Stop! Do Not Pass Go 
Feasibility Study Required


By Erica Shatzer

In the game of Monopoly, players move their piece around the board in an attempt to purchase as many properties as possible. When a player has procured all the properties within the same color group, he/she can begin building houses, and eventually hotels, to increase those properties’ rental rates.

Anyone who has played Monopoly knows that Boardwalk is typically the most coveted property on the board. Despite having the largest price tag, it has the ability to command the highest rent. Nevertheless, buying Boardwalk isn’t always the best strategy.

Similarly, in the self-storage realm, that attractive parcel in a desirable location may not be a feasible fit for a self-storage facility. There are many more aspects to consider besides the site’s visibility or traffic count. For this reason, a feasibility study is an essential—and oftentimes required—first step to any development project.

Unbiased Studies
Regardless of your real estate and/or self-storage experience, or lack thereof, an objective look at the potential site through a feasibility study should always be a part of your due diligence process.

According to JoBeth White, president of Development Services, Inc., the Colorado-based firm that specializes in feasibility analysis for self-storage, RV/boat storage, records storage, and storage condominiums, developers should hire a third party with “no emotional ties to the deal” to conduct the feasibility study.

Ted Culbreth, vice president of sales and marketing for Boerne, Texas-based SBS Construction, Inc., concurs. “In general, a feasibility study is a small insurance policy that the decisions you’re going to make will work,” he says, adding that those decisions require sound judgement and not emotion. For this reason, it is usually unwise for the developer to solely conduct his/her own research for the feasibility study, as everyone tends to think their project will be a successful endeavor. Unfortunately, that’s not always the case.

What’s more, anyone who has any sort of interest in the potential project—from the financial institution to the contractor or vendor—could be persuaded to make the project seem more feasible than it may actually be to “make a sale”. As Thomas Krendl, president of Tucson, Ariz.-based SkilCheck II, Inc., points out, “There are people who will write anything” to make the project look good or support their intent. “Never hire a builder or anyone connected to the property to do the study.”

The fact of the matter is that a “weighted” study could negatively impact the entire market area. For example, a biased study that shows inflated demand could encourage a developer to build more storage supply than can actually be absorbed by the market, thus distressing the vitality of the existing self-storage properties. It could also result in an unprofitable unit mix or product types that aren’t truly needed in the area. 

For an even less biased input, Culbreth encourages developers to seek someone who isn’t local to the market in question to conduct the feasibility study. “Someone local may have preconceived notions,” he says. “Whereas, a non-local person will have an unbiased opinion of the market and provide a fresh look.”

Furthermore, White adds that, compared to an individual’s own research, a third-party feasibility study firm “could uncover facilities that others didn’t know exist,” which could potentially push the project from feasible to unfeasible.

When it comes to selecting someone to do the study, Culbreth advises his clients to refer to vendor listings of companies that conduct feasibility studies specifically for the storage industry to ensure they “know the caveats of self-storage”; these can be found in the “Products/Services” section of MiniCo’s annual Buyer’s Guide, under the “Feasibility Studies” heading. He then suggests that developers “pick a few and interview them like you would an employee”.

Another note about the selection process: Krendl warns developers not to hire an individual without solid experience in self-storage development. For instance, he notes that there are plenty of so-called “professionals” on LinkedIn who have not invested into self-storage development and, therefore, lack the “gut instinct” necessary to determine whether the space being studied would be a good investment.

“Feasibility studies are 50 percent science and 50 percent gut,” says Krendl, noting that there’s a lot of number crunching involved as well. “It either feels right or it doesn’t. You need someone with a good gut. The person should be independent, unbiased, and experienced, with at least 10 or, even better, 15 years in the industry.”

Culbreth adds, “Remember: The study is only as good as the person who does it.”

The Aim Of The Game
Although there are no set “rules” for conducting a feasibility study, most self-storage professionals who do them follow a similar methodology before giving their synopsis about whether the project is likely to be a profitable venture.

“You can collect data from different sources,” says Krendl, “but you need the right data.”

The data to which he is referring includes demographic information, a market survey, land costs, and zoning details. “You need this information to make an educated decision,” Krendl says, adding that the objective of the game is to determine if the proposed project is worth pursuing in that particular market area.

Culbreth breaks down the feasibility study even further. He states that a thorough study will define:

  • The market area, which Culbreth says may not necessarily be a one- to three-mile radius any longer thanks to the internet;
  • The competition and the composition of the competition;
  • Occupancies and rental rates of the competition;
  • The demographics of the area;
  • The makeup of the market;
  • The square footage per capita; and
  • The most significant expenses, including taxes, utilities, and payroll. As a side note, Krendl mentions that feasibility studies need to be more accurate when listing the managers’ salaries. “They aren’t being paid $10 an hour anymore,” he says, adding that not incorporating the most truthful information within a feasibility study can skew the project’s final determination of viability.

And with all the data the needs to be collected, it’s imperative to utilize the most up-to-date information as possible. “You can’t use demographic information that’s two to three years old,” Krendl stresses. “That doesn’t make sense.”

Krendl recommends that demographic data be obtained from a reputable source, such as Claritas, which updates its demographic information every six months, instead of relying on data from the U.S. Census Bureau, which is only collected every eight years. You can pull a simple demographic study from Claritas for about $100.

Nonetheless, Krendl reminds developers that a demographic study is merely a “snapshot” of the time it is conducted. Therefore, keep in mind that the data will not be an exact representation of the area’s demographics upon completion of the proposed project, which can take 18 months or longer.

For that reason, it is wise to seek information about the market’s projected growth. If the area’s population is not expected to grow, it must have enough pent-up demand to make the facility feasible. However, Krendl advises developers to rely on the facts and not put their faith into uncertain forecasts. He recalls a self-storage facility that was built based on the belief that Caterpillar, a manufacturer of construction equipment, was going to bring 1,000 new jobs to the area. Unfortunately, that didn’t pan out and the floundering facility didn’t meet its lease-up projections.

While job relocations are a driver of self-storage demand, and certainly could have increased that site’s occupancy, it’s best not to depend on information that isn’t official. White has the same warning when it comes to building based on residential developments or apartment complexes that haven’t yet been constructed. “If you plan on future growth, it could backfire,” she says, noting that construction projects may not stick to the anticipated schedule or could get scrapped altogether. “Be more conservative and not count on it!”

On another note, White encourages developers to look at the sizes of single-family homes in the market as well as the renter marketplace. “If you don’t have enough true growth, you need to have apartment renters to absorb the new supply,” she says, adding that there’s a smaller radius for an apartment market.

Additionally, regarding demographics, White brings up the matter of socio-economics. “You can’t tell that from visiting a site,” she says, encouraging developers to drive the marketplace to determine who will be most likely to use the self-storage facility. Although there may be affluent clientele in the area, your actual customers may be from the other side of the tracks, so to speak. White says to ask yourself whether those customers, who may be in closer proximity to the site, can afford the kind of storage facility you plan to build.

Switching gears from demographic information to the market survey, Krendl is adamant that the reports used to determine existing supply as well as projects in the pipeline should only be used as a base. “You still have to check,” he says. “You need to investigate the market.”

So how does Krendl determine a market area’s demand? He pulls reports from Radius and REIS, utilizes information from real estate brokers, visits the existing self-storage facilities, and talks to the self-storage managers who work at those properties for their honest input about the area’s demand for self-storage. While he’s gone so far as to rent a unit to obtain accurate information, Krendl typically tours the facility and either counts the available units or takes photographs of the property’s site map with his phone.

Indeed, it’s important to utilize methods that can glean a more accurate depiction of the market at hand than simply relying on internet research and industry reports. “Those [reports] give some of the best info,” Krendl says, “but you still have to verify with on-site door checks.”

Last but not least, one must take the land costs into consideration. Krendl suggests using the 66 percent rule that was created by industry veteran Buzz Victor. Although it’s a general rule that was not used for conversion projects or multi-story facilities, it may still be a valuable calculation to try before you buy. “It helps you determine how much you can spend for land,” says Krendl.


The 66 Percent Rule

The result of this equation determines the most you should pay per square foot of land.

Step 1. Average the per-square-foot rate for a 10-by-10 and a 10-by-15 unit.

Step 2. Multiply the total by 0.66.

Example:

The monthly rent of a 10-by-10 is $100 or $1,200 per year. That unit will earn $12.00 per square foot. The monthly rent of a 10-by-15 is $120 or $1,440 per year. That unit will earn $9.60 per square foot. The average of the two is $10.80. When you multiple that amount by 0.66 (or 66 percent), the result is $7.13, which is the most you should pay for each gross square foot of land you purchase.

How To Win
All the information contained within a feasibility study is vital in order to make an educated decision about a project’s viability, but there are a few other key items that White says shouldn’t be overlooked.

First of all, she stresses that “any competitor is a competitor”. In other words, just because a facility isn’t new nor outfitted with climate-controlled features, doesn’t mean that it should be omitted from the market study. “They should still be looked at,” says White, adding that it should come down to all supply versus demand. “How much more can the market bear?” is the question that must be answered. 

White also reminds developers that the per capita for self-storage square footage is not a set number. “Every market is different,” she says.

On that topic, Krendl adds, “The 7.5 square feet per person isn’t a good metric for every market. Some can be oversaturated at four square feet.”

Obviously, the main objective should be to avoid saturating the market with too much new self-storage supply. “Consider the number of projects under construction and in the planning/permitting process that will open before you,” says Culbreth.

Roll The Dice
The moral of the story: Self-storage development is not something to leave to chance. There are numerous factors that should be carefully and thoroughly considered before taking the gamble. Haphazard self-storage development can tip the supply/demand scale from equilibrium to oversupplied—an action that negatively impacts the rental rates (and livelihoods) of every self-storage operator in the market.

“I wouldn’t spend a nickel without doing due diligence,” Krendl says. “Be realistic and realize the harm that could occur when building in the wrong area.”

Various Uses Of Feasibility Studies

According to Culbreth, feasibility studies can serve multiple purposes throughout the entire development process. For starters, the majority of lenders require one prior to issuing funding for the project as they aren’t in the business of operating distressed self-storage properties.

Then, the information contained within a feasibility study can be put into a proforma to determine its potential for success. Lenders will require a proforma as well, so obtaining a feasibility study puts you ahead of the game in that regard.

In addition to lenders, basically anyone hired to work on the project can utilize the feasibility study to ensure better results.

“General contractors like them,” he says. “They should be used as a recipe for what’s to be built.

Culbreth goes on to say that architects should use them as well. “The design process is easier with one,” he says, noting that feasibility studies help determine what type of storage facility to build, its square footage, and its unit mix, as well as its features and amenities.

“You do need it to build what needs to be built,” Culbreth adds. “You don’t want to build something that’s not going to be successful.”

Worth Its Weight In Gold

When it comes to feasibility studies, there’s no such thing as a free lunch. Even if you decide to conduct the study yourself, which isn’t advised, you’d still be spending your precious time and energy doing the research and collecting the data.

While feasibility studies can cost up to $9,000, which is a pretty penny to spend on a project that may prove to be impractical, it’s money well spent.

When you take into consideration the total investment of a self-storage facility, it’s only a drop in the bucket. For instance, a $10,000 feasibility study is merely 0.2 percent of $5 million project.

That’s a minuscule amount to pay for the assurance that the market can in fact support another self-storage facility.

“It’s too huge of an investment to not put in the money for a sound study,” says Krendl, who typically charges between $6,500 and $7,500 for a full feasibility study that he calls a “partner-ready package”.

“Don’t do a cheap study” adds Krendl, who emphasizes that seeking out a cheap study that will simply make the project look good on paper can potentially “taint the market”. 

Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, and Self-Storage Canada.

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