Before you dive into self storage ground-up development, it is always good to know other peoples’ mistakes. Fortunately for you today, if you are considering developing storage, I have made a lot of mistakes and can share my experience.
I could have made this article “100 mistakes to avoid”, but then no one would read it. Fortunately, most mistakes are not fatal mistakes, but some have been very costly, time-consuming, and caused a lot of headaches.
Nothing is more fulfilling than seeing your vision take material form as a facility. Creating something from nothing, of having an idea take form and exist, is one of the most satisfying experiences anyone can have.
So, avoiding some of the big pitfalls and mistakes can really enhance the experience of fulfillment as you step into this future you are creating.
In an effort to support any new self storage “developer” using new, ground-up construction as their entry point into the business, or someone expanding their existing business, let me share some of the bigger mistakes I have made over the years.
Mistake One: Location
We all know that self storage has become a retail business, needing retail type locations.
However, as you search for the right site, in most cases, retail priced land is too expensive. Some retailers get hundreds of dollars per square foot in sales; thus, retail land is the most expensive land out there.
Even though self storage is often thought of as a retail business, most storage buildings generate a maximum of 20-something dollars per square foot income and downward.
It does not take long to realize, most “retail” zoned and priced land doesn’t work.
So, after a while, we set our sights lower. At least I have.
There is one site, in particular, I have been involved in that I sure wish I wasn’t. It is at the end of a dead-end road, with hotels, retail, and apartments all around it, but this is an example of not holding out for a better site.
Today, I need sites on heavily trafficked roads (high car counts for that market) and, most of all, visibility.
In our portfolio, anywhere from 30% to 45% of our new leases come from people who identify “drive-by” as how they chose our facility to rent.
In other words, they drive by so often, see it, that when they have a storage need, our facility is top of mind.
We don’t always need “retail” land, just land that is visible, and lots of people for the market size have the opportunity to see it.
This also assumes that the average household income is not too low, and there is a good population. The actual numbers will vary depending on where you are (i.e., south and mid-west are lower than coastal areas, for example). I have had problems in areas where the average income is in the $30,000’s. I have had great success in the lower $40,000’s in places, so I am not going to give a hard and fast benchmark number.
Just look for disposable income in the market. Is there a Starbucks nearby? Do you see furniture stores instead of furniture rental locations?
Mistake Two: Not Compensating For The Time Involved In New Construction
I really wasn’t sure what to call this mistake, but in our first new construction project, we did not adequately understand and make adjustments for the amount of time involved.
For example, before we closed on the land, we did all the normal things:
- Feasibility Report
- Construction and site work bids
- Layout the approval process and know if what we needed to do
- Land was zoned all we had to do was get site disturbance permit and building permit
- Get loan and construction loan
- LLC formation and partner negotiations
This is what we have done for expansions and conversations, so we thought we had a handle on the amount of time. We closed on the land, got the loan, then started.
Well, it is often said the key to success is how well you implement plan B.
It took way longer to get the site disturbance permit and more engineering work than we ever expected or have had to do before.
Construction took longer. We couldn’t get the initial contractors in when we thought we could, they went to another job, and you know the story.
By the time we were ready to open and start leasing, a year and a half had gone by, and the submarket was in a different state than when we had the initial feasibility report.
We did not adequately assess the time involved; thus, we had many impacts on the project we did not foresee.
Sometimes, one cannot close until approvals are received. That would be nice, but one can’t always get the seller to wait. Just make sure if you close before approvals, you not only know you can build the project but how long it will take. Add more time to whatever you are told.
Mistake Three: Not Having enough Contingency in Your Construction Budget
This goes hand-in-hand with mistake number two. Because of the length of time, our bids went up as well as the normal unexpected events that cause price increases.
We had a 10% contingency factored in and wished it had been more. I would not use 15% (or more) on new ground-up construction projects.
Mistake Four: Not Phasing In As Much As Possible
Contractors, suppliers, and sub-contractors will be advising you how much of a “cost savings” you will receive by building out all, or as much as you can of the project upfront. This may be well and true, but they are not servicing the debt on the project.
Other than vertical, multi-story climate-controlled buildings, one of the beauties of self storage is its ability to be phased in.
Phase in as much as possible and do not get too far ahead of the market.
You will have to make decisions like:
- Do we pour all the pads while the concrete truck is here?
- Do we do the site work on phase II now to reduce costs?
- Do we go on and get the building for phase II fabricated because prices are going up?
And many more.
All I can say is I wish we had done more phasing in than we did. You will love servicing debt on empty units (keep telling yourself you saved money).
Mistake Five: Over Engineered Or Overbuilt Projects
We have experienced some of this, mostly with HVAC, but I have seen a lot of it in the market as we look at self storage to purchase.
Remember, you are creating self storage, not a monument for future species to dig up and marvel over.
If possible, every project I would build would be steel walls, steel roof system, and chain link fence. We start there, then make adjustments needed to get the approvals.
Why?
Because in reality, we will get no more for a 10 x 10 in a steel building than I will in a brick one, concrete block, one with decorative ironwork in the fencing…you get the picture.
We will use system buildings as much as possible, and the minimum amount of “aesthetic” features. Our goal is to get an ROI not to create a structure you take your spouse to and show off what a beautiful building you created. I think simple steel storage systems are the most beautiful thing in the world. My wife says I am a little off.
The beauty of the self storage business is its simplicity, so keep that in mind as you build the project up.
Those are some of the big mistakes I have seen and experienced. Learn from others and the mistakes they made so you don’t have to learn from your own in these areas.
It’s not that you won’t make mistakes, you will. Just don’t make these if you can avoid them, and you will experience the fulfillment and the excitement of creating a future for yourself and your family that self storage offers.
