If you’re contemplating a new self-storage project, it’s imperative that you perform a feasibility study, particularly in these times. Many markets are overbuilt or at the saturation point. You don’t want to build a project that becomes the tipping point to rent concessions and occupancy slides in the marketplace. A well-done feasibility study by a third-party, unbiased provider will tell you if your project has the attributes it needs to succeed or, more important, if it fails to meet the criteria for success.
Study by Whom?
First and foremost, consider who is actually going to prepare and complete the study. Ask a lot of questions before you award the assignment. Is the person unbiased in his opinions? Be wary of those who have something to sell should the study conclude with “build.”
Does the provider have experience in developing self-storage projects, either for a large company or his own portfolio? Is this experience recent? Things are much different today than 20 years ago in almost all aspects of development and construction.
Does the provider have experience in what it takes to lease up properties to 85 percent occupancy? Everything looks easy on paper, but leaseup is the toughest thing to accomplish.
When did the provider last research development and construction costs? A well-prepared study should include a construction budget that’s very close to actual costs. It should also reflect the latest market rates and terms for financing. Remember, a great feasibility study is the road map to a successful project.
What the Report Should Include
Let’s look at what comprises a quality feasibility study.
Executive summary. The report should include an executive summary that clearly states if the project should or should not be built and the reasons why. You’re paying good money for a clear answer―demand it. Your bankers and partners may not read the whole document, but they will read the executive summary to get that answer.
Site examination. The study should evaluate the site being considered and provide recommendations on general layout. Most feasibility-study providers are not professional engineers, so don’t expect CAD drawings. You want a general site design you can provide to your engineer to save time and money and, most important, create the best design possible.
This general design determines the approximate square footage a site may produce, which is critical to the study. The design will also dictate construction costs, which will vary widely between a traditional single-story, drive-up facility on a flat lot and a four-story structure built into a hillside, for example. To maximize a site’s square footage, consideration should be given to visibility, office location, security, ingress and egress, where to push snow in northern climates, storm-water management, and building location.
Demographic analysis. Who are your customers and how many are there? That is the question this section should answer. There are several indicators that bode well for self-storage. Apartment renters are typically good tenants, as well as military and college students. Household-income levels give some clue as to the likelihood of renting self-storage. Be careful of levels that are too low (can’t afford it) and too high (will build their own storage in their 10-car garage).
Residents in rural, suburban and urban areas have different motives for self-storage use. Your provider should be experienced in these various markets and rely on industry data to make an educated estimate of the customer base. This will later be used in the demand analysis.
Competition analysis. Every site has competition. To a greater or lesser extent, competition will determine how much storage you build and the rental rates you can achieve. Your feasibility-study provider should personally visit each competitor and provide a report on the location, general appearance, security, occupancy levels, rental rates, manager capabilities, store hours, amenities offered and size of the project.
Determining the average unit size also will help in designing the ideal unit mix for the subject property. All this data will be used to determine demand and rental rates, as well as how to operate the store competitively. A map showing competitors’ proximity to your potential store and pictures go a long way in telling the competitive story.
Supply and demand analysis. This is the most critical part of the study. It must answer the question of whether there is remaining demand to support the development of a new store.
Supply is the easy part. Simply visit each competitor in the market and determine how many square feet or units it has. The market may be measured in blocks in the urban areas and miles in suburban and rural markets. Three and 5-mile market rings are the most commonly used. Be cognizant of drive times. In traffic-congested areas, drive time will be more critical than distance.
There are numerous methods employed to determine demand. Square feet per capita is the old standard, which has generally been replaced by units per household. The formula used is not as critical as the provider’s experience using it. What’s the history of projects built based on his formula? Did they meet their lease-up projections? Be sure there’s some room for error in determining the project’s viability. In other words, make sure there’s excess demand in any market you’re considering, not just enough to squeak in your project.
Financial projections. If the supply and demand analysis is the most critical, the financial projection is the second most important. There are markets in which there’s excess demand, but due to low rental rates or high construction or land costs, the project cannot meet the financial return hurdles demanded by most developers.
The financial model must take into consideration the amount of square footage to be built, how many units of what size and rental rate, phasing of the project, construction costs, financing rates and terms, operating costs and, most important, how long the lease-up period will take. The lease-up period will determine how much operating capital and lease-up reserves are needed to get to the breakeven point.
Many projects are not cash-flowing today, and the owners are in financial trouble because they didn’t allow enough time and money to get the store to the breakeven point. Make sure the model your feasibility provider uses takes rent discounts into consideration and that rental rates are not inflated. The model should cover a 5- to 7-year period, month by month, so you can see the seasonality.
Here are a few things to watch out for in a feasibility study. Ask the provider how he takes the following into consideration:
- No discounts in financial pro formas
- Aggressive lease-up periods (more than 2 percent or 1,500 square feet per month)
- Poor design layouts
- Aggressive rent levels
- Small unit mix (small units get high rents per square foot, also called a banker’s mix)
- Too much climate-controlled space
- No space for snow
- Understated construction costs
The feasibility study is a great tool to help you determine the viability of your project. Interview several providers and get multiple quotes. When completed, ask to see a draft of the report before it’s published. You may catch a few items that need to be corrected or clarified. The provider would much rather make those changes for you up front rather than later.
Remember, supply and demand changes every three miles or so. There are development opportunities out there. Find those sites, get a feasibility study done, and do the American capitalist duty of filling that remaining demand!
John H. Gilliland is the CEO of the Investment Real Estate Group of companies, which provides self-storage brokerage, management, construction, consulting and feasibility studies for facilities in the mid-Atlantic and northeast United States. To reach him, call 717.779.0804; visit www.irellc.com.