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.
1. “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. 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 facility studies that IRE has developed over the past 20 years in the industry.
Twelve 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 career. So how long does it take to fill a self-storage facility? 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.
2. “I’ll build a small facility…”
Building 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 stormwater 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.
3. “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.
4. “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.
5. “Housing units were just built nearby…”
It’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.
6. “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.
7. “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 development. Many profitable self-storage facilities have been built in rural areas.
8. “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.
So how much of your self-storage facility should be temperature controlled? 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 that addresses the demand in the market, if any, for temperature-controlled storage.
9. “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.
So why do you need a feasibility study for self-storage development? 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.
10. “Zoning regulations won’t affect my facility’s business…”
Investing in self-storage is a great strategy, and if you’re doing it right, you could make a great profit. But if you pick a bad time to build or work against the wrong regulations, then your whole strategy may be ineffective.
Zoning regulations are sometimes relegated to the bottom of the planning checklist, but these regulations are actually a huge factor when it comes to building storage facilities. Zoning regulations can affect many different aspects of your strategy, including available areas for facilities and maximum property coverage of buildings. Regulations can also change relatively quickly, and a zoning law that helped open your business up one year may act to hurt you the next.
If you move too quickly, you could find yourself in a bad location with new competition opening up around the corner in a much better spot. When it comes to zoning, it’s best to view regulations objectively and patiently, surveying how the landscape is playing out and biding your time for the right moment to build.
Be sure to really look at the zoning regulations to determine how they will affect your customer base. It’s a vital step in the planning process and it will be very beneficial to you in the future.
11. “All this traffic means a lot of customers…”
One of the biggest self-storage development misconceptions is that a mass of traffic will be great for your business. You may be considering building your storage facility in a location that sees a lot of traffic. This locating might be situated near a main road or highway, in a prime spot for hundreds of eyes to see. All this traffic may look great, but is it really helping your bottom line?
All of that traffic could be commuters headed to work from out of town. It could be tourists taking a day trip or a vacation to visit family. The reality is, most of the people who see your storage facility may not even live nearby. It’s one thing if people see your storage facility — it’s another altogether to target people who actually live nearby and would be in the demographic to use it.
Therefore, your storage facility should be as close to your target area as possible. Look for areas in town that would be conducive to locals – maybe by groceries or convenience stores. Someone driving from an hour of town likely isn’t looking to rent a storage facility in your area. People want convenience above all else — so market that convenience to those who are close. In truth, your target audience is people living just a couple of miles from your facility. Keep them in mind as your go about your planning process, and you should see more success.
It will also help to consult a feasibility study to determine if your area is high in commuters, tourists and the real storage needs of the people in your area. This will help narrow down your strategy and base your planning on real research.
12. “Multiple locations across states will increase my business reputation…”
Multiple locations can be beneficial, but you should start expanding when you’re sure your initial investment is paying off. An early dive into expansion can create an abundance of unnecessary stressors, and you could risk actually damaging your business. Your new ventures might not see the same success as your first facility, and you might filter more time to try to grow your new facility while forgetting to maintain your successful one.
Buying a storage facility usually demands an individual self-storage business plan, and buying up several different facilities can be an overwhelming amount of work. File the rapid building of multiple locations as one of the self-storage misconceptions that can actually act to hinder your business.
Focusing on your first success also contributes to your brand and strategy — it helps you to see what works and what doesn’t, helps you build a trusted, quality facility and gives you confidence going forward. You can use that experience as a launching pad for other ventures, building up your knowledge of the economics of the self-storage business. From planning to construction to self-storage lease up time, development is a long, focused process that you should handle methodically and with clarity instead of juggling several all at once.
It’s good to look for growth, but you should do it when you know you can handle the workload and organization that comes with it. Scale slowly and wisely for optimum results.
13. “It’s just development, I don’t need to be picky…”
There’s a whole world of developers that would love to take your business. But you should avoid choosing the first one that comes your way. It’s your job to find the developer that’s the best fit for your vision and goals.
Picking the right developer is a strategy in itself. You should find a team with a great track record of working in self-storage unit construction and development. It’s essential to find a trusted, reputable source that will get the job done the right way. Along with that, ensure you communicate what you really want out of development and the image you’re trying to convey to customers. All too often the right strategy isn’t communicated well to the developer, leading to dissatisfaction and disappointment in the owner. Be honest with yourself and your developer in this process, because you want to ensure you’re getting what you want at the end of the day.
Another way to make the development process go smoothly is to start early. Schedule time to discuss intricacies in the process and important aspects such as their normal subcontractors. If you rush the process, it could lead to mistakes and shortcomings. Instead, begin meeting with developers early on to see if they’re the right fit. Sometimes it takes several meetings just to find someone you can click with and trust. It’s better to find that person sooner rather than rush through a developer process and settle for a firm you may not like.
Make Your Self-Storage Business a Success
Still excited about the site where you would like to build your self-storage facility? Our brokerage advisors at Investment Real Estate, LLC are happy to help you achieve your investment goals. We’ve been in business since 1998, specializing solely in the self-storage industry and helping buyers and sellers everywhere with their strategies and goals.
We’re a unique company in that we offer a wide range of brokerage and feasibility services, paired with our expert staff, who have had combined decades of experience in self-storage construction, development and property management. Our accounts range from single properties to multi-million dollar portfolios, so whatever your size and scale, our caring staff can help you find the help you’re looking for.
If you would like to contract with Investment Real Estate for consulting services on your new development, contact us today!