The finance landscape is forever changing, which can be problematic for self-storage development. Projects can take months, sometimes years, to move from concept to reality. To be better prepared before seeking funds for your next venture, consider the following factors.

Tim Littlejohn

March 29, 2024

5 Min Read

The self-storage development sector is still robust, but the availability of capital to fund projects can change based on many factors. This article offers insight to the world of real estate financing, to help you understand the influences that may be impacting your ability to secure capital.

Project and Borrower Viability

At the core of any self-storage project lies its financial viability. Creating a compelling narrative around the following factors becomes paramount in your ability to obtain financing at favorable terms.

  • Cash flow: Understanding the cash-flow dynamics of a project is like reading its financial heartbeat. Positive cash flow indicates operational viability and potential return, while negative cash flow signals risk that can negatively impact financing.

  • Capacity: This is the borrower's ability to take on debt in relation to income. It goes beyond income and focuses on a person’s ability to effectively manage additional debt.

  • Capital: In the financial realm, this serves as a safety net. It’s the cash invested in an asset that acts as a buffer for loan repayment.

  • Collateral: These evaluations use metrics such as debt-service coverage and loan-to-value ratio to gauge a project's financial viability.

  • Conditions: These encompass project alignment with lender interests, including terms, life expectancy and project classification.

  • Character: This includes the borrower's credit score, profession and history of fulfilling commitments. Lenders seek assurance that borrowers can be trusted to fulfill their obligations, and a great way to show this is a positive borrowing history.

Macro-Economic Dynamics

The following macro-economic dynamics are also important in shaping your self-storage project's financing landscape:

  • Federal rates: Understanding how federal money supply shapes interest rates is critical for making informed decisions in a volatile market. Obviously, fluctuations in rates influence the cost of borrowing.

  • Migration trends: Population-migration patterns can significantly affect your ability to obtain capital. For example, a mass exodus of potential customers from your target self-storage market can significantly alter your projections, making lenders less supportive of your project.

  • Global economic shifts: An event such as a pandemic or geopolitical conflict can impact self-storage supply and demand. Developers and lenders must anticipate and understand how these trends affect the market and assess associated risks.

As a self-storage developer, you need to stay attuned to these factors and adapt your investing strategies accordingly, ensuring your project aligns with prevailing economic conditions. If you’re successful in this, you’ll be a step ahead and better able to assess the risk of a “hold” or a “fold.”

Micro-Economic Nuances

Now, let's shift our focus to some micro-economic considerations that can impact your self-storage development financing. Your feasibility study acts as a roadmap to many of them, guiding you through local product demand, market trends and potential collaborations.

For example, one of the things your study will examine is average household income, which plays a crucial role in determining the rental rates you can charge; that impacts your financial projections and ability to borrow capital. If your property caters to households with a six-figure income on average, there might be a higher demand for luxury storage options such as wine and boat/RV storage, which generate more revenue. If the average income is lower, there may not be much appetite for these things. In either case, it’s important to align your project with the economic realities of the local population.

Collaboration isn't just a buzzword; it's the key to making your project financially viable. By aligning your self-storage rates with the income potential of your customer base, you ensure your project isn’t just a financial success but a cultural and economic asset to your community.

Government Involvement

The government is a multifaceted entity that can influence the success of your self-storage development, and it’s essential to understand its complexities. You must consider factors such as those listed below and how they might impact your project.

Regulations. These aim to create stability, which safeguards consumers and ensures responsible lending practices. They act as a protective barrier, preventing the kind of financial crises seen in the past. Government intervention isn’t always about stifling growth. It’s often about ensuring sustainable and responsible development. It also puts developers on an even playing field.

Conservation measures. While these are essential for environmental protection, they can introduce challenges for real estate developers. As federal entities work to protect wildlife and preserve land, they introduce legislation that can impact development timelines. For example, in some municipalities, there are times of year when noisy construction equipment can’t be used, as it disrupts mating rituals or migration patterns for endangered species. Therefore, conservation measures need to be considered in the early stages of a project.

Incentives. Government offerings like the Community Reinvestment Act drive lenders to support projects in underserved communities, spurring development in areas that may otherwise struggle to attract investment.

Use Your Insights for Good

It can be difficult to decipher all of the elements that play a role in self-storage development financing. You need a comprehensive understanding of project and borrower viability, macro-economic dynamics, micro-economic nuances, and government impact. However, you can then leverage these insights to make informed decisions, collaborate strategically, and secure financing that aligns with your financial goals and community objectives.

Tim Littlejohn is a design-build manager with Spartan Construction Management, a division of Spartan Investment Group LLC, a privately held real estate investment firm that specializes in self-storage and operates the FreeUp Storage brand. He manages construction projects, design development, estimating and risk mitigation. Tim’s background in asset classes include healthcare, multi-family, special purpose, hospitality, aviation, mixed-use and self-storage. For more information, call 855.588.1326.

About the Author(s)

Tim Littlejohn

Tim Littlejohn is a design-build manager with Spartan Construction Management, a division of Spartan Investment Group LLC, a privately held real estate investment firm that specializes in self-storage and operates the FreeUp Storage brand. He manages construction projects, design development, estimating and risk mitigation. Tim’s background in asset classes include healthcare, multi-family, special purpose, hospitality, aviation, mixed-use and self-storage. For more information, call 855.588.1326.

Subscribe to Our Weekly Newsletter
ISS is the most comprehensive source for self-storage news, feature stories, videos and more.

You May Also Like