To many investors, self-storage seems like an easy venture―just build a facility and reap the rewards. Maybe 20 years ago that was true, but today the barriers to entry are higher, as well as the risks.
Even so, self-storage can be quite rewarding for the investor who does his homework and understands the business. Here are a few items every first-time developer should consider.
Before you begin building a self-storage facility, get an independent third party to review the site and research the market. Selecting a solid property is critical to success, as the importance of location ranks high for self-storage as it does for all commercial real estate.
You need visibility, easy access and good traffic counts. (Avoid inexpensive land on side roads. Most customers are the result of drive-by traffic and local awareness. There’s too much competition, and you need to be seen.)
Feasibility professionals not only determine if the demand exists for self-storage in a particular market, but can assess project costs and ensure the financial projections make it viable. They will be valuable in creating a unit mix that meets your market’s demands. Don’t leave this up to your engineer or architect.
Hire a feasibility expert to do the study, but don’t sit back and wait. Do your own homework, as it relates to evaluating the competition. Call all the municipalities in the proposed market area and ask if any other self-storage projects are in the approval process. Determine all development costs for your project including permits, impact fees, fire codes and performance bonds.
Remember, you’re making a sizable investment. Comparing your results with those of a third party will give you peace of mind. Plus, most lenders will require a feasibility study anyway.
Lenders are more conservative than ever before, so make sure you and your investors have the financial strength to get a loan commitment. Lenders are tough on seasoned self-storage operators and even tougher on first-time developers, so be prepared. Have your feasibility study and business plan ready. Take the offensive to cover all facets of your project and reduce the lenders’ concerns, and they’ll ask fewer questions.
Lenders will request tax returns and financial statements, and demand personal guarantees. Most will ask for business and personal deposits. Be sure all cash shortfalls during the lease-up period are provided for in your loan request or that you have the cash equivalent available.
Send your information to as many banks as you can, because you want options when lenders return with their term sheets; more than likely, some will pass on your proposed project. You may have the most success with local lenders who already know you and the project area. In addition, there are several self-storage finance brokers who can help you find lenders.
You’ll most likely seek financing during the due-diligence process of acquiring land. This means more investigation such as environmental and geotechnical reports, surveys, and an appraisal. Recently, more deals have been killed because of low appraisals. Loan-to-value ratios have decreased from 75 percent to a range of 50 percent to 65 percent for development, which requires greater investor equity. If possible, you want an appraisal from a firm with self-storage experience.
Hire a general contractor to coordinate all of the construction vendors. He can pull together a project budget that includes site work, utilities, electrical, building materials, concrete, landscaping, paving, and fencing and security systems. The contractor should also include a contingency budget. He’ll make municipal and bank inspections go smoothly as well. It may sound easy to oversee the building process, but you had better have plenty of time and energy if you want to take this on yourself.
Having a general contractor to coordinate your building supplier along with the site work and preparation is crucial to reducing your building expenses. Unexpected delays can become a costly drag on the project, so keep things moving to avoid material-price increases and storage expenses if things are out of sync. The sooner you complete construction, the sooner you can open for business.
It’s now time to bring on your most valuable asset for success in self-storage: the property manager. Today’s manager needs a combination of skills including sales, customer service and marketing. The manager usually works alone and needs decision-making authority that goes along with the responsibility of operating a facility.
Be sure you’re conservative in your rental assumptions. Allow more time than you think to rent up to stabilization―typically three to five years on projects of more than 25,000 square feet. Allow for promotional discounts, and don’t be too aggressive on future rents. This economy has made it tricky to garner projected revenue, so budget for a worst-case scenario. If you have that factored into your pro forma, you’ll rest easier.
This is a general overview of key areas to be aware of as you move forward with a self-storage project. Land development involves a lot of “hurry up and wait.” All aspects of land approvals invariably take longer than expected, as does the financing process, the mobilization of the construction team, and even the lease-up period.
Budget everything on the conservative side—from time to money—and have lots of patience. With this as your foundation, along with a great site in a pocket of opportunity, you too can find success in self-storage.
John E. Barry is a self-storage broker and owner with Investment Real Estate LLC in York, Pa., which, along with Investment Real Estate Construction, provides feasibility studies, brokerage and construction services for self-storage operators in the mid-Atlantic and northeast states. For more information, call 717.779.0804; visit www.irellc.com.