ViewPoint: April 2016

Posted by msmessenger on Apr 1, 2016 12:00:00 AM

Question: What is the most important piece of advice that you give to someone looking to get started in the self-storage industry?

Steve Hajewski – Marketing Manager Trachte Building Systems

Steve Hajewski
Marketing Manager
Trachte Building Systems

Location. The single most important decision you make in developing a new site is to choose a good location. And the priorities in choosing a site are changing thanks to technology. Perhaps 10 to 15 years ago, visibility and traffic count were priorities. Those are still important, but today my top goal would be to find a properly zoned parcel close to the target rooftops.

Most clients look you up on Google. And Google will tend to show the site closest to them physically. The renter may remember that site on the freeway at the edge of town, but when it comes time for them to look up a number on their smartphone, I want to own the site that comes up on top, because that’s the one that they are going to call.

There are a few reasons to build on a particular site that make me cringe. “I already own it” tops the list. The cost of the land is a small percentage of a project; you’re also going to deal with grading, foundations, driveways, buildings, gates, fences, etc. Unless you happen to own the best location in town, sell it and buy the location that will help you to succeed. Price is the other “reason” to buy that I will point out as being short-sighted. Consider not just land price, but the rental rates that you can achieve in a given location. In many cases, a premium market (yes, more expensive) parcel of land will pay for itself and then some in the form of higher rental rates. 

When you run preliminary budget numbers, it’s helpful to simplify. Think in cost and revenue per square foot rather than attempt to fully design a layout for every parcel that you look at. Keep in mind that most drive up sites result in about 30 to 35 percent of the property being rentable space.

M. Anne Ballard – President Marketing, Training & Developmental Services Universal Storage Group

M. Anne Ballard
President Marketing, Training & Developmental Services
Universal Storage Group 

All of us working in the industry have felt the recent upsurge in newcomers; having said that, we want those entering our business to be as successful and active as possible with industry professionals and our national and state associations.

  1. Join In! Get educated by joining your state and national associations and subscribe to and/or purchase publications such as this one, the many books available on the subject, attend conferences, and get all the information you possibly can.

2. Ask The Experts! Find an operator, not just your building company, who can guide you through the process of managing and operating a facility. Don’t just hire a manager who has worked in the storage business. There are many of us who do start-ups, due diligence, training, and feasibilities that spell out all the details. This alone can make you millions and save you hundreds of thousands in mistakes and missteps like office design, systems needed, unit mix, budget, income forecast, etc. Besides, your lender is going to want to see you are prepared with adequate negative cash for a lease-up or transition. Consulting early saves millions.

3. Develop For Your Market! Include the features your customers want to pay for and use. For example, wine storage may not work if everyone can build their own cellars or the average household income won’t support this feature. The same is true with lockers, we’ve seen developers include these stacked units to improve the proforma, but they sit empty in markets where no one will want them. Give them something unique that other local operators don’t provide. Get out there and personally visit all your competition then analyze what is missing and deliver on unique features, services, or amenities, remembering that customers are willing to pay more for better technology and access.

Michael A. Mele – Senior VP Investments Senior Director, National Self Storage Group Marcus & Millichap

Michael A. Mele
Senior VP Investments
Senior Director, National Self Storage Group
Marcus & Millichap

Location, location, location. While the phrase appears simple in its appearance, one of the oldest real estate sayings continues to hold value; this mantra is my best piece of advice to anyone looking to get started the self-storage industry. The self-storage ride will proceed in having its ups and downs in the market; therefore, it’s imperative that any real estate asset, regardless of product type, is selected with meaning. In the down times, the poorer location suffers the most and may not retain its presumed “cash cow” status as well as another facility in the right location.

For self-storage in particular, versus other commercial real estate assets, the right location is even more of a factor. The self-storage industry has retail tendencies involved that further elevate location as a key component of consideration. While Internet marketing has increasingly become a bigger player for self-storage, drive-by is still the king for generating new business. For most individuals, a strong self-storage brand loyalty hasn’t been developed, resulting in the selection of a facility within drive-by view.

What makes a location considered the “right” location? The ideal location for a self-storage facility should be one that has an initially high barrier of entry with facility frontage on a main road, granting it both strong street visibility and traffic. A facility that best fits these characteristics will be the most equipped for the bad times in comparison to others, armored with features that allow it to better withstand market changes.

By choosing a solid location it will strengthen the asset in its encounters with the ever-fluctuating market’s entire spectrum, whether in the positive times, the inevitable negative times, or in between. Picking the right location is a significant factor and can’t be stressed enough, especially for someone looking to get their first start in the self-storage industry.

Cris Burnam – President StorageMart

Cris Burnam

Do your due diligence. Gone are the days when you could build a few garages, buy a Yellow Pages ad, and make a few bucks. The bar is set much higher today and will continue to rise in the very competitive self-storage field.

Learn as much as you can before you fill out that loan application. There’s nothing like first-hand experience, so rent a few units to see how your competition is doing business. Spend time visiting their websites as well to see how they sell their service. Check out reviews to see what’s important to customers. Read a few trade journals and visit a trade show; you might find a mentor and learn from his/her errors. Remember, the mistakes you make before you start your business are much less costly.

Communicate clearly to everyone involved in your venture. It takes time to get everyone on the same page, but this will prevent surprises. Don’t assume; ask questions and take good notes. Don’t rush a decision if you see a “red flag;” take the time to find out all the details and their consequences.

Make sure you hire the right people too, because you can’t do this by yourself. Trust the people you hire to make good decisions with the clear policies you’ve outlined.

And make time for family, even at work!

Devin Huber – Principal BSC Group

Devin Huber
BSC Group

When making an entrance into the self-storage market, owners must make sure their facility is properly capitalized from both a debt and equity standpoint. Investors often look to secure the highest level of debt possible on their property. While this is beneficial, because it increases return on equity, it is not without consequence. The higher the leverage, the more difficult it is to weather a market downturn or a cash flow shortfall. Therefore, as you climb the capital stack and place more debt on the asset, be sure you have sufficient cash reserves should the need arise to inject equity, either to cover debt service or to bridge an equity gap at refinance.

Selecting an appropriate loan term is also vital in a successful market entrance; try to match the loan term with your investment horizon or business plan. When developing a property, you want to ensure the construction financing has sufficient term to carry the property through lease-up, and provide a cushion if lease-up doesn’t go as planned. Insufficient term, too short of an interest-only period and a lack of interest reserves are among the deadliest pitfalls of storage development. It is challenging to refinance a property with a construction loan that has not yet hit stabilization. In these situations, borrowers are often required to pledge additional equity in order to refinance.

It is also essential to match the loan term with the investment horizon when purchasing a stabilized facility. If you plan to hold the asset long term (10-plus years), consider securing debt with a term of 10 years or greater. For shorter hold periods, or when there is significant upside in the property, securing debt with a shorter maturity date can help diminish prepayment penalties when liquidating the asset. Furthermore, once value has been created, a borrower can recapture equity through a refinance, assuming they have matched loan term with investment horizon, without paying prepayment penalties. In summary, as crucial as the operation and location are to the success of the facility, proper capitalization is central to the success of the venture.