By Andrew Kelly
Welcome to today’s best real estate investment for your money: self-storage! After many years of oversupply, the market is now filling pent-up demand. Banks are becoming aggressive with lending, and everyone from real estate investment trusts (REITs) to regional operators are looking to buy or build.
This article is intended to help industry newcomers understand the bank’s requirement for a feasibility study and what’s needed for this evaluation. The study is performed to assess many facets of a proposed site, whether for new construction or conversion. Just about every lender requires a study to gauge the demand for additional storage in the market as well as the project’s financial viability.
The market-study portion will evaluate the demographics of the area, including average household income, population growth, excess square-foot demand (if any), existing competitors, traffic counts and local economic conditions. If this information shows sufficient demand, the second part of the study begins. It examines the financial feasibility of the project, such as lease-up, income and expense projections, and unit mix.
Though a lender will ultimately expect an experienced self-storage professional to interpret the data unearthed by the study and provide a determination as to whether the project will succeed, much of the preliminary work can be done by a novice. If you’re considering a new self-storage development, the following will help you tackle the initial feasibility homework before you engage a professional to dive deep into market specifics.
Identifying Potential Sites
How can you zero in on a potential self-storage location? The decision of whether to build in a major Metropolitan Statistical Area or a smaller town is up to the individual and based on investment criteria. As a rule, the larger the market, the higher the product demand and returns. However, the same can be said of secondary and tertiary markets if no storage exists or the properties are outdated.
The most important factor to success is location—this can’t be over emphasized. Following are important factors to consider when choosing potential parcels. Each could affect a property’s ability to draw tenants.
- If possible, the site should be on main streets, between retail shopping and residential neighborhoods.
- The site should have high traffic counts of 25,000 cars per day at a minimum.
- The site should be on the “going home” side of the street whenever possible (backed-up traffic gets to look at your site while waiting).
- Three to 5 acres is a good size, but storage can be built on a plot as little as 1.5 acres if a multi-story design is allowed by zoning.
- The site should be easily accessible from major streets with visibility, not hidden behind buildings or in areas considered unsafe or industrial in nature.
- Look for community growth with newer homes and retail vs. the older part of town—unless there’s no storage in the area and the demographics are favorable.
- Look for land that’s zoned for self-storage. If you need a conditional-use permit rezoning, or there are obstacles to getting approval, these are critical items to consider.
- Generally, a storage facility will attract customers within a 3- to 5-mile radius. Consider whether your proposed site is in an urban, suburban or rural area in which the area may be larger or smaller.
- Consider the drive time to the site, not just the mileage. For example, is the site surrounded by natural barriers such as a lake or mountains, or physical boundaries like train tracks and highways?
- Is the area growing or declining? Annual population growth is needed to ensure the region isn’t stagnant. Any negative or immobile population numbers for the proposed site area or city should be carefully evaluated.
- Is the population employment based on a single enterprise such as a mine, oil and gas, fracking, or a military base that could be downsized or closed overnight? Growing economies with multiple areas of employment make banks excited about a proposed site.
- What’s the amount of renters vs. homeowners in the area?
- What’s the average household income?
- Is the area close to a college, landmark or shopping area? Areas around colleges and universities need to cater to the students and families of those institutions. Landmarks and retail centers also see increased traffic.
When looking at demographics, the ideal target population is 35- to 60-year-olds who are set in their careers and generally have disposable income, families and homes. Often, this group is upsizing or downsizing and needs storage for the transition. In addition, they may have an extra car or recreational vehicle that needs to be stored outside the home.
Local competition is a very important component of any feasibility study. If your proposed site is surrounded by self-storage REITs or regional operators, you may want to reconsider, as it’s difficult to compete against their pricing and economies of scale. This can be especially important if customers must pass these competitors on the way to your facility.
Instead, look for areas populated by local, independent operators. Consider how your facility could a better option for prospective tenants. Are competitors outdated and behind the curve on technology and security? If they have poor curb appeal and customer service, you may have an opportunity. Visit all the competitors in the area to get an idea of the market dynamics, from occupancies to waiting list for units. This could mean it’s a favorable area to consider for storage development.
The Right Help
In evaluating potential sites, seek out the right professionals to assist. First, meet with local planning and zoning members about every facet of the proposed property. Ask if any other self-storage developments have been recently approved or are under review.
I also recommend hiring an experienced self-storage architect and/or civil engineer who understands self-storage development and its nuances. He can evaluate the parcel for setbacks, grades and retention ponds, which can be good indicators as to whether the site has development potential.
You’ll also want to hire a good industry consultant. An experienced professional will have seen all the good and bad involved in developing a storage facility. He can review the preliminary information you’ve gathered and determine if the site meets basic parameters. A qualified consultant is worth every dime, as he can save you from making a bad investment.
Many potential investors will have sticker shock over the cost of a feasibility study; however, the bank won’t even talk to you about financing without one. The study provides a third-party, independent, objective viewpoint, a candid opinion based on experience that will help you determine if you should move forward or cut the cord. The study will give you, your investors and the bank peace of mind in knowing the project can be successful.
Andrew Kelly is principal of Self Storage Consulting LLC, which was founded in 2004 to help new and existing facility operators enhance their return on investment. The company offers facility brokerage, consulting for new development and due diligence, facility audits, owner and staff training, and property management. For more information, call 520.323.6169; visit www.sierraselfstorageconsulting.com.