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Misconceptions About Self Storage Development

Right now the self storage industry is in a construction boom, with many self storage facilities under construction all across the country. Chances are good that if you’re reading this blog, you are considering building a self storage facility, or there’s one being built near your facility. Below is a list of the most common misconceptions that we see when developing a self storage facility.

I’ll fill it in 12-18 months…

So many factors go into calculating the demand for a self storage facility in any market at any given time, that it can be challenging to pinpoint how many months it will take for the facility to lease up. However, we do see consistent trends for lease-up based on the many self storage feasibility studies that IRE has developed over the past 20 years in the industry. 12 to 18 months is virtually unheard of in lease-up times for a self storage facility with 50,000+ square feet. I have managed many self storage facilities through lease-up in my self storage career. Based on my experience, I advise self storage developers to financially prepare for the 50,000+ square feet facility to take three to four years to reach 85% maturity.

I’ll build a small facility…

self storage unit constructionBuilding a facility under 40,000 square feet is not nearly as cost effective as building a facility of 50,000 square feet or greater. Some of the reasons include storm water management costs, on-site management costs, and other fixed operating expenses. Typically, when we evaluate a proposed development that is under 40,000 square feet, it does not deliver acceptable returns. The exceptions to this rule of thumb are if the site is going to be built in multiple phases (and subsequent phases will take it over 40,000 square feet), if the development is a conversion of an existing building that is obtained at a reasonable basis, or if the site is in a high rental rate market with low cost of site acquisition.

I can just market it online…

It’s dangerous to bury your new site at the back of an industrial park, residential neighborhood, or on a tertiary road. Your lease-up period will be markedly slower, even with significant investments into online marketing or great signage. There is only so much that you can spend on digital marketing before you’re wasting money. The most powerful marketing tool you can use at a self storage property is having self storage doors visible from the road. Two common types of weak sites that we see are flag shaped sites and sites that are obscured from visibility on the main road but have large signs. Signage does not compensate for seeing storage doors when potential customers are driving by at 45 miles per hour.

I already own the land, so it will be cheaper…

Cheaper is not always better. It’s important to ask yourself, “Would I buy this land from somebody else to develop into self storage?” If you build a self storage facility on a site without demand in the market, and then your facility takes five years to fill up; you could potentially go bankrupt on it with carrying costs. That’s rare, but more importantly, you may be missing out on more lucrative opportunities to sell the land for another use and build self storage elsewhere.

Housing units were just built nearby…

New Row House ConstructionIt’s very tempting to look at the new housing development going up down the road and assume that it will drive demand for your proposed self storage development. However, there are several reasons it’s best to ignore that development in demand calculations. Subdivision development is historically risky and can take years to fill a neighborhood with homes or buyers for homes. Moreover, even if they were able to build a 250 home development and fill it up overnight, it would only generate demand for about 4,000 square feet of self storage. Considering that most sites start at 50,000 square feet (in order to be economically sustainable), a developer should be very cautious of including demand from housing units that are being built.

I’ve developed XYZ, so self storage will be easy…

Self storage is a unique real estate product type in that it is also an operating business. There are many site design considerations that can simplify operations, such as gates at the end of driveways to push snow out of drive aisles or including large windows on a building with interior units facing a road in order to expedite lease-up. Even if you’ve built offices, apartments or other types of real estate, you will save a lot of time and heartache by investing in general contractors, architects and building suppliers who specialize in self storage.

Self storage doesn’t work in rural areas…

Many self storage sites are developed by investors who live close to the development site. They know the community and have found an opportunity for development through their personal networks. If you are casting a wider net to look for a development opportunity outside of your area, we encourage you to not overlook rural areas. If you have a site that may work for self storage (on a heavily traveled road relative to the area, with great visibility and appropriate zoning), feel free to reach out to us for a supply and demand study to determine whether the market there will support a development. Many profitable self storage facilities have been built in rural areas.

The more temperature controlled square footage, the better…

One trend that has dominated new development in the self storage industry over the last few years is temperature controlled storage. In urban areas, it is typically the best way to maximize the square footage you can fit on a small piece of land. In suburban and rural areas, developers often decide to add temperature controlled storage because of the premium in this type of storage over drive up, non-temperature controlled storage. As enticing as that 25-30% premium in pricing is, we recommend that you do not make more than 25-35% of your square footage temperature controlled. The majority of your tenants will not be willing to pay that premium, so you end up renting temperature controlled storage to them at drive up self storage rates, and in turn the HVAC expense will eat up your profit margin. Any feasibility study you have done for your site should include a unit mix suggestion which addresses the demand in the market (if any) for temperature controlled storage.

I don’t need a feasibility study…

If you’re building in your hometown, you know it better than anybody. You know the clientele for your future site, their price sensitivity and the general zoning laws. It can be tempting to build a self storage facility without a feasibility study. It is very risky, though. There can be any number of pitfalls to your development that you may not see. Calculating demand for a facility is difficult, and best done by a consultant who has reviewed the lease-up results for many self storage facilities and can evaluate your market dispassionately. Beyond the risk mitigation element, a qualified consultant can recommend modifications to your site that may expedite lease-up, increase rates per square foot and lower costs. The small price you pay for a self storage feasibility study will certainly outweigh the expense.

Still excited about the site where you would like to build your self storage facility? Our brokerage advisors are happy to help you achieve your investment goals. If you would like to contract with Investment Real Estate for consulting services on your new development, contact us today.

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