When it comes to choosing a site for a new project, many self-storage owners and developers take a “ready, aim, fire” approach.” But in today’s market, it really pays to be careful. You have to consider the consequences of picking the wrong location and what you can afford to lose. So, your approach is better as “ready, aim, aim, aim, fire.”
The truth is many developers aren’t willing to complete proper due diligence when pursuing a parcel, which can be a costly mistake. When considering the financial feasibility of a proposed site, you have to ask yourself if you’re determined to select an excellent location for self-storage or willing to settle for something that’s merely average.
Many of us make mistakes during the self-storage development process. It’s difficult to get everything right from the get-go. But the one error we can’t afford is choosing the wrong site at the wrong time. Following are several key items to consider in determining whether a piece of land is worth your time and money.
Visibility. While many self-storage customers search online when looking for a self-storage facility, physical visibility to passersby still matters. When considering a property, examine how well it can be seen by drivers along major arterials. Great visibility is always valuable. If your site doesn’t have it, a competitor may develop a location that does.
Existing competition. You must shop current competitors to get a sense for how your facility will perform once operational. Examine rental rates and occupancy within a four-mile radius to determine if your facility will be better located or offer any other distinct advantages. Quick word of caution: When tracking competitor rates, make sure they’re realistic.
Future competition. If you’re considering this area, other self-storage developers may be, too, or current operators may be eyeing an expansion to capture future demand. Check for the availability of other nearby land on which competitors might build. Research whether zoning in the area is favorable toward your project and others. In other words, can someone besides you easily enter the market? As billionaire Warren Buffet says, “I like a moat around my investments.”
Residential growth. What’s the residential development activity in the area? Multi- and single-family housing can be an excellent supplier of self-storage customers, and any projects in the pipeline could be a good indicator of sustained demand. Check to see if any apartments or single-family dwellings are scheduled. Even complexes and neighborhoods positioned for expansion will attract new residents to market. Conversely, you also want to know if the site you’re considering is in a declining area, with no new developments on the horizon.
Self-storage demand. Ideally, you’d like to know the amount of self-storage per capita is available in the three-mile radius around your potential site. Though a true number can be difficult to determine, you should be able to arrive at a good guesstimate of future demand. The national average is around 6 square feet per person, which can help you gauge whether this particular market is underserved or oversupplied. If rates are high compared to other markets, is it because of high demand?
Zoning issues. If a property isn’t already zoned for self-storage, you need to know what the hurdles are to rezone or pursue a special permit or exception. These factors can add time, cost and risk to your project. You have to dig in and research, and get to know the municipality’s and community’s stance on self-storge businesses. Will planning staff likely support a project on your proposed site? What’s the likelihood that neighbors would oppose it? If rezoning will be required, consider whether the property seller will give you enough time pursue and secure the change prior to close.
Topography. Look at this to determine if there are any advantages or challenges. How will the site accommodate a potential layout? How much grading will needed? Unusual shapes and orientations can sometimes help self-storage projects gain municipal approval. You also need to be mindful of any soil and water-drainage issues, as these can add significant costs.
Utilities. Depending on your location, there may not be existing service for electricity, water, natural gas, sewer, storm drains, phone, cable and internet. If utilities aren’t in place, you may be on the financial hook to bring them in, which can drive up construction costs.
Limiting Financial Exposure
The above isn’t an exhaustive list. Chances are, when you place a property under contract, you won’t have answers to all your questions. To understand the current and future state of the market and how a potential self-storage site fits into the picture, you have to do your homework and become an investigator, planner and strategist. Here are some items on which to focus to help limit your financial exposure.
Local insight. Brokers, planners and self-storage specialists can be excellent resources to help you understand how the competitive landscape will take shape. Depending on the outlook, you have to determine your willingness to take on future competition in addition to the current market. Use caution. Developers who aren’t dealing with their own money often take higher risks on properties.
True land cost. It should be clear from the list above that your real land cost is more than what you pay for the property. Do your best to understand what the actual costs will be for a finished site that’s ready for construction. This includes any expenses that need to be budgeted for running utilities to the property, grading, stormwater retention, etc.
Parcel reduction and phasing. If you’re considering a developed, infill location, there may be an opportunity to sell off extra land. On three occasions, I’ve been able to sell a portion of a property, which reduced my land costs. I’ve also been able to expand three facilities using a phased approach. Though this is more expensive than building out the entire facility at the outset, it helps reduce risk if the site doesn’t lease up as expected. Still, phasing may mean an additional $1 million per project in construction costs.
Future sale. To have economy of scale, consider sites that’ll accommodate at least 60,000 square feet of rentable self-storage area. This is a size that most of the real estate investment trusts would consider buying in a major metropolitan area. Though you obviously don’t have to sell your facility, you shouldn’t develop without an exit strategy. This’ll set you up for financial gain in the event you do decide to unload the property.
There’s a lot to evaluate when it comes to self-storage site selection. I recommend you consider at least 10 alternative sites to the one you favor to help determine which is the best and most viable.
We’re in the Golden Age of self-storage. Rates are increasing while the number of new facilities being built is falling in many markets. Don’t let this opportunity turn to fool’s gold by failing to complete your due diligence when evaluating potential development sites.
Hank Saipe is the owner of 303 Self Storage. He began his commercial real estate career in 1981 as a broker who specialized in finding sites for Public Storage Inc. and other developers. Today, he owns multiple self-storage facilities comprising more than 4,000 units in the Denver metropolitan area. In his career, he’s been involved in site selection, financing and third-party managed properties. To reach him, call 303.888.1260; email [email protected].