A methodical approach greatly reduces risks and increases the odds of success. That starts with finding the right site. But what constitutes the right site?
That question has a multipart answer, several industry experts say.
A third-party feasibility study early in the process is “critical,” says Tarik Williams, president of TLW Construction Inc., based in Gilbert, Ariz. Williams thinks most self-storage developers have a good idea of what constitutes a site that’s right for development. They have a general sense of the market and the area’s rates.
“However, you’re looking at spending $10,000 on a feasibility study for a project that might cost $10 million to $15 million,” he says. “It’s money well spent to manage the risk.” David Dixon, Atlanta-based Universal Storage Group’s COO, calls the cost of a feasibility study “a rounding error” compared to a project’s total cost.
“I personally would not go into any endeavor without having another set of eyes on it to check the market conditions, occupancies, the rates, saturation points, and the viability of zoning,” Dixon says. “Developers understand the necessity of the studies. Lenders won’t move forward without it.”
Universal doesn’t do “desktop” feasibility studies, says Sarah Beth Johnson, Universal’s director of sales. Those studies are limited to online research. Instead, the company first gets the address of the site in question or a place near it and “looks from 30,000 feet [to decide] whether the feasibility study is worth it,” Dixon says. With this first step, “I always say we can’t necessarily give you a really good ‘yes,’ but we can give you a good ‘no,’” Johnson says.
Universal does a two-phase feasibility study. The first phase is to assess supply and demand. They send someone to “shop the market,” look at the conditions, and judge the site. If everything looks right, then they’ll engage an architect to do some preliminary floor plans to get a unit mix. They don’t engage a civil engineer at this stage because “they’re very expensive for the feasibility,” Dixon says.
Universal also designs self-storage facilities. After they assess supply and demand, M. Anne Ballard, Universal’s president of marketing, training, and developmental services, draws plans to scale by hand with the entire unit mix judged most desirable. Then Dixon will do a five-year proforma based on that.
Cecelia Parra agrees that a feasibility study early in the process is very important. Parra is vice president of Noah’s Ark Development, a business unit of The Parham Group, based in Bulverde, Texas.
The feasibility study determines whether self-storage demand exists in the market in question, says Rachel Parham, president of Noah’s Ark Development and NDS Construction, another Parham Group business unit. If demand exists, then the details enable them to decide what unit mix they’ll design and build.
Charles Plunkett, founder and CEO of Capco Steel Inc. and Capco General Contracting, based in San Antonio, Texas, says for the typical developer—excepting “an extremely seasoned developer or a big REIT”—a feasibility study is “probably the most important thing.”
Plunkett has been in the business for 38 years. He has seen developers who get partway into a project, get excited about it, spend $50,000, “and get blinders on,” even when it’s not a viable project.
“They want to press on,” Plunkett says. “My thing is developers are eternal optimists. The glass is always half full. A third party gives a detached opinion, an unbiased opinion. They’ll be cautious. A third-party feasibility study is the cheapest insurance policy you can buy.”
A typical self-storage project will require the developer to spend $25,000 to $50,000 before they know whether the project will work. “That’s the price of development,” Plunkett says. “If you can’t afford that, you have no business being a developer.”
A thorough feasibility study gives the developer a detailed picture of the market and whether demand calls for a new facility at a given site.
Even with the feasibility study in hand, developers should “continue to pepper the feasibility company with questions and continue to study the market, reach out to city officials, and compare timing with other projects coming up in that area,” Williams says. “It takes constant study.”
Parra suggests learning about other facilities in the market and their lease-up rates. Track planned facilities in the development pipeline and cross-reference it with municipal data, such as permits granted, planning, and zoning committee meeting minutes.
“Where’s the traffic coming from and going?” Plunkett asks. “Typically, people rent storage close to home. It’s not an impulse buy. In the old days … 75 to 80 percent of traffic came from drive-bys. Now it’s by looking it up online. Figure out the demographics, income. People with big houses generally don’t rent storage.”
Twenty years ago, developing a site near a big box store or another business with heavy traffic “was incredibly critical,” Williams says. The majority of tenants rented self-storage after having seen the property while out and about. Now, people often use their phones to search “self-storage near me.”
But building a facility near a major road or highway is still better than having a “really strong three-mile radius where all the tenants are coming from,” he says. “You’re reaching out five or even 10 miles.”
Plunkett says the ideal location for self-storage is on the edge of the main business district near residential housing, on a corner with two access points and slightly elevated, in an area with daily traffic of 100,000 vehicles, and near a school because “everybody in the area is bringing kids to school and will drive by.”
“That’s the perfect site,” he says. “How many of those factors can I get?”
Assembling a project team early on is indispensable, according to industry experts. That team usually includes an architect, a civil and a structural engineer, a construction general contractor, a geotechnical analysis expert, and a self-storage real estate professional.
Most deals Williams has seen recently are structured with a two-stage contingency process through the land’s purchase agreement. The first phase is generally more legal in nature. It includes an American Land Title Association survey, easements, liens, and hazardous materials. The second phase involves entitlements, working through site plans, elevations, city approval, landscaping, a geotechnical survey, an architect, a zoning lawyer, a civil engineer, and contractors for conceptual budgeting.
“The most successful projects have all these early in the process,” Williams says. “The feasibility starts when an owner finishes general real estate due diligence, which is usually 30 to 60 days from a contract escrow.”
Whether the developer has experience with self-storage, or they hire Plunkett’s company to make “a roadmap for them,” the team is fundamental. First, get a contract on the site with a specified due diligence period. Assess entitlements and hire an architect and a civil engineer.
“Those unseasoned developers don’t understand the whole process,” Plunkett says. “If you think the site is good and the price for land is good, then have the feasibility study done. A smart developer would bring in a contractor and maybe architect at that point. It takes time for feasibility study. Proceed with what you can do during that time. Maybe spend a little bit of money for an architect to draw up a preliminary site plan.”
A developer needs a reasonable estimate of the cost to build the project, adds Plunkett. Utilities or soil problems can bring unexpected costs.
Site work causes most construction budget overages. Stone in the soil, bad soil, or drainage problems can be the culprit. Capco “missed by a million bucks” on its budget for a project five years ago in Franklin, Tenn. “We had to haul 700 truckloads of dirt out,” says Plunkett. “It’s possible to miss something even with diligence. Tell your geotech guys to over-bore. We called for 13 borings on that site. If we had done 20, we would’ve found it. Our $7 million budget turned out to be $8 million.”
Current Market Conditions
Even if you have the right site in hand, today’s rising interest rates make development harder because banks are more conservative and less willing to lend, Williams says. Construction costs are still high, though they’re starting to fall. And self-storage rental rates are softening.
“But people are still getting deals done,” says Williams. “It goes to reputation.”
Dixon hasn’t seen as many new developments planned or being built as there are now since 2007.
“Occupancy and rates are falling,” says Dixon. “Move-ins are good. Move-outs have increased 20 percent. Saturation is coming. I thought interest rates would slow development down, but they haven’t.”
Jerry LaMartina is a freelance reporter and editor based in Shawnee, Kansas.