sometime in 2022, but if oil continues to go up, then what’s that going to do to the trucking and the price of manufacturing and inflation, with everything else that goes into it?”

All of the uncertainty creates a hectic mess of calculated risk. “My best hope right now is that 2022 is a year of stabilization,” Culbreth adds.

“You better plan,” agrees Lindau. “We’re selling a lot of these outside-access garage doors, and the problem is that a lot of them are four to five months out. So, the price has doubled for those.” And with high demand comes higher prices and longer wait times. Understanding the timeframe plays into pricing, including shipping times.

In the past, a 10% construction contingency has been the rule of thumb. What are you now recommending?

This can be a tough question to answer, as every situation is unique and contingency can be flighty. “I haven't seen a new facility in our situation that has gone above [10%]. But that is because we are so proactive with updating our prices so many times in the process,” says Culbreth. “So, you know, they've seen these prices climb and climb and climb. But we stay on top of so much that I think if they still kept that 10%, they would still be fine. It's just 10% of a much bigger number than it was two years ago.”

Lindau takes a broader approach. “There are two parts to a contingency,” he says. “The first is a construction contingency designated for cost overruns and unplanned added costs, including escalating materials costs. The second portion is for working capital during rent-up. Typically, you set aside money for the one- to two-year rent-up period to get you to the breakeven point. Many lenders include an interest-only period during construction and rent-up, which makes it easier for new developers. A 20% total contingency is reasonable in today’s environment.”

Just like all aspects of development, contingency will fluctuate as 2022 unfolds. All we can do is keep an eye on the market, build strong relationships with contractors and clients alike, and pivot with the changing times.

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].