A self-storage feasibility study is an industry expert’s opinion on the financial viability of a property at a specific size and location, based on local research, industry standards and trends. Though it may or may not provide an estimate of what the facility might be worth once it’s built and rented, a feasibility report is not an appraisal.
When I designed my first storage facility as a young civil engineer in 1984, I’m pretty sure no feasibility study was done (or needed). Even in 2006, when I designed and built my first property as an owner, my study consisted of two simple questions: How much did the land cost, and how quickly could the project be built?
But, alas, times have changed. There are still many great sites available—more than many in the industry would like to admit. But do you want to be the one to invest more than $5 million only to break even or perhaps run out of money because it took 48 months to lease up?
Why You Need It
In today’s climate, there are four main reasons to perform a feasibility study for a self-storage project:
- To confirm your own initial findings that a site has the required demand and other features needed for a great self-storage location
- To obtain estimated construction costs, along with an income-and-expense pro forma to better understand the financial scenarios and opportunity for profit
- To better understand your competition so you can plan accordingly
- To satisfy the feasibility-study requirement of many banks (especially Small Business Administration lenders) or investment partners
Essentially, a good study will answer several questions and provide a wealth of information to guide planning as well as the site and building design. Here are some other things a study can do for you:
Provide data. Though it’s getting easier to conduct your own initial study with the aid of online tools, it’s still critically important to have an expert confirm your opinion and provide supplemental material and analysis through online data and first-hand research. The information you gather may look decent, but mitigating factors can turn an initially good site into a bad investment, for example, if you miss just one project in the pipeline, fail to recognize the competition is renting 10-by-10 units for $75, or overlook certain site conditions. By the same token, a site that may not appear to have enough demand based on national standards may very well be an excellent location once details are revealed through local investigation.
Offer design assistance. A good feasibility study will help determine the best design for your facility, guiding you on unit mix, climate-control considerations, and amenities the competition has or is missing to ensure you offer what customers in your area want. In addition, the construction costs, financials and rent-up period outlined in the study will help you understand equity required for the project, carrying costs, and whether you should develop the project all at once or in phases.
Provide local expertise. Self-storage feasibility experts can be international, national or local. It’s important to hire someone who is familiar with the area since demand (available square feet per person) can vary significantly from state to state and even between cities. Construction costs can also vary widely.
Construction costs and market trends used to change slowly, but this isn’t always the case anymore. It’s important that your study provider has his finger on the pulse of the industry and is in regular contact with industry experts, developers, self-storage associations, building manufacturers and owners. Many of the best feasibility practitioners also regularly attend self-storage conferences to help them stay current.
Most providers are one- or two-person outfits, so studies can take up to a month or longer. If time is of the essence, there are a couple of larger firms that can often get reports completed more quickly.
What It Should Contain
A thorough feasibility report should include:
- Detailed project description
- Review of the community and demographics, including the site’s micro-market description
- Self-storage trends that may affect the facility
- An in-person review and analysis of competing facilities (often those within a three-mile radius) including square footage, age, location, unit sizes, street rates, features, occupancy rates, etc. (more on this later)
- Review of any previously approved but not yet built projects and developments in the planning stages (must be included!)
- An in-person review of the proposed site, including features such as street view, road-network traffic, access, etc.
- Analysis using national and local self-storage standards and a summary of these standards
- Clear confirmation that there is or isn’t sufficient demand to justify the proposed net rentable square feet
- Projection of future self-storage development and how it may impact your facility
- Total construction costs, including soft and hard expenses
- Proposed unit mix (how many of each size), and proposed rental rates for each
- Estimated operational costs broken down into typical self-storage expenses
- Explanation of assumed financing, matching current lending standards and options available
- Loan equity and required carrying costs based on lending option and pro forma analysis
- Estimated lease-up rate and duration based on local conditions, including any required to meet the rent-up schedule
- Month-by-month pro forma providing income, expenses and net operating income, typically provided for two full calendar years past optimal occupancy of 90 percent
- Development, operational and marketing recommendations
Rate and Competition Analysis
As mentioned, the feasibility study should propose a unit mix with rental rates for each size based on local competition. The proposed rate won’t necessarily reflect your marketing and sales expertise or how your property may differ from others. Typically, since your facility will be a new-generation site while many of your competitors are second-generation, the rates proposed in your study will be in the mid to upper range of the market.
Since the facility that charges the most is typically the most profitable, closely review the competition and your proposed rates. The right product in the right location with the right management can often charge more (sometimes much more) than other storage facilities; but you can’t determine if this is true for you without a thorough understanding of the market.
A competition analysis should include the age and rates of individual locations, and the distance between your site and each competitor. It should evaluate each site’s visibility, access, office quality, manager, traffic, property condition and curb appeal, and provide an overall rating for each site. It should note whether each facility has boat/RV parking, covered parking, gated access, paved or gravel drives, truck rental, 24-hour access, security cameras, door alarms, climate control, fire sprinklers, a retail office, etc. This data will help you understand why your state-of-the-art, next-generation facility should command premium rental rates.
The more information you can provide your feasibility expert about your goals, plans, site and anticipated facility design, the more accurate the study will be. Valuable information includes the property address, assessor’s parcel numbers, property area, property map and deed, land purchase price, traffic counts, zoning and approval process, land easements and restrictions, proposed net rentable square footage, number of stories to be built, unusual land features, out-of-the-ordinary construction costs, phasing plans, your background and a marketing summary. Share any information you have about self-storage expansions in the area or proposed facilities in the pipeline.
The feasibility study will assume your facility will be attractive, with all the latest amenities renters want. It’ll also assume construction by an experienced developer and operated by an experienced industry professional capable of executing a high-end sales and marketing plan. These are real factors that affect the success of a facility and shouldn’t be taken lightly. Poor execution in development or operation will alter the report findings.
Too often, I see construction costs based on past projects completed one to three years ago, without adjusting for increased costs or reflecting current soft costs. Review the cost ranges with your report provider. It’s best to assume the high-end cost until you have bids in hand and added a 10 percent contingency.
It’s important to know that feasibility experts aren’t typically engineers or architects, so they may not be able to evaluate how much self-storage can realistically fit on the property or the viability of getting regulatory approvals. If your civil engineer can provide a conceptual plan prior to the study, with square footage, based on local zoning and other regulations, it’ll allow the report’s findings to be more specific to your final development.
The conceptual plan and input on regulatory approval should be considered as part of overall project feasibility. These are especially valuable for small lots that require a multi-story building. Be aware, though, that while some architects offer feasibility studies that include a zoning review and concept plan, your lender may not accept it for consideration if it requires a report from an independent, third party.
Marc Goodin is president of Storage Authority LLC and the owner of three self-storage facilities that he personally designed, built and manages. He’s been helping others in the industry for more than 25 years. To reach him, call 860.830.6764, e-mail [email protected], visit www.storageauthorityfranchise.com. You can also purchase his books on facility development and marketing in the Inside Self-Storage Store.