The self-storage industry has changed drastically over the last two decades. An industry that has never been considered an overly important part of the commercial real estate sector is now consistently providing solid returns and a safe haven to yield starved investors. While other commercial real estate sectors have been dealing with vacant buildings, delinquent customers, uncollectable revenue, turbulent economics, and burdensome government regulations, the self-storage industry has been thriving. According to a report released by Green Street Advisors in May 2020, the self-storage sector had the lowest decrease in property values in comparison to other commercial real estate sectors over the preceding 12-month period. A period which included both nationwide lockdowns due to the pandemic and overall economic instability. The most recent quarterly financial reports, released by the publicly traded self-storage REIT’s, showed that during the 2nd Quarter of 2021 each of the REIT’s exceeded 95% in overall occupancy. In essence, it’s never been a better time to be a self-storage owner or operator. Success breeds new competition and for self-storage investors or developers, the investment landscape is now a bit more perilous. According to the August 2021 Yardi report, there are a total of 2,357 self-storage properties in various stages of development. If you’re considering developing a self-storage facility, then it has never been more imperative to consider having a self-storage feasibility study completed on your potential investment.
So, what is a feasibility study? A feasibility study is a detailed physical, operational, and financial review of a potential self-storage development. This is not an appraisal but more of an extensive business plan, with detailed operational and financial underwriting. A feasibility study should be designed in a way that provides an in depth, but easy-to-understand, model of a potential self-storage development. During the development process potential investors, finance partners, contractors, architects, engineers, real estate professionals, etc. will reference your feasibility study for information vital to the success of your project. These potential project and vendor partners must be able to easily understand the milestones of your potential project and how you plan to reach them.
A self-storage feasibility study should include multiple items. First, your feasibility study should include an opinion of the overall project. Does the author of the report believe the project will be successful or not? Why or why not? What supporting data or documentation supports this opinion? Your report should also include an executive summary or narrative reviewing items such as the market of the potential project, construction, municipal information, land/parcel information, facility operations, and financial analysis.
Next, your feasibility study should set an overall market area and include an overview of the potential self-storage competitors in that market. If you are commissioning a full feasibility study this market overview should take place in person. Technology is great and many items needed for a feasibility study can be obtained through electronic research, but nothing can replace a “boots on the ground” review of a potential market. A competitor review should include items such as competitor locations, estimated size of the competitors, amenities, operational review, class types, estimated occupancy levels, and competitor pricing. Your competitor review should also include a breakdown of potential self-storage competitors that are verified to be in any state of development. Your feasibility report should also include a demand analysis. A typical demand analysis will review the overall supply and projected self-storage demand of a market by analyzing demographic data relating to population, businesses, and households.
Finally, a self-storage feasibility study must include a financial analysis of the potential project. A critical piece of this financial analysis is the development of a facility’s unit mix. Your feasibility study should include an estimate of a potential projects gross building square footage and net rentable square footage. Depending on the parcel of land or the market area this gross square footage may be realized by utilizing single story construction, multi-story construction, or a mix of these on a given parcel of land. The estimated net rentable square footage should then be utilized to determine the potential project’s unit mix. Remember, customers do not rent self-storage specifically by the square foot, like they do with office space. Customers rent self-storage by choosing a unit size that best fits their needs, which is why having the right unit mix is critical to the success of any self-storage facility. To finalize the financial analysis, your feasibility study should include both line item and annual projections considering lease up estimates, potential revenues, potential expenses, potential financing and debt service terms, potential valuations, and potential returns.
One of the questions most frequently asked regarding self-storage feasibility studies is “Can I do this myself?” or “Should I hire someone?”. There are a few reasons why you should consider hiring a feasibility consultant. The first is that a lender may require an independent feasibility study to finance a potential project. This requirement will typically vary depending on the lender and the overall experience of the developer. In addition, investors may also have a similar requirement before investing in a project. The second reason is knowledge and experience. Yes, self-storage is an amazing industry, and you can learn it over time, but it’s difficult to learn everything you need to know on the fly. Most potential developers are very good about collecting information about a potential market, but they get stuck on how to process that information into something tangible. A feasibility consultant will know how to utilize that information and will help you identify any potential red flags with your project. Then finally, just having someone that you can speak with during the development process can be invaluable. Often an engineer, architect, contractor, lender, or investor will have questions about a project. Your feasibility consultant can assist with these questions and make sure you are getting the right information to the right people.
Typically, a self-storage feasibility study will cost between $7,000 to $11,000. If you need a self-storage feasibility study, take your time, and conduct some due diligence on different providers. Interview multiple people, ask questions, review and verify their experience, request proposals, and ask for references. Just following these few simple tips will help you find the right person for both you and your potential investment.