The best feasibility studies start emphatically with one word: Stop!
Sometimes a self-storage developer gets an idea he thinks is great and, well, it’s not. Markets get overbuilt. A site is just plain bad. A good property has a poor site plan. That leftover parcel won’t work for self-storage. Rental rates are soft or declining. You can’t build enough to be competitive. The site is just too small. The setbacks are too wide. Zoning doesn’t allow storage. It could be a million things.
Oh, I’ve gotten some pushback over the years when I’ve advised someone to put a stop on a project, but mostly, I get a “thank you.” The best developers are usually pretty good business people, too. It’s better to spend a little up front and find out the bitter truth early than to spend a lot and learn it later.
In this industry, we do a feasibility study to measure investment quality. Sometimes the market is great and the site is terrible, or the site is great and the market is terrible, or the returns are just marginal. The best developers will find a better site or move to another micro-market. However, some people don’t do their homework. That’s why we hear stories about the guy who never leased up that facility he built in the back of the industrial park, or that 300-plus unit self-storage facility with all 5-by-5s! Read on to uncover why a feasibility study is a must when developing a self-storage property.
When I was a self-storage lender, some of the market measurements I’d see in feasibility studies just didn’t make sense because I knew every market was unique. I would see studies that used national benchmarks and averages as a forecasting tool. Statements like, “As long as you don’t exceed x square feet per person in the market, you’ll be OK,” don’t make sense for predicting an equilibrium supply in specific micro-markets. It’d be like saying, “Well, the average temperature across the country is 60 degrees.”
Just as you can’t forecast the weather in your city by looking at the average temperature across the nation, neither do averages and benchmarks help you determine if your market will absorb more self-storage. If a market is demanding 60,000 additional square feet, your lease-up percentages will look different if you build 20,000 square feet versus 80,000.
When we study micro-markets, we want to gain a good understanding of how demand ebbs and flows across the year, and how newer, established and older competitors are performing. All markets are unique. Some have two square feet per person and are stable, while others have 20 square feet per person and are growing. Some markets have seasonal occupancy fluctuations of 30 percent to 40 percent, while others see only nominal changes. Our goal during a feasibility study is to identify specific micro-market dynamics so we can accurately forecast the potential for expansion, contraction, busy/slow seasons, rental-rate shifts, unit-size demands, etc.
Markets experiencing growth are usually targets for self-storage developers, but beware of investing strictly on forecasted expansion. Some developers jumped into storage several years ago and experienced slower than projected lease-ups when residential growth came to a screeching halt. Just because the city or county predicts growth doesn’t mean it’s going to happen.
Part of your market analysis should be a close look at what’s coming up on the development horizon—in residential and commercial. You also want to know if the storage supply is already expanding among existing or new operators.
Investment Pro Forma
The ability to develop a quality investment model relies heavily on market dynamics, prevailing rental rates, necessary competitive business models, acquisition and development/re-development costs, and investment structure. Acquisition and development costs aren’t the same across markets. A good site in the New York City area will cost more and probably require different construction elements than one in Smalltown, USA. A second-tier site might cost more to gain visibility than a Main Street site with higher acquisition costs.
Similarly, the way you intend to manage the site will impact your investment. If you’re in a market with national or regional competitors, your management and promotion strategy might necessarily be different than it would in a developing market with only small, closely held competitors. It’s difficult to duplicate or compete with the online presence and economic scale of a company with hundreds of stores without using quality third-party management. Often, turning over the reigns to a professional company with established best practices saves a lot of “learning curve” expense.
Quality study of the competitors in a market should reveal details on what a new developer can expect during lease-up. I generally try to be conservative in my investment modeling and look at how a project could be adversely impacted by changing market conditions, declining rental rates, upticks in interest rate or other outside factors.
For a new development project, don’t shortchange your site on cash-flow deficit funding during lease-up. For many projects, that means at least a year of operations expense and debt service. Be conservative in your projections. The riskiest time for your investment is when it’s bleeding cash. If you can’t deliver a competitive business model because you don’t have enough cash after construction, you could be in trouble. Being short on cash during lease-up is very risky.
Like the markets in which they reside, self-storage sites are unique. We’re seeing more multi-story projects as the five-acre site in a great location becomes more difficult to find. Wider buildings are becoming more popular as developers try to maximize square footage. Regardless, you want your customer to recognize your facility as storage, know where to transact business and know his belongings are safe. Your market analysis should reveal the unit sizes that are in the greatest demand so you can design the best unit mix.
A good site engineer is your problem-solver for all sorts of site-related issues. From storm-water management and utilities to getting a project through planning, he’ll understand the issues and processes and how to best develop workaround solutions.
If you’re building storage today, know what your customer is demanding and how best to compete. Make sure your site communicates your unique value with curb appeal, signage and overall presentation. Design to lead the market from the beginning with modern features and clean lines.
However you go about conducting your feasibility study, set out to know and understand the truth about your site, investment and market. With the right information in hand, you’ll be ready to develop the best site or move on to the next opportunity.
Benjamin Burkhart is owner of StorageStudy.com. As a consultant to the self-storage industry, he specializes in feasibility studies, acquisition due-diligence and loan-package preparation. He can be reached at 804.598.8742 or firstname.lastname@example.org.