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Busting 9 Common Misconceptions About Self-Storage Development

If you’re thinking about building a self-storage facility, you might have some preconceived notions about the process. The author busts some common misconceptions and shows you what to really expect.

The self-storage industry has been experiencing a construction boom over the past few years, with many new projects being built all over the county. The thing is, those who are new to the industry have a lot of misconceptions about the development process. Let’s talk about what they are and what you should really expect.

Misconception 1: I’ll Fill It in 12 to 18 Months

There are always factors to consider when calculating demand for a new storage facility, and it can be challenging to predict how many months it’ll take for the property to lease up. The 12- to 18-month timeline is almost unheard of with a facility of 50,000-plus square feet. In this case, I advise you to prepare financially for it to take three or four years to reach 85 percent occupancy.

Misconception 2: I’ll Build Small, So It’ll Cost Less

It’s just not as cost-effective to build a self-storage facility of less than 40,000 square feet. This is because of items such as storm-water management, property management and other fixed operating expenses. A small facility just can’t deliver acceptable returns.

One exception is if the site will be built in phases and the total buildout will eventually exceed 40,000 square feet. Another would be if it’s a conversion of an existing building that was purchased at a reasonable cost, or if the site is in a high-rental-rate market with a low cost of acquisition.

Misconception 3: I Can Build Anywhere, Because I Can Just Market It Online

It’s a nice thought, but you still can’t hide your property at the back of an industrial park, in a residential neighborhood or on a tertiary road. If you do, lease-up will be notably slower, regardless of marketing. Remember, there’s only so much you can spend on digital marketing before it becomes wasteful.

One of the most powerful tools you can use to promote the business is visibility. Build along a main road with storage doors visible to everyone, not on a weak, flag-shaped site or one that’s obscured from the street. Large signage, no matter how catchy or attractive, won’t compensate for not having those storage doors visible when a potential customer drives by at 45 miles per hour.

Misconception 4: I Already Own the Land, So It’ll Be Cheaper

Ask yourself, “Would I buy this parcel from somebody else to develop self-storage?” Just because you own a piece of land doesn’t mean it’ll work. If there’s no demand in the market and it takes you five years to lease up, you’re losing money and could potentially go bankrupt due to costs. That may be rare, but the more important thing to realize is you might be missing out on more lucrative opportunities to sell the land for another use and purchase a site to build your self-storage facility where demand warrants.

Misconception 5: Housing Units Were Built Nearby, So It Makes Sense

Just because a new housing development is being built doesn’t mean that a self-storage facility is going to work. There are several reasons it’s best to ignore that development in demand calculations. Subdivision development is historically risky, and it can take years to fill a neighborhood with homes or home buyers. Even if that development fills up quickly, for every 250 homes, there’s only 4,000 square feet of storage demand. Considering that most storage sites start at 50,000 square feet (to be economically sustainable), you should be cautious of including demand from housing units.

Misconception 6: I’ve Developed XYZ, So Storage Will Be Easy

Commercial real estate isn’t all the same, and that’s especially true for self-storage. It’s unique because it’s also an operating business. To simplify operation, you need to consider many things, such as site design. This might include gates at the end of driveways to push out snow from the drive aisles, or large windows that showcase interior units facing the main road. Even if you’ve built offices or high-density housing, you need to invest in general contractors, architects and suppliers who specialize in self-storage and have the portfolio to back it up.

Misconception 7: Self-Storage Doesn’t Work in Rural Areas

That isn’t necessarily true. You should cast a wider net when looking to develop outside of your area. Many storage properties are built by investors who live close by because they know the community and understand the opportunity of their personal networks. Rural areas can be successful if the site is on a heavily traveled road and has great visibility with the appropriate zoning. Many profitable facilities have been built in rural areas.

Misconception 7: The More Temperature-Controlled Space, the Better

Temperature-controlled is great, but though it’s been a dominant trend in new development over the last few years, it isn’t always better than standard drive-up units. It can make a lot of sense in urban areas, as it’s typically the best way to maximize square footage on a small piece of land. In suburban and rural areas, it’s added because operators can charge a 25 percent to 30 percent premium.

As enticing as that might sound, I recommend you stay around 35 percent of your total square footage for temperature-controlled units. Some customers want the simplicity of drive-up access and don’t want to pay that extra. Plus, if you can’t fill those units, you end up renting them at a lower rate and your HVAC expenses eat up your profit. Any feasibility study you’ve completed for your site should include a unit-mix suggestion that addresses the demand in the market (if any) for temperature-controlled storage.

Misconception 9: I Don’t Need a Feasibility Study

It can be tempting to bypass a feasibility study if you’re developing a self-storage facility in your hometown, because you feel you know it better than anyone else—the people who’ll become your tenants, their price sensitivity and the general zoning laws in the market. However, developing without a study is risky. There can be any number of pitfalls you may not see.

Calculating demand for a storage facility is difficult and best done by a consultant who has reviewed the lease-up results for many facilities and can evaluate your market dispassionately. Beyond the risk-mitigation element, a qualified consultant can recommend modifications to your site that may expedite lease-up, increase rates per square foot and lower costs. The small price you pay for a feasibility study will certainly outweigh the expense.

While building self-storage might seem simple, it’s actually complex. Before diving in, understand all facets of the development process so you’re not caught unaware and unprepared.

Kevin Bledsoe is vice president of brokerage for Investment Real Estate LLC (IRE), which brokers the sale of self-storage facilities in the Northeast and mid-Atlantic states. He’s responsible for listings, sales, buyer representation, due diligence, financial analysis and feasibility studies in Delaware, New Jersey and Pennsylvania. He holds a leadership position and plays a vital role in the firm’s strategic planning, accountability and goal-setting, while supervising and mentoring the team of brokerage advisors. To reach him, call 717.779.0804; e-mail kbledsoe@irellc.com.

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