By Erica Shatzer
The new year has arrived, but many self-storage professionals are waiting with bated breath to see if this drawn-out development cycle will finally end. This is especially true of owners and operators in oversupplied markets.
Fortunately, many markets experienced less new supply in 2019 than 2018, yet there are still self-storage facilities in the planning or permitting stages as well as properties under construction. While some of those plans will never see the light of day due to staunch city councils and unfavorable conditions, there also are projects stuck in construction limbo—caught between conception and completion as a result of construction costs.
Construction Costs In 2020
According to Wayne Woolsey, president of Murrieta, Calif.-based Kiwi II Construction, Inc., which was founded in 1982 to exclusively serve the self-storage industry, additional increases in construction costs in 2020 could be problematic for projects in development.
“I hope there are no further increases,” Woolsey says; “with the market trying to absorb the storage projects built in 2018/2019, further increases would push more developers into a construction hold phase.”
Woolsey goes on to explain that the past two years brought more than just a significant uptick in new self-storage supply; they delivered cost increases as well. Kiwi has experienced freight cost increases as well as installation increases in labor costs, equipment rentals, and accommodation costs. There also have been costs increases for steel components, door systems, structural steel, rebar, and concrete.
“In the same period, we have seen many direct costs increase that really have not increased since the GFC [Great Financial Crisis], so I would expect these to hold in 2020,” says Woolsey. “So unfortunately, I do not see a window for any immediate decrease in costs. Maybe toward the third or fourth quarter we could see some change.”
However, Woolsey notes that not all those costs aren’t tied to steel this time around. In November 2019, he stated that steel pricing for the period was flat. “We have not heard anything negative from the steel mills,” he adds. “We are encouraged that the typical first quarter increases will stay away.”
Woolsey divulges that a “typical” increase is “a couple of percentage points,” which he says equates to a “small amount” of money.
“The steel mills like to test the market’s resistance to the increase,” says Woolsey, who adds that those increases are oftentimes not implemented after pushback from end users like Kiwi II Construction. “That sets the tone for the next potential raise. I think with the slowing of storage development for 2020, we should hopefully see no increase in steel costs. However, storage construction is such a small piece of steel absorption.”
Flat steel costs in 2020 would be a welcome relief for self-storage developers, since facility development requires an ample amount of steel. Woolsey mentions that steel usage in self-storage is approximately 60 percent heavy gauge (structural steel) and 40 percent light gauge (doors, siding, hallway systems, etc.). He adds that while the heavier gauge steel is usually hit with price increases, now the lighter gauge steel is affected.
There is another silver lining where steel in concerned: “The tariffs are not currently impacting the steel availability or pricing,” Woolsey says.
And despite all the hullaballoo last year about the 25 percent tariffs on foreign steel, Woolsey says it didn’t amount to much. “The last round was not as impactful as predicted,” he states. “We are not currently dealing with any change to the tariffs.”
Nevertheless, he acknowledges that tariffs changes could arise at any time. “I think we agree the purpose of the tariffs is to protect the U.S. producers,” says Woolsey, adding that he is more concerned with figuring out how to monitor the honesty of the steel price increases on the U.S. production to prevent over-inflated pricing.
Staying In The Know
To combat price fluctuations, as well as changing building expectations, Woolsey and his company “stay involved,” monitor the steel index, and brainstorm solutions together. “We have had many years of experience in the design-build process of these projects since the early 80s,” he says. “These project designs have changed so much over time; we have grown up with them and all the design changes, code changes, city requirements and building costs. We often sit as a group with no particular project in front of us to discuss the most effective and efficient ways to deal with the changing requirements.”
But to fully tap into any company’s knowledge of the design-build process, and keep a workable budget, a developer should be getting them involved with the architect and the design phase as soon as possible. “Continue to reach out to us for our ideas and value engineering style,” says Woolsey. “Here at Kiwi II, we strive to provide the most up-to-date information possible on building costs and future steel price changes, along with code changes that impact project budgets. A recent change is the new energy codes; this is impacting pricing and construction schedules. We are constantly looking to improve procedures and designs to minimize this impact.”
Although zoning and permitting issues can prevent a proposed project from becoming a reality, the viability of a self-storage development hinges on costs. Obviously, the objective is to turn a decent profit, but that won’t happen if the land costs and construction costs exceed the rental rates you’d be able to charge in the area once the facility is finished.
Therefore, Woolsey offers this solid advice to developers who are looking for ways to minimize construction costs:
- Be selective. “Site selection is a big driver in costs,” he says. “As the prime sites have been selected, we are seeing tougher sites be presented. Projects with basements, walk-out basements, and zero lot lines complicate the build plus add cost.”
- Do your homework. “Keep looking for prime locations and complete a very thorough feasibility study and confirm you’re aware of any future competition entering your one- or three-mile market,” Woolsey says.
- Make plans. “Spend time creating a complete set of construction documents,” says Woolsey.
- Employ the right people. “Hire a general contractor who will qualify all subcontractors’ bids to minimize change orders,” he says.
- Have a budget. While the goal is to come in at or below budget, don’t forget to allow for unexpected costs that may arise. This can prove helpful if costs should increase during the development. “Reach out to general contractors and the top tier subcontractors (steel building, concrete, door companies) for budgeting help,” says Woolsey. “We are the biggest numbers that contribute towards the construction costs. We are available to help and provide good direction and potential future pricing changes.”
- Negotiate with the city. “Work with the municipality to minimize the exterior elevation requirements, reduce tower or parapet elements and siding design,” he says. “The elevations can add a considerable amount to the budget.”
- Check your calendar. Woolsey also suggests building outside the winter months if possible. He warns that inclement weather can add costs due to delays in the project schedule. “Rain and snow may require the projects to be re-graded or cleaned,” adds Woolsey. “Heating systems may be needed in some states if the weather gets too cold. These can be surprising costs if they are not discussed or in the budget up front.”
- Be flexible. Be open to alternatives that could save you money without sacrificing style or functionality.
On another note, Woolsey reminds developers of the potential hidden costs that can plague conversion projects. “Conversions can be troublesome,” he says, adding that older building can be harder to convert. For instance, buildings constructed before 2000 don’t have the floor loads required for self-storage and reinforcing the floors can be expensive.
There are also building codes to take into account. Woolsey mentions that in some situations it may make more sense from a financial standpoint to demolish the existing building and start over than to get it up to code and meet ADA requirements. Therefore, both the age of the building and the materials of the building should be taken into consideration before proceeding with a conversion project.
Plan For Change
Despite the fact that future costs remain uncertain, it’s always in your best interest to plan in advance as much as possible while recognizing that those plans are likely to change somewhat.
“With the added time it now takes for projects to get from the napkin design stage through the construction documents/permitting process, then the development period, this duration can take 24 to 36 months, maybe longer in come towns,” says Woolsey. “Can someone predict what the market will be like at that point? There are so many factors that change—economy cycles, higher or stalled population growth, additional competition, rental rate changes. All these can change your proforma, strategy, and project outcomes.”
Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, and Self-Storage Canada.