If you own a self-storage facility, sooner or later, you’ll wonder whether you should renovate. For many of us, this moment hits when we’re looking to purchase an older property and remodeling would allow us to reposition or expand the business. For others, it occurs after years of operation and reaping the cash flow. Either way, at some point, you’ll arrive on the property, turn on the lights, and realize the facility looks tired compared to nearby competitors.
In this moment of clarity, ask yourself, “Why would someone rent here when there’s a brand-new facility right down the street?” After all, the beauty of self-storage is its simplicity. Facilities have steel walls, concrete floors and apartment-like income. Theoretically, unless the metal roofs are rusted and leaking, you could simply drop your rates, make no further investment in the property, and rent units until natural depreciation does its job. There should almost always be a market, at some price, for an old storage facility.
The only economic reason to renovate is return on investment (ROI), or more accurately, a positive ROI. When considering an upgrade, ask yourself the following two questions:
- Will it help rent units? (Assuming you have units to rent.)
- Will it allow for a higher price? (Either in rental rates or the facility sales price.)
If the answer is yes to either question, it’s worth running the numbers.
Our Case Study
Let’s use Q2 Self Storage in Jeffersontown, Ky., as an example. My partners and I acquired this 25,000-square-foot property, built in 1982, along with three acres next door that housed a 20,000-square-foot warehouse. The idea was to convert the warehouse to climate-controlled space and add another 12,000 square feet of traditional self-storage to the property.
When we added the new section, we saw a sharp contrast. The new units had nice, shiny doors against a dark blacktop, beautiful landscaping, and decorative fencing. The older portion of the site had first-generation, brown roll-up doors on concrete block and metal buildings.
The new, 10-by-10, traditional units could get $90 per month, but the same size units in the older building were at $75. The rest of the unit sizes were apart by approximately the same percentage. In other words, unless we wanted two distinctly different price points and unit types, we were going to have to upgrade the old building.
Running the numbers determined we could average a 17 percent increase in rental rates through an upgrade. My immediate thought was, “I like 17 percent income increases, but what’ll it cost us?”
Making the older building look like the newer ones would require doors and paint. Fortunately, the roofs on the older section were in good shape and could be left alone. At the time of the project, new doors cost $355 each to buy and install, while paint was priced at $25,000. There were 198 units, so we added some contingency and estimated it would cost $100,000 to achieve that expected income bump.
In terms of ROI, the increase would generate $2,575 monthly, or $30,906 annually. At a 7 percent capitalization rate, that would add $442,857 of property value. In other words, if we spent the $100,000 to upgrade, we would be able to pay for it in slightly over three years, and that portion of the project would be worth more than $400,000. That wasn’t a bad ROI, so we said yes to the project.
New roll-up doors at Q2 Self Storage in Jeffersontown, Ky., which was built in 1982
Identify Your Goals
The goal of a self-storage remodel is to bring the facility up to date and add amenities that allow you to get the highest possible rent. The industry is changing. If we were to price out the Jeffersontown project today, we’d do a price comparison between new standard doors and high-tech models that open via smartphone. The decision would come down to whether the expected additional rent would justify the cost of high-tech access.
Consider which amenities make sense to add and how they might impact operation, including payroll. There are automation tools today that can effectively reduce the number of personnel required. For example, doors can now overlock automatically when a tenant is delinquent and unlock automatically once payment is received. Though these certainly cost more, the question you have to consider is how much they lessen payroll and other expenses.
Given that the primary moving parts at a self-storage facility are the unit doors, I suggest pricing price door replacement rather than repair. You can also price restoration. In some cases, a clear restorative product can be sprayed on doors to bring back their luster. Spray paint can also sometimes be used.
Obviously, when evaluating your site for a potential renovation, you don’t want to stop at your doors. Compare your management office against the competition. In today’s market, it’s smart to have it look more like a retail store. Include open space with merchandise displays. The area should be as bright as possible and allow customers to easily pick up and buy items like locks, tape, boxes, etc.
In most cases, it’s relatively easy and inexpensive to paint the office, replace flooring and add a new retail counter. Many offices can be remodeled for $5,000 or less while improving their appearance significantly.
No matter what you’re considering, run the numbers. Look at the ROI, your long-term business plan and how any additions or subtractions relates to employees. There’s simply a lot more to consider in a self-storage renovations today than there used to be.
A pre-renovation door (closest unit to the left) in stark contrast to replacement models
A Word on Vendors
If you’ve made the choice to renovate, use suppliers who specialize in self-storage and are knowledgeable about the industry. This almost always adds value to a project. We also use local plumbers, electricians and, occasionally, installers (sometimes our own employees), but we almost always use self-storage specialty companies for any products we buy.
Communicate With Customers
With the Jeffersontown project, nearly every unit was occupied when it was time to install the new unit doors. We worked with the installing company to determine how many doors it could complete in a day and the route it would take through the property. We sent letters, made phone calls and e-mailed tenants informing them of the day their unit was scheduled to receive a new door, including a two-hour window. We advised them of three options:
- The tenant could be present, unlock his unit, watch the installation and then relock the unit once the new door was in place.
- The tenant could leave his key with us, and we’d do the work and return it. If the tenant wasn’t present (and most weren’t), we video-recorded the door opening and showed the unit contents. Once the new door was installed, we recorded the unit again, showing it looking exactly the same as when it was opened, along with closing and relocking the door.
- If the tenant never responded or failed to bring his key, we cut the lock and put on a new one when the door replacement was complete. We recorded the procedure the same as in option two.
We didn’t experience any negative issues with customers during the process. In fact, most were very appreciative. Even better, few complained when their rental rate increased.
If you’re looking to reposition a potential acquisition or upgrade a facility you already own, determining which renovations should be considered, along with the cost vs. return, isn’t that complicated. The important thing is to make decisions methodically.
With the Jeffersontown facility, we wouldn’t have installed high-tech doors, even if they’d been available at the time, for two reasons. First, we wouldn’t have been able to achieve enough rent for those units to justify the cost. Second, under our company structure, expanding the facility to more than 50,000 square feet meant we’d always have a site manager on duty to manually place and remove overlocks. Conversely, if the property had been smaller and we’d been looking to reduce payroll, adding high-tech doors might have made financial and operational sense.
Go through decision by decision, calculating the ROI and asking the same two questions we discussed at the top of this article. If you follow the process methodically, you’ll be able to decide exactly which upgrades to complete.
The self-storage industry is evolving quickly. If we don’t keep our facilities competitive, the value of our properties will decrease. Customer have more variety to choose from than ever. If you stay relevant and renovate when needed, you can reap the rewards of this fantastic business for many years to come.
Mark Helm is a commercial real estate agent and self-storage investor. He began working with real estate investment trusts in the mid-1990s to locate and purchase self-storage properties before striking out on his own. He’s the author of “Creating Wealth Through Self-Storage” and the creator of “Storage World Analyzer,” a cloud-based, financial-analysis software tool designed to help self-storage operators and investors evaluate potential real estate acquisitions or development projects. To reach him, e-mail [email protected].