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Unit Mix for the Next Millennium

July 1, 1998

8 Min Read
Unit Mix for the Next Millennium

Unit Mix for the Next Millennium

By Dan Curtis

Now that the self-storage industry is more than 30 years old, it can beconsidered a "grown-up" member of the business world as well as one thatcontinues to improve. An important consideration in this continuing improvement is theproper use of unit mix.

As an example of how something good can become something even better, consider a Texasproperty of 500 units built in the early 1970s. Totaling 100,000 square feet, the unitsare all 10-by-20s, and each unit rents for $50 per month. The facility has always beennearly full. Helped by low expenses and taxes, the project has been paid off for years andprovides about $240,000 in annual net income. At today's cap rate, it is worth about $2.4million, or about $24 per square foot, a handsome return on a project that cost about $1million to build.

That's not bad, but if the project's unit mix was more like the current standard,including climate control and current pricing levels, the same facility could easily bringa net income, before expenses, of $600,000 annually. At about the same cap rate andexpenses, the project might easily be worth $5.4 million. It would also be much lessvulnerable to competition, and easier to sell and keep rented.

This facility provides the perfect example of the importance of a good unit mix. Asdevelopment continues,and competition stiffens, and as better storage products areoffered, it will become even more important.

Much was learned about the profitability of self-storage in the '70s and '80s, but inthe '90s we hear fewer stories of a facility's unit mix being totally dedicated to theone-size-fits-all formula. The influence of Public Storage, Shurgard and other REITs hasbeen strong, as they are now more competitive. Major owners have also contributed to amuch better self-storage product. Early in the industry, the theory had a Field ofDreams approach: "If you build it, they will come." But, as we approach themillennium, we should probably focus on a more suitable maxim such as, "Build itsmarter and increase income."

Today, builders must contemplate careful land planning in order to effectively profitfrom available land space. Unlike in the past, environmental issues must also be satisfiedin the early stages of planning. Increasingly tougher building codes and higher land costsare also factors in predicting project success. These issues all effect the final unit mixand the eventual bottom line on income.

Factors Affecting Project Feasibility and Unit Mix

Long before determining the correct unit mix for a facility, a developer must considerthe practicalities of building in certain locales. Although not a guaranteed formula forsuccess, the following list includes factors that weigh heavily on a self-storagefacility's outcome:

  • Population. Determine the population within a three- to five-mile radius, using small ratios for dense, urban areas and a larger radius for rural areas.

  • Average age of population. Seek out a marketplace where the average age is slightly above 33.5 years old, which is the national average.

  • Income. This should be slightly above the national average of $34,000 per year per household.

  • Education. This should be above the national average of 11.4 years.

  • Nationality. Mixed areas are best.

  • Family size. Smaller families generally have more disposable income.

  • Climate. Moderate and warm areas have larger concentrations of self-storage.

Influence of Types of Living Units

When determining the feasibility of a self-storage project, developers should alsoconsider the types of housing in the area:

  • Single Family. These have good potential, especially if houses have single-car garages and no basements.

  • Multi-Family. These have the best potential if income level is high and garages are not provided.

  • Town Homes. Usually, storage is limited and owners are mobile, making this climate attractive to self-storage development.

  • Mobile Homes. Space is drastically limited and, usually, both homeowners are employed.

  • University Housing. Although this is a seasonal renting area, storage is well used by this group.

  • Military. Always a good prospect for storage, but unpredictable military-base closings can drastically damage a self-storage business.

Collecting the Facts

All this demographic information can be obtained in various ways. For example, utilitycompanies have huge bands of collected data, real-estate companies have information on whois moving in or out, and companies such as National Decision Systems in Washington, D.C.,have complete data that can be purchased for a minimal cost. Check the Yellow Pagesdirectory for the "Market Research" listings. Builders who own storagefacilities may also have collected a large amount of information, as do local chambers ofcommerce. Keep in mind, though, that some prospective builders may want to keep intentionsconfidential.

Once all the above data is gathered and plans are being consolidated, competitors inthe targeted area must also be surveyed. Honesty is always the best policy wheninterviewing a competitor's manager. Interviews should always be friendly and nevercombative. Share information and, if managers are friendly, ask if they know othermanagers in the area. They may know one that could be considered as a manager for the newfacility being planned.

When doing a competitive survey, make certain no project is overlooked. A new one maynot yet be in the Yellow Pages, or may be on a street normally not traveled or in alow-visibility location.

With all of this demographic information collected, a prospective builder may still nothave all the answers, but a few basic guidelines can be helpful. Keep in mind that everyarea is unique and different problems can also create possibilities. For example:

  • Multi-family, condos and apartment housing offer the largest rental potential.

  • Military and commercial renters remain tenants longer than others.

  • University and single-family renters use smaller unit sizes.

  • The average unit mix varies 85 to 120 square feet in size.

  • High-income tenants in transition tend to rent larger-than-average units.

  • As projects fill up, phone calls for larger units typically increase.

Stay Flexible

No guidelines for unit mix will work verbatim, which is why it's so important to remainflexible throughout the whole procedure. Remembering this, a builder may elect to phase aproject, leaving as much as 25 percent or more to be completed at a later date. In largeprojects (100,000 square feet or more), it is not unusual to set aside as much as 50percent of space for future buildout. This "set aside" space can be used forbulk storage. If outside, it can be converted to RV storage, which also creates aprofitable ancillary income. Also, when phasing it is practical to purchase partitions anddoors for installation at a later date. Obviously, this helps to reduce immediateconstruction costs.

Most tenants prefer outside units for ease of accessibility for loading/unloading,which entitles the operator to charge a premium for these spaces. Nevertheless, interiorunits may have a marketing advantage for security reasons, and they might be betterprotected from moisture, bugs or rodents, offsetting the convenience of drive-up units. Ifland use dictates the use of inside units, the average size will still be about the sameas outside units.

Climate Control

All facilities, whether new or conversions, should feature at least some climatecontrol. On the average, approximately 40 percent of U.S. storage units are climatecontrolled. Rent premiums for climate control are usually 25 percent to 60 percent higherthan conventional storage. Operating costs for climate-controlled units are approximately10 cents per square foot per month, but this varies depending on the climate conditions indifferent parts of the country. Climate inside may vary from a low of 40 degrees in winterto 90 degrees in summer. Much of the time, it can be controlled by using dehumidifiers.

Multi-Story

As land costs rise and land availability declines, multi-story storage becomes a viablealternative. Under-utilized land had always been a problem. With multi-stories, landutilization can far exceed 100 percent. Building codes require a design load of 125 poundsper square foot. Construction cost per unit is somewhat higher as space is lost tohallways, and the extra expense of elevators must also be included. Fire sprinklers areusually required, and unit mix will be nearly the same as in single-story construction.

Conversions

This method of self-storage development has recently been gaining in popularity.Utilizing a big box in good condition but with an obsolete use is now being done in allparts of the country. Column spacing developed by building size may dictate odd unitsizes, but that is no real problem. Renters may prefer a 5-by-10, 10-by-10 or 10-by-15,but will nevertheless accept a 7-by-7, 8-by-12 or 12-by-12 at the same price level, oncethey have pictured how their possessions will fit into that space.

Conversions are easy to develop in phases by simply holding an area in the building forlater build-out. Often, in second or third phases, the large unit mixes that were in thefirst phase are used again, probably because of acceptance by the public.

Conclusion

To achieve the right unit mix, builders must first study the demographic of thetargeted area, noting the traffic patterns and location of competition. Higher land costsmay require multi-story development and a climate-controlled building with higher rent.Unit mix will remain about the same as in conventional storage. It is preferable to buildan upscale property with a variety of unit sizes. A mix with limited unit sizes may behard to rent, and the value of a property is greatly enhanced by keeping units rented atthe highest possible rental rates.

Dan Curtis is vice president of Douglasville, Ga.-based Doors and Building ComponentsInc. The company provides the self-storage industry with roll-up steel doors, fillerpanels and partitions and complete hallways systems, among other services. Mr. Curtis is afrequent contributor to Inside Self-Storage as well as a speaker at numerous InsideSelf-Storage Expos. For more information, contact DBCI at (800) 542-0501.

How to Use Unit Mix Percentages

1. Determine the percent you wish to rent to each category. This percentage should add up to 100 percent.

2. Multiply that percentage by the percent number in each category.

3. The resulting number added vertically will equal your original percentage by category.

4. Add the numbers horizontally and they will give you the percent you should have of each size. Those numbers added vertically will equal 100 percent.

Most unit mixes will average 112 square feet per unit. If you think you will rent more than 20 percent to commercial, you may need to rethink.

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