When it comes to choosing a site for a new project, many self-storage owners and developers take a “set, aim, shoot” approach. But in today’s market, it really pays to be cautious. You need to consider the consequences of choosing the wrong location and what you can afford to lose. So your approach is better than “ready, aim, aim, aim, shoot”.
The truth is that many developers are unwilling to perform proper due diligence when pursuing a package, which can be a costly mistake. When considering the financial feasibility of a proposed site, you should ask yourself if you are committed to selecting a excellent location for self-storage or willing to settle for something that is merely average.
Many of us make mistakes during the self-storage development process. It is difficult to set everything up from the start. But the only mistake we can’t afford is choosing the wrong site at the wrong time. Here are several key things to consider when determining if land is worth your time and money.
Visibility. While many self-storage customers search online for a self-storage facility, physical visibility to passers-by is still important. When considering a property, consider how well it can be seen by drivers along major thoroughfares. High visibility is always valuable. If your site doesn’t have it, a competitor can develop a location that does.
Existing competition. You should shop around for current competitors to get an idea of how well your setup will perform once it’s up and running. Look at rental rates and occupancy within a four-mile radius to determine if your property will be in a better location or offer other distinct benefits. A word of caution: when tracking competitor pricing, make sure they are realistic.
Future competition. If you are considering this area, other self-storage developers may be too, or current operators may be considering expansion to capture future demand. Check the availability of other nearby land on which competitors could build. Find out if the zoning in the area is favorable to your project and others. In other words, can someone other than you easily enter the market? As billionaire Warren Buffet says, “I like a moat around my investments.”
Residential growth. What is the residential development activity in the area? Multi-family and single-family dwellings can be a great supplier of self-storage customers, and any ongoing projects could be a good indicator of continued demand. Check to see if apartments or single-family homes are planned. Even complexes and neighborhoods positioned for expansion will attract new residents to the market. Conversely, you also want to know if the site you are considering is in a declining area with no new developments on the horizon.
Application for self-storage. Ideally, you would like to know the amount of self-storage per capita available within the three-mile radius of your potential site. Although an actual number may be difficult to determine, you should be able to come up with a good estimate 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 is not already zoned for self-storage, you need to know what the obstacles are to rezoning or applying for a special permit or exception. These factors can add time, cost and risk to your project. You need to dig and research, and get to know the municipality and community’s position on self-storage businesses. Are planning staff likely to support a project at the site you are proposing? What is the probability that the neighbors will oppose it? If rezoning is necessary, ask yourself if the seller of the property will give you enough time to pursue and secure the change before closing.
Topography. Look at this to determine if there are any benefits or challenges. How will the site adapt to a potential layout? How much grading will it take? Unusual shapes and orientations can sometimes help self-storage projects gain municipal approval. You should also be aware of soil and water drainage issues, as these can lead to significant costs.
Utilities. Depending on your location, there may not be existing service for electricity, water, natural gas, sewer, storm sewer, telephone, cable, and Internet. If utilities aren’t in place, you may have financial difficulty bringing them in, which can drive up construction costs.
Limit financial exposure
The above is not an exhaustive list. When you place a property under contract, chances are you won’t have all your questions answered. To understand the current and future state of the market and how a potential self-storage site fits into the picture, you need to do your homework and become an investigator, planner, and strategist. Here are some things to focus on to help limit your financial exposure.
Local insight. Brokers, planners and self-storage specialists can be great resources to help you understand how the competitive landscape will shape. Depending on the prospects, you need to determine your readiness to face future competition in addition to the current market. Pay attention. Developers who do not manage their own money often take higher risks on properties.
Real land cost. It should be clear from the list above that the actual cost of your land is more than what you pay for the property. Do your best to understand what the real costs of a finished site ready for construction will be. This includes all expenses that need to be budgeted for to run the property’s utilities, grading, storm water retention, etc.
Reduction of packages and phasing. If you are considering a developed and infill location, there may be an opportunity to sell additional land. On three occasions, I was able to sell part of a property, which reduced my land costs. I was also able to expand three facilities using a phased approach. Although it costs more than building the whole facility initially, it helps reduce risk if the site doesn’t rent as expected. Yet phasing can mean an additional $1 million per project in construction costs.
Future sale. To achieve economies of scale, consider sites that can accommodate at least 60,000 square feet of self-service storage space for rent. This is a size that most real estate investment trusts would consider buying in a major metropolitan area. While you obviously don’t have to sell your facility, you shouldn’t grow without an exit strategy. This will set you up for financial gain in the event you decide to unload the property.
There’s a lot to evaluate when it comes to selecting self-storage sites. I recommend that you consider at least 10 alternative sites to the one you prefer to help you determine which is better and more viable.
We are in the golden age of self-storage. Rates are rising as the number of new facilities being built declines in many markets. Don’t let this opportunity turn to 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 specializing in site finding for Public Storage Inc. and other developers. Today, he owns several self-storage facilities comprising over 4,000 units in the Denver metro area. During his career he has been involved in site selection, financing and third party managed properties. To reach him, call 303.888.1260; E-mail [email protected].