Today, more than ever, I am convinced that conversion of an existing building into self-storage building is one of the best ways to get into the business.

I am writing this at the end of 2018. Prices for existing self-storage are still very high. Anywhere from a 5.5% CAP rate to 6% something. I really have yet to see one for sale over a 7% CAP, even though interest rates have gone up.

For us smaller investors, buying an existing self-storage and getting any kind of return that matches the risk involved is very hard to do.

I am sure you have looked at a number of self-storage projects for sale and said: “…this doesn’t make any sense.”

Conversions in the Self-Storage Business 

When I speak of conversions, I am talking about taking an existing building and turning it into a self-storage project.

I will list and go over the four main benefits I see in utilizing this strategy today, but all of the basics involved in determining if a self-storage project is a good one are still in play. I have written about them before, but let’s review here.

Today, the biggest risk facing us as investors in self-storage is overbuilding. 

The good news is self-storage is very much a “submarket product”. In other words, the submarket for your facility is not the city or the county, is usually only a three to five-mile radius. On average in our portfolio, 86% of our self-storage customers live in that market area. 

So it is fairly easy to determine if the market area of a potential conversion has too much self-storage.

How much is too much?

Well, on average, about 7.5 square feet of self-storage per person in that market area is the national average. It can vary from state to state and city to city. But let’s say if we are looking at a potential project and it turns out to be 4 square feet per capita. That indicates there is most likely demand for more. 

If it turned out to be 13 square feet per capita, well that tells us that there is probably more supply than demand.

A city, state, or even a country being “overbuilt” is interesting information, but for the most part useless. What is going on in that submarket, however, is very relevant. 

Remember, always get a feasibility report to validate your initial determination.

If the US is becoming overbuilt, it is happening submarket by submarket. I know there are a lot of underserved submarkets today and our job is to identify them and create supply.

This episode is about how to do a conversion to fill that gap.

Also, don’t forget the rest of what makes a good market. Population, population growth trending upward and good income for your area of the country. I tend to look for mid $40,000 average income in a submarket per year and up for midwest and southern. If I was in California or other parts of the country, I would probably need more.

Never, do a conversion, or any other kind of step into the self-storage business just because you can at a location. If the submarket fundamentals are not there, do not do the project. I am speaking from experience. It is not fun to be sitting on a slow leasing project where you are not a breakeven yet. There are a lot more interesting ways to lose money and to spend your time.

 

 

The 4 Benefits of Doing a Conversion Today 

Let’s look at why conversions are a good way to get in the self-storage business.

What we are looking for as smaller investors is a return to match the risk. 

Building a facility from the ground up is a valid way to create self-storage, but it is also riskier. I have learned that again first hand.

From the time we obtained our original feasibility report and went through all the approvals, site work, and construction time it was over a year and a half. By then, the market changed and a lot more space hit the market. 

Usually, in a new construction project, you may not hit break even until 55% to 62% occupancy. This can take a two to three years in most cases.

So, I see four main benefits of doing a conversion today as an entry point into the self-storage business.

Conversions 

1. The speed at which you can start getting income.

In most cases, when you do a conversion, there is no site work to be completed. This keeps cost down, but more importantly, it speeds up the time before you can start generating income.

We have found that we can average around 3,500 square feet a week once an erector gets started putting up self-storage units on a conversion project.

On a two-story project, we usually phase in the construction anyway. On the first conversion project we did, we erected half of the first floor and then got a CO (certificate of occupancy) which allowed us to start getting income.

This was less than six months from the time we closed on the building.

If you would like to see a video of this conversion project, I made back in May of 2015 you can view it here.

On our first new ground-up construction project, it was 15 months before we could start getting income. On our first conversion, it was five months.

Conversions can drastically reduce the amount of negative cash flow until you hit break even.

2. Typically, conversions cost less than most other ways of getting in the self-storage business.

So besides the fact in most cases you can start getting income earlier than new ground-up construction, typically the cost is less. Therefore, your cash on cash return is greater.

Now at the time, I am writing this, steel prices are very high because of the person in the white house. His protectionist trade policies have really impacted our industry in a negative way.

However, this won’t last forever. When he is replaced, self-storage fabrication cost should return to normal. It may adjust down to a higher number, but I am sure it will have stabilized.

I have found that the fabrication of a self-storage system for conversion is the least expensive fabrication we have ever paid. This is important because the system is the highest single line item in a self-storage construction budget in most cases.

In benefit 3 we will be discussing two stories vs. single story. In most cases, if you are erecting a storage system inside an existing building if it is a single story or the units on the top floor are very inexpensive compared to other storage systems.

There is no weight on top of the units, so light gauge steel is used throughout. Before the person in the white house, we were paying about $7.50 per square foot for the top floor or single story conversion systems to be fabricated and delivered. 

Also, there is no insulation in these systems (any insulation that would need to be added would be on the building itself), the erection cost can be as low as $3.50 per square foot.

If you are creating more than one floor, we usually have to have supporting steel every ten feet on the first floor, or any floor with one above it. It holds up a four to a six-inch metal tray that holds concrete for the flooring on the next floor.

These supports are usually the framing and it is made of a higher/stronger gage steel.

Our cost was in the $9.50 to $11.00 per square foot range for the first floors. Usually the same erection cost.

There are no insulation or roof systems. This will most likely be the lowest cost self-storage system you will ever need.

We have been able to do our conversion creating first-class institutional grade projects in the $27 to $36 per square foot range, not including the cost of the building. This includes electrical, plumbing, security, insulating the building, and rehabbing the existing building. 

Now, this cost can very be depending on what part of the country you are in. Often, impact fees, fire suppression requirements, and regulatory environments can add a lot of additional costs. But as a whole, the cost of a conversion is usually a lot less than new construction.

In every case of a conversion we have been involved in, our total cost, including the building, has been around $50 per square foot.

3. Easier to earn additional income as you phase in the Self-Storage Project.

In every conversion we have been involved with, we have rented out portions of our buildings while we do the initial phase of self-storage.

Yes, on new construction, you can rent portions of the land you are not building on for parking. That is a good thing. But in a conversion, you have a lot more options. We have generated income from office tenants, warehouse tenants, indoor parking, as well as outside parking.

In our first conversion project, our partner ran a sign company out of half of the building. We had $42,000 in income before we leased the first unit. And being a partner, he was motivated to move when it was time for the expansion into his space. That same space could generate over $100,000 gross income with two floors of self-storage.

4. Typically, conversion projects have a higher value upon completion than a typical single story self-storage project.

One of the best features of a conversion is the ability to go vertically.

If at all possible, make sure you have approximately 17 feet clear in warehouse height. At least for a portion of the building. This will allow you to create more than one floor.

In a 42,000 square foot warehouse building, we were able to get 66,000 net rentable square feet. You buy 42,000 square feet and generate much more in income-producing square feet. 

Usually, you will get between 70% and 73% efficacy. In other words, if you have a 100,000 square foot floor plate, you can get between 70,000 and 73,000 square feet of income-producing square feet. The rest are hallways, loading areas, offices, restrooms etc.

So if you can double that or even more, that is very efficient.

Also, these are usually 100% or close to that, climate controlled units. So all or most of your net rentable square feet are generating the maximum income for your market area. Our conversions are our highest income producing projects in our portfolio.

And we all know the value of the project is a function of the income.

So for the calories expended, you will create more wealth in conversion than most other entry points into the self-storage business.

Conclusion

There is a risk in every deal. As a self-storage investor, our job is to quantify, minimize, and control the risk as much as possible.

Conversions are a great way to accomplish this task.  

My experience is that getting to breakeven in conversion is much faster than new construction. 

And we have not even mentioned the benefits of recycling a building and the positive impact on a community by not taking existing green space and developing it. I will leave that to others to discuss. 

My focus is to support investors who want to get into the self-storage business or grow their self-storage business, and I am convinced conversions are a smart way in today’s market to accomplish both. 

For details on how to analyze a self-storage project click here. This is a free video training series on how to analyze self-storage.

Thank you and good luck as you get into the self-storage business. This is by far the best business there is for the small investor.