Unit Mix for the Next Millennium

By Dan Curtis

Now that the self-storage industry is more than 30 years old, it can be considered a "grown-up" member of the business world as well as one that continues to improve. An important consideration in this continuing improvement is the proper use of unit mix.

As an example of how something good can become something even better, consider a Texas property of 500 units built in the early 1970s. Totaling 100,000 square feet, the units are all 10-by-20s, and each unit rents for $50 per month. The facility has always been nearly full. Helped by low expenses and taxes, the project has been paid off for years and provides about $240,000 in annual net income. At today's cap rate, it is worth about $2.4 million, or about $24 per square foot, a handsome return on a project that cost about $1 million to build.

That's not bad, but if the project's unit mix was more like the current standard, including climate control and current pricing levels, the same facility could easily bring a net income, before expenses, of $600,000 annually. At about the same cap rate and expenses, the project might easily be worth $5.4 million. It would also be much less vulnerable to competition, and easier to sell and keep rented.

This facility provides the perfect example of the importance of a good unit mix. As development continues,and competition stiffens, and as better storage products are offered, it will become even more important.

Much was learned about the profitability of self-storage in the '70s and '80s, but in the '90s we hear fewer stories of a facility's unit mix being totally dedicated to the one-size-fits-all formula. The influence of Public Storage, Shurgard and other REITs has been strong, as they are now more competitive. Major owners have also contributed to a much better self-storage product. Early in the industry, the theory had a Field of Dreams approach: "If you build it, they will come." But, as we approach the millennium, we should probably focus on a more suitable maxim such as, "Build it smarter and increase income."

Today, builders must contemplate careful land planning in order to effectively profit from available land space. Unlike in the past, environmental issues must also be satisfied in the early stages of planning. Increasingly tougher building codes and higher land costs are also factors in predicting project success. These issues all effect the final unit mix and the eventual bottom line on income.

Factors Affecting Project Feasibility and Unit Mix

Long before determining the correct unit mix for a facility, a developer must consider the practicalities of building in certain locales. Although not a guaranteed formula for success, the following list includes factors that weigh heavily on a self-storage facility's outcome:

• Population. Determine the population within a three- to five-mile radius, using small ratios for dense, urban areas and a larger radius for rural areas.
• Average age of population. Seek out a marketplace where the average age is slightly above 33.5 years old, which is the national average.
• Income. This should be slightly above the national average of $34,000 per year per household.
• Education. This should be above the national average of 11.4 years.
• Nationality. Mixed areas are best.
• Family size. Smaller families generally have more disposable income.
• Climate. Moderate and warm areas have larger concentrations of self-storage.

Influence of Types of Living Units

When determining the feasibility of a self-storage project, developers should also consider the types of housing in the area:

• Single Family. These have good potential, especially if houses have single-car garages and no basements.
• Multi-Family. These have the best potential if income level is high and garages are not provided.
• Town Homes. Usually, storage is limited and owners are mobile, making this climate attractive to self-storage development.
• Mobile Homes. Space is drastically limited and, usually, both homeowners are employed.
• University Housing. Although this is a seasonal renting area, storage is well used by this group.
• Military. Always a good prospect for storage, but unpredictable military-base closings can drastically damage a self-storage business.

Collecting the Facts

All this demographic information can be obtained in various ways. For example, utility companies have huge bands of collected data, real-estate companies have information on who is moving in or out, and companies such as National Decision Systems in Washington, D.C., have complete data that can be purchased for a minimal cost. Check the Yellow Pages directory for the "Market Research" listings. Builders who own storage facilities may also have collected a large amount of information, as do local chambers of commerce. Keep in mind, though, that some prospective builders may want to keep intentions confidential.

Once all the above data is gathered and plans are being consolidated, competitors in the targeted area must also be surveyed. Honesty is always the best policy when interviewing a competitor's manager. Interviews should always be friendly and never combative. Share information and, if managers are friendly, ask if they know other managers in the area. They may know one that could be considered as a manager for the new facility being planned.

When doing a competitive survey, make certain no project is overlooked. A new one may not yet be in the Yellow Pages, or may be on a street normally not traveled or in a low-visibility location.

With all of this demographic information collected, a prospective builder may still not have all the answers, but a few basic guidelines can be helpful. Keep in mind that every area is unique and different problems can also create possibilities. For example:

• Multi-family, condos and apartment housing offer the largest rental potential.
• Military and commercial renters remain tenants longer than others.
• University and single-family renters use smaller unit sizes.
• The average unit mix varies 85 to 120 square feet in size.
• High-income tenants in transition tend to rent larger-than-average units.
• As projects fill up, phone calls for larger units typically increase.

Stay Flexible

No guidelines for unit mix will work verbatim, which is why it's so important to remain flexible throughout the whole procedure. Remembering this, a builder may elect to phase a project, leaving as much as 25 percent or more to be completed at a later date. In large projects (100,000 square feet or more), it is not unusual to set aside as much as 50 percent of space for future buildout. This "set aside" space can be used for bulk storage. If outside, it can be converted to RV storage, which also creates a profitable ancillary income. Also, when phasing it is practical to purchase partitions and doors for installation at a later date. Obviously, this helps to reduce immediate construction costs.

Most tenants prefer outside units for ease of accessibility for loading/unloading, which entitles the operator to charge a premium for these spaces. Nevertheless, interior units may have a marketing advantage for security reasons, and they might be better protected from moisture, bugs or rodents, offsetting the convenience of drive-up units. If land use dictates the use of inside units, the average size will still be about the same as outside units.

Climate Control

All facilities, whether new or conversions, should feature at least some climate control. On the average, approximately 40 percent of U.S. storage units are climate controlled. Rent premiums for climate control are usually 25 percent to 60 percent higher than conventional storage. Operating costs for climate-controlled units are approximately 10 cents per square foot per month, but this varies depending on the climate conditions in different parts of the country. Climate inside may vary from a low of 40 degrees in winter to 90 degrees in summer. Much of the time, it can be controlled by using dehumidifiers.

Multi-Story

As land costs rise and land availability declines, multi-story storage becomes a viable alternative. Under-utilized land had always been a problem. With multi-stories, land utilization can far exceed 100 percent. Building codes require a design load of 125 pounds per square foot. Construction cost per unit is somewhat higher as space is lost to hallways, and the extra expense of elevators must also be included. Fire sprinklers are usually required, and unit mix will be nearly the same as in single-story construction.

Conversions

This method of self-storage development has recently been gaining in popularity. Utilizing a big box in good condition but with an obsolete use is now being done in all parts of the country. Column spacing developed by building size may dictate odd unit sizes, but that is no real problem. Renters may prefer a 5-by-10, 10-by-10 or 10-by-15, but will nevertheless accept a 7-by-7, 8-by-12 or 12-by-12 at the same price level, once they have pictured how their possessions will fit into that space.

Conversions are easy to develop in phases by simply holding an area in the building for later build-out. Often, in second or third phases, the large unit mixes that were in the first phase are used again, probably because of acceptance by the public.

Conclusion

To achieve the right unit mix, builders must first study the demographic of the targeted area, noting the traffic patterns and location of competition. Higher land costs may require multi-story development and a climate-controlled building with higher rent. Unit mix will remain about the same as in conventional storage. It is preferable to build an upscale property with a variety of unit sizes. A mix with limited unit sizes may be hard to rent, and the value of a property is greatly enhanced by keeping units rented at the highest possible rental rates.

Dan Curtis is vice president of Douglasville, Ga.-based Doors and Building Components Inc. The company provides the self-storage industry with roll-up steel doors, filler panels and partitions and complete hallways systems, among other services. Mr. Curtis is a frequent contributor to Inside Self-Storage as well as a speaker at numerous Inside Self-Storage Expos. For more information, contact DBCI at (800) 542-0501.