Self-storage is consistently ranked by analysts as offering one of the best investment returns in commercial real estate. As a result, new investors clamor to get their foot in the door, while those who are already in the business look to solidify their standing. Whether you want to build a new project, convert a non-storage structure or expand an existing facility, there’s a great deal to consider. With so many variables, it can be difficult to make decisions, which is why the best way to begin and gain confidence is with a feasibility study.
Self-storage isn’t like any other industry (hospitality, office space, medical buildings, etc.). It’s unique, with its own regulations, terminology, nuances, financial strategies and operational standards. Don’t try to go it alone or learn on the fly. Doing so may only damage your investment results. Find yourself a good consultant with actual storage experience and invest in a solid feasibility report.
Self-storage is need-driven and recession-resilient, but that doesn’t mean you can build wherever you want. You must pay careful attention to what’s occurring in your target market as well as other dynamics that could negatively impact investment outcomes. Let’s look at why feasibility is important and how it can guide your decision-making.
A feasibility report is a market-specific study that provides a professional opinion on the financial viability of a proposed self-storage project. A good one will answer the following:
What are the area demographics? Your report should shed light on trends within the market. You need to know whether the population is increasing or decreasing as well as the average number of people per household, median income, number of vehicles per household, etc. These all influence your product and service mix.
What competition will you face? This should only include facilities that are class-C or better. Anything lower would be like a McDonald’s vs. a high-end restaurant. Both are nice and have their patrons, but they’re an entirely different product. Any new self-storage project should be built and operated to attract market share, capturing and retaining a substantial portion of an inferior operator’s clientele.
What’s the demand? The current national average is about 6 square feet of self-storage per person; however, this number differs in every state. Your feasibility study should look at national and state averages to help determine if there’s enough unmet demand in your target area. This number doesn’t make or break any project, but it’s one you should consider.
What unit sizes should you build? Your report should identify the proper unit mix for the area, one that reflects the needs of the market. Do not use a “banker’s mix” approach; and don’t fall in love with a certain rental rate per square foot, which is often much higher on smaller units. Though it may look great on paper to include a lot of small spaces, you’ll wind up building too many and collect nothing when they sit empty. In any given market, there’s only so much need for a specific unit size, which is why you must build based on demand.
What products should you offer? If you’re going to enter a market, you need to know what services and amenities will attract customers. Things to consider include climate- or temperature-controlled units; enclosed, covered or outside vehicle storage; and profit centers like truck rentals, wine storage, records storage, mailbox rentals and more. Your report should make recommendations in this area.
What level of security is necessary? Considerations include video cameras, individual door alarms, magnetic locks, mobile access, motion sensors and more. All of these options need to be examined in the market.
How should units be priced? You need to know what your rental rates should be when you first open and how to structure increases. One of the beauties of self-storage is you can raise rates as often as necessary with only 30 days’ notice. Your feasibility report should consider competitor pricing, demand and service offerings, and outline what you can reasonably charge for your own product.
In addition to identifying what’s occurring within your desired market and which service options make sense for your potential site, your self-storage feasibility report should help you address investment-related considerations. The goal is to determine whether moving forward makes smart financial sense.
Lease-up period. The report should help you forecast a breakeven point for your investment. It should also help you account for all the necessary capital leading up to breakeven.
Operational challenges. It should help you determine if you’re ready to take on the marketing and management aspects of the business or if outsourcing makes more sense. In addition to what you can glean from the analysis, consider consulting with a third-party management company, which can give you more specific information and help you choose the best path.
Budgeting. Your feasibility study should help you create a line-item budget that takes you through “maturity,” which is typically when the facility hits 85 percent to 90 percent occupancy. This is the point at which your construction and mini-perm loans will be done and it’s time to get a permanent loan. The budget will help you forecast exactly which month you’ll be able to cover the debt service. You can also use this initial plan as the property budget once you receive your Certificate of Occupancy.
Important note: Never use a budget based on percentages vs. hard dollars. While materials costs are essentially the same everywhere, your land cost and rental rates will be different in each market. For example, a 10-by-10 unit on the East Coast may get $210 per month, while the same space in the Midwest may be $79. If you use percentages rather than dollars, your budget won’t reflect the nuances of the market.
Cost of construction. This should also be a line-item budget and will differ depending on the type of facility you expect to build. Will it be single- or multi-story, or both? Will units be drive-up, climate-controlled or a mix? Will you offer boat/RV storage, wine storage, etc.? Every project is unique, and the construction budget should be based on the project type and scope.
If you’re considering the conversion of an existing structure or buildings, you may see significant savings in construction costs. However, you also need to estimate other expenses for things such as HVAC, electrical work, roof repairs or any other necessary upgrades. There are times when the cost of “updating” a building may be too high or the orientation of the existing structure won’t be ideal for project flow, in which case it might prove beneficial to tear it down and rebuild.
Using the Report
Your completed feasibility report should give you a good idea of what to expect if you move forward with your self-storage development plan. Once you’ve read it thoroughly, schedule a time to review it with the provider to ensure all your questions are answered and you’re able to make a yes or no decision regarding the viability of the project.
If the results aren’t what you were expecting, do not force a square peg into a round hole. Move on and look for a better option, possibly with the help of your consultant. Yes, this process takes a lot of work and time; however, the returns on a project done correctly can, in many instances, be larger than you may have anticipated.
Stephan Ross is owner of Cutting Edge Development LLC and a managing member of Cutting Edge Self Storage Management & Consulting. He’s been in the self-storage industry since 1984 and has performed hundreds of feasibility studies in the United States and Canada. During his career, Steve has directed the development and daily operations of more than 2 million square feet of storage space. He’s been a contributing writer for industry publications and a featured speaker at self-storage events. To reach him, call 801.273.1267; email [email protected].