Increased interest in the self-storage industry raises a lot of questions regarding market potential and viability. New projects have flooded the pipeline, leaving increased margin for error within this competitive space. For peace of mind, a feasibility study can satisfy lender requirements while adding a layer of protection for an owner or investor. To understand the benefits of this deep, complex, site-specific tool and how it can be applied to development decision-making, let’s dig in to the basic who, what, where, when and why.
Who Needs One?
Anyone thinking seriously about building a new self-storage facility or expanding an existing site should consider engaging a consultant to provide an unbiased opinion on project viability. Frankly, owners, developers, investors and lenders need a feasibility study to protect their investment. Those just getting into the business are prime candidates, as the study will serve as an educational tool. Experienced owners can also benefit, particularly if they’re expanding into a new market or planning an expansion.
Lenders will often require a feasibility study. Some owners and investors see this as a negative, though it’s really just a precautionary, smart step to safeguard a project’s success while maintaining balance in the market.
Owners will sometimes complete their own study, thinking it should be sufficient; but this fails to consider the lender’s point of view. A self-study is likely to be biased because the project is the owner’s “baby.” It’ll be the “best” in the market, so of course, it’ll have the highest rents and occupancy, fastest absorption rate, and best overall return, right? Lenders don’t want to see above-the-bar assumptions. They want a realistic, unbiased and generally conservative opinion from a professional who understands the project on a broader, multi-market level.
Other beneficiaries of the feasibility study include the architectural/construction team. By reviewing a completed study, they can better understand market nuances and trends regarding unit type and size. When analyzing unit mix, designers can use the study to tailor the layout and maximize the site to its fullest potential. It also can help them understand trends related to amenities, such as office size, self-serve kiosks, drive aisles, climate-controlled units and so on.
What Does It Cover?
At the end of the day, the feasibility study won’t simply tell you whether or not to build. It’s completed on a micro-economic basis, meaning it’s site-specific and includes several components that work congruently to provide overall support to the success of a proposed project. Most studies comprise four main components: market supply and demand, site characteristics, physical feasibility, and financial feasibility.
Market supply and demand. The study should begin with estimates of current and future supply and demand. Is there enough demand to support this development? That’s the key question here, and it takes a lot of research and analysis to return an answer. Demographics are reviewed and analyzed for the primary and secondary markets, sometimes referred to as trade areas. Any projected population and household growth over the next five years will support demand. The more growth expected, the better.
Supply is identified, and proposed projects are researched to aid in a more realistic analysis of 12-month supply. Likewise, historical trends are reviewed. Various techniques are used to estimate current and future demand, generally on a per-person or per-household basis.
Other methods can also be used, such as a state capture-ratio analysis. Not all markets are concluded to be three- or five-mile radiuses. It really depends on the specific property and location. It could be as small as a 1-mile radius or as large as a 15-mile radius. Likewise, in some markets, a drive-time or polygon method should be used.
If demand is found to be sufficient to accommodate the planned development, then the site is analyzed further for suitability as a self-storage facility, including physical and financial feasibility (detailed below).
Site characteristics. Your feasibility consultant will inspect the subject property and analyze its location and characteristics relative to the market. Does it have a primary or secondary commercial location? Is it urban or rural? Does it have good frontage and visibility for use as a storage facility? What are traffic counts? What’s the zoning? Will it need a zoning change? What’s the topography? Are there any environmental concerns? What size is the land, and are there any issues with access or useable acreage?
Ensuring a property is well-suited for self-storage is important and goes beyond evaluation of general location. While a primary location may be preferable, it doesn’t ensure a project will be feasible. The buyer could be paying too much for the ground, or market rents might not be sufficient for the planned design. At present, there appears to be more demand in secondary and tertiary markets compared to primary markets that are at or over market equilibrium. Finding the right site within the right trade area is key, and understanding its suitability for storage performance plays a huge role in overall feasibility.
Physical feasibility. This section is where you come to understand what’s physically possible on the site and what’s needed in the market. It answers three important questions: What can be built? What should be built? What does the owner or investor intend to build?
Keep in mind that just because a study may advise that you can or should build something, doesn’t mean that’s your only option. You must consider your budgetary requirements. Working through the physical feasibility of the site will help dictate its hypothetical best use. Then financial feasibility can be investigated further.
Financial feasibility. To get to the numbers and tailor a proper pro forma, in-depth research must be completed and assumptions established. An in-person market survey, including norms pertaining to rental, occupancy and absorption rates, should be reviewed and analyzed to aid in forecasting property performance. Income and expenses should be estimated and projected on an annual basis, with lease-up considered in a monthly cash-flow analysis.
Generally, a five- to 10-year pro forma will be used to project the project through lease-up, stabilization and beyond. Additional considerations include discounts and promotions, other income sources, annual increases for income and expenses, estimated going-in and terminal capitalization rates, applicable discount rate to the income stream, and more.
A net present value (NPV) should be provided as well as an estimated reversionary value. In addition to the pro forma, a cost estimate should be included. This is accomplished by comparing the estimated cost to acquire the land/property and build the development against the NPV. If the NPV is greater than the cost to acquire the land and build, then the project is deemed financially feasible.
Other conclusions that should be provided are the internal rate of return and return on investment. The acceptable numbers will vary depending on your intentions. What’s acceptable to one owner/investor may not be to another. The financial indications must to be sufficient for all parties involved to achieve overall feasibility.
Where Is It Conducted?
Each feasibility study is site-specific. Other study options can be applied to a broader market or used to understand general demand, but feasibility pertains to one specific project and one specific site. The consultant will need to travel to the subject property, visit all competitors and interview managers. Though a study can sometimes be completed remotely, it isn’t generally recommended. A consultant’s job is to familiarize himself with the property, competition and market trends, which can be difficult to achieve without seeing them in person.
Types of reports that can be completed remotely include a hybrid study, expansion study, rent study, preliminary demand analysis (also called a desktop study), and others. Before requesting a remote study, check with your lender to ensure it would be acceptable.
When Is It Conducted?
A feasibility study can be engaged at any point once the property is put under contract. Ask for 60 days or more for due diligence, or just make your offer contingent on a favorable feasibility study for using the property as a self-storage facility. Put it in the contract!
If you already own the land and have plans in hand, a feasibility study can be completed any time. If you’re just searching for a site in a general market, it’s too soon. Many consultants offer additional study options to aid in site selection or a remote check of demand on a potential site. If you’re unsure whether it’s time to begin feasibility, ask a professional who specializes in self-storage feasibility or inquire with your lender.
Why Is a Study Necessary?
The feasibility study is a helpful tool for the self-storage owner and supports lender decision-making on a loan. Despite best efforts, not all developments succeed. Why not have an unbiased, third-party opinion? Though it’s an extra step that takes additional time and money, it won’t be as costly as making a poor decision.
Most feasibility professionals charge $6,000 to $10,000 for a full, in-person study. This can vary based on location, travel costs, project complexity and other factors. The cost is well worth the additional comfort and confidence you’ll have in moving forward.
A feasibility study not only protects your investment, it provides useful information to help maximize the design of your facility to satisfy market demand. Not all sites are equal. The key is to hire a professional who’ll give you an unbiased opinion. Whether the outcome results in a thumbs up or down, the cost and time involved is well worth the protection it can provide.
Amanda Helfrich, is an appraiser and feasibility consultant with Starr Commercial Real Estate in Louisville, Ky. She has worked as a commercial appraiser for 13 years and holds a MAI designation from the Appraisal Institute. For more information, call 502.807.7319; e-mail [email protected]; visit http://starrcommercial.com.
