After dropping precipitously during the recession, construction of new self-storage locations is finally approaching its pre-recession pace. Depending on your market, the concerns over overbuilding will always be rearing their head, but the demand for storage reflects a changing consumer dynamic. Storage utilization has increased from one unit per seventeen households in the mid 1990’s to one unit for every ten households today. Combine that with increases in multifamily construction and smaller homes in urban markets, the storage market doesn’t look to be running out of steam anytime soon.
So what are developers looking for in their prospective self-storage locations?
- Is it a good location? – This, of course, is an obvious question for decisions related to real estate of all types, however self-storage locations bring some interesting nuances. Much has been done in terms of standardizing the criteria that indicate a high potential location in terms of traffic counts, populations, incomes, etc. However, it pays to dig deeper. Which way are populations trending in that submarket? What are the breakdowns for household size, multifamily construction, and other factors that may enhance a local demand for storage.
- What are the competition doing nearby? – Considering the competitive landscape for a potential self-storage location requires an analysis of numerous factors, including not just the existing self-storage square footage, but the types of self-storage in the immediate service area, climate-controlled versus non-climate-controlled, the occupancy of these facilities and rates they are charging, and new facilities that are expected to come online during the stabilization period.
- What makes this site more or less valuable than another site? – Potential self-storage locations in a particular area can have vastly differing values as storage sites because of qualities specific to the site. One site we have been evaluating recently sits on an island of Industrial zoning in a sea of storage-restrictive zoning. This factor alone makes it a vastly more valuable site for storage than the one immediately across the street, which would require complex rezoning before any construction of self-storage could take place. Other sites may have proper zoning or an excellent facility for conversion, but lack the road frontage or some other factor necessary to optimize the site for storage. These factors may also affect the competitive analysis if, for example, a nearby competitor is operating at capacity but the site has weaknesses compared to the site being considered.
- What is the plan for design and development of the facility? Being able to manage the costs during the design and development phase is critical. If you don’t maintain these resources in-house, you will need partners you can trust that can bring in a quality product, on time, and on budget. Moreover, in many locations, they will need to be able to design a facility that is not only functional and within the budgetary constraints, but also satisfies the demands of local planners and the surrounding community.
- What is the strategy and time frame for getting the project to stabilization? On a new self-storage project, everything will hinge on getting the project to stabilization. The profitability of the enterprise will never materialize otherwise and it will be difficult to realize the full market value of the property for an eventual sale. What’s your marketing strategy? How many customers do you expect to acquire and lose each month? What percentage occupancy do you consider stabilized? What is your break-even cash flow and what percentage occupancy is this equivalent to?
- Do you want to bring in a management partner? The decision to bring in a management partner requires careful consideration. It will immediately reduce your NOI significantly, but, if you pick the right one, it will also significantly reduce you NOH (net operating headaches). One factor to consider is how the management company will market the facility. We see many that completely lose their identity and are simply placed into a competitive, price-based marketplace for customer acquisition. This reduces their ability to compete on quality and price their services higher than lower quality competitors. It also fails to take advantage of local and mobile SEO tactics to drive customer traffic to their self-storage location.
- What is your exit strategy? This is key. Are you planning on holding through stabilization and selling at the top of market value? Do you plan on maintaining the property for cash-flow and/or building a portfolio of self-storage locations? Regardless, you should probably be having discussions sooner rather than later with representatives from the self-storage funds buying properties in your region. The market has driven down cap rates and we’ve seen some remarkably high prices per square foot, especially in portfolio acquisitions. Whether this trend will continue is far beyond the scope of this article, however, it is probably safe to assume that consolidation probably continue and it’s always better to have a seat at the table. Here’s a helpful link on valuation: http://bit.ly/2g3YnCS. The takeaway is to maintain a pulse on the market by working with a broker or an appraiser long before you actually intend to list or sell the property, with the understanding that setting the value is the most important step in the selling process.
David Spencer is a member of the commercial brokerage team at The Moore Commercial Group in Decatur, GA. The Moore Commercial Group assists owners of self-storage facilities with prospective acquisition by privately held self-storage investment funds.
Self-storage Locations: 7 Questions to Consider
Construction of self-storage locations has rebounded since the recession. This article examines the evaluation process for a new self-storage location.
Moore Commercial Group