he logistics required to competently enter or expand in the self-storage industry include many facets to understand and consider.
It’s a long list that includes feasibility studies, local market demand, location, design considerations, construction costs, municipal zoning and permitting, financing, probable lease-up rates, best management practices, and staff training, as well as whether to hire a third-party consultant to guide you through all this and how to go about choosing one who meets your needs.
And self-storage is a formidable force to consider in the wider marketplace. SpareFoot, an online self-storage marketplace and provider of industry-related news, features, and analysis, said in its U.S. self-storage industry snapshot in January that the industry generates $29 billion in annual revenue, has more than 51,200 facilities nationwide, and provides more than 2 billion square feet of rentable storage space. Just over 11 percent of U.S. households rent self-storage.
M. Anne Ballard, president of marketing, training, and developmental services for Atlanta-based Universal Storage Group, says you should find someone who’s actively involved in the industry and attends industry conferences. Check their references and ask how well the consultant performed for them.
“And if I were looking for a feasibility or operational consultant, I would want to make sure they have operated storage before and for how long, and they have a track record in designing and building or helping clients design, build, and operate successful facilities,” Ballard says.
The most common mistake she finds among consultants who provide feasibility studies is that they do the study with a hypothetical unit mix and hypothetical cost to develop, she says, “which I think is sort of false information.” A feasibility study should include an exact recommendation for the site, including the unit mix, cost to develop, and a realistic estimate of the lease-up time, based on the best data that can be found.
“Desktop” feasibility studies, created using online data on a given market instead of in-person analysis of the site and the local competition—are also common in the industry, Ballard says. She advises not to make that the full measure of a feasibility study.
“It’s cheaper, yes, but who has visited those competitors to find out find out on the ground what that competitor is really like?” says Ballard. “Are they really a Class-C or -D property? If so, it’s not even going to compete with a new store and should not be included. What is the market asking those managers for that they don’t have? Those are the things that should be included in a new development—what is the market asking for that it can’t get? I think if you’re going to gamble $10 million to $15 million and then be cheap on your feasibility study, that does not tell me that you’re very intelligent.”
Jim Chiswell, though, owner of Chiswell & Associates LLC, based in Fredericksburg, Va., does use desktop studies initially. He says what he calls his site-summary memorandum, which is essentially a desktop study, serves as a good starting point to answer the question of whether the project is worth pursuing. If it is, then a more in-depth feasibility study is called for. He charges $495 for the memorandum and spends a few hours with databases and proprietary information to create it.
Chiswell started his business in 1990 and has worked in self-storage for 40 years. He consults mainly on feasibility studies but also works on new developments, acquisitions, and conversions.
“Feasibility studies range from $6,000 to $12,000 or $15,000 if you include travel,” he says. “It’s a pittance on a multistory facility that costs $10 million to build. But it’s tough when you write that check initially because you haven’t committed to do the project. But if you get the right folks, it’s the best money you’ll ever spend.”
Several large banks that make self-storage loans won’t loan without a third-party feasibility study, Chiswell says. “There isn’t a banker in America who’s made a self-storage loan who can’t pick up the phone and sell the facility, forego the foreclosure,” he says. “The borrower stays clean on paper, though he loses the asset.”
Eric Blum, president of BMSGRP Self Storage Consulting, based in Coral Springs, Fla., agrees that a desktop study is “an excellent way to know what you’re getting into.” BMSGRP provides only feasibility studies. The studies “save you money, and there’s good information there to give you an idea of what to expect.”
“Knowing those things ahead of time gives you a good idea of whether to move forward with your site and invest the time and money,” Blum says. “I always tell my clients to start with a desktop study. For me, it’s a great first look and really gives you an idea of your market. Wouldn’t you rather spend a little bit of money to get the idea rather than a lot of money to be told, ‘no’?”
If the desktop study yields a green light to proceed, Blum advises clients to then do the deeper study.
“When I get calls for a desktop study for $5,000, then that’s not a person I want as a customer, because they’re short-sighted and they’re not going to get all the information their banker is going to want to know from a desktop study,” says Ballard. “I want to make sure I include a five-year proforma of cost to develop, operating expenses, and targeted budgets and incomes so I can create a valuation that says to the customer, ‘Well, this project with these particulars is going to yield a 20 percent internal rate of return or an 18 percent. I’m going to know the answer exactly, not just take a guess. And I want to be able to forecast the lease-up rate for my customer based on what kind of product I’m putting there and what competition they have.”
For operational consulting, Ballard says you should ask: How many stores have you operated? How long have you been in the business? What’s your success track record? Have you helped your clients make more money?
Sometimes, the client doesn’t know what he needs from operational consulting. For example, clients might want someone to train their manager, but they really need to improve their operational processes, says Ballard. They need to know how to manage their revenue, increase rates, and manage delinquency. They need to know how to market and sell the project to customers.
“I ask them: ‘What is your end goal?’” she says. “Are you trying to improve your revenue? Have happier managers? Come up with a bonus program? Get more rent? So, by asking them questions we can give them exactly what they really are after. This does seem to be common sense, but common sense doesn’t always prevail. It happens all the time. It’s very common for us when we take over a store that an owner has been managing himself or herself that income increases 30 percent or more. We had two last year that the income went up over 40 percent.”
Diane Gibson, president of Phoenix-based Cox’s Armored Mini Storage Management Inc. and past president of the Self Storage Association, says to ask consultants how well they know the local market area, region, or state where your project is located. How do they plan to market your facility? And how do they approach staffing your facility?
“You’re known by your reputation,” Gibson says. “Sometimes this industry is pretty small.”
If you choose to get a detailed feasibility report, ask the consultant to come to the site, not do it remotely, Chiswell says. He meets with the client at the location, talks about what’s happening in the industry, gauges the client’s industry knowledge, and sometimes meets the client’s banker.
“People understand it’s a process that takes time,” says Chiswell. “It takes longer to get it built and open than you think, even with the right zoning in place. All this should have a bearing on a feasibility study. Self-storage is being used by people in every economic strata. You want the proforma from the consultant to be realistic about lease-up time (and other elements).”
When you approach a consultant, don’t make your first question, “How much do you cost?” Chiswell says. Focus first on the method and the report’s depth instead. Everyone must consider cost; a written proposal will include it.
“If the decision’s going to be just driven by numbers, then you’re in the wrong business,” says Chiswell. “This is a people business. I’ve preached this for years: Self-storage is not a real estate investment; it’s a service business.”
Chiswell also argues with people about whether a hotel is a real estate business or a service business. It has real estate characteristics, such as location and access, but it, too, is “really a service business.”
“I really preach that, honestly, anybody can build a storage facility,” says Chiswell. “If you’ve got a checkbook, I can hire a contractor who’s built self-storage and build it pretty close to budget and maybe on time or a little bit late these days. But then what happens? The day you get a building permit, you should be thinking about how you’re going to run the business. Because it’s only when you rent units that you’re going to make money. Should you hire a third-party manager?”
Another important question is whether the consultant has a conflict of interest with the site you’re considering. Has the consultant done work recently in that community?
“There are counties and cities in America we can’t go to because we’ve done so much work there,” Chiswell says, singling out Dallas, Miami, and Los Angeles. “Because you want to make sure the person you’re working with has that kind of ethic that they’re not going to come in having just spent a lot of time learning about a market on somebody else’s nickel and provide you all that information and basically give somebody they just did work for a brand new competitor. I’ve never thought that was an ethical thing to do.”
Always evaluate the chemistry between you and the consultant, he says, especially if you don’t know much about the industry. Can you call or email the consultant about problems? If you do, is the meter running?
“I’m not here to tell you I know the answer to every question you have, but I guarantee you I know somebody who does,” Chiswell says. “That’s just a matter of longevity really. Everyone has to get experience, but do you want the guy who’d be doing his third project and it’s yours? I don’t think so, not when you’re writing a check for millions of dollars.”
The abundance of accessible industry data enables deep quantitative analysis, “but you need qualitative analysis,” too, he says.
Some owners seeking consultants want to keep their individual identity and not be a REIT “or a cookie cutter,” Gibson says. Others want a big REIT’s brand recognition. Owners “should interview to find the style that best suits them.”
Despite its reputation as a “helpful and open” industry in which people are quick to help one another, “there are a lot of big egos out there in the storage business,” Ballard says. “But our industry is made up of entrepreneurs. After you take off the top operators, that leaves all the entrepreneurs doing what they think is best. But a lot of people think, ‘Well, I know everything and I’m just going to do what I want.’ Well, those are the people who have lawsuits and who don’t get the best performance, because they’re winging it instead of asking for help.”
Universal Storage Group charges $15,000 plus travel expenses for a feasibility study. “But it includes something no one else I know in the industry includes,” Ballard says. “It includes a site plan with a unit mix and lease-up rate for that property. Then I give the site plan and my drawings to the architect, and then they know what to build. So, I save my client money on architectural fees and change orders. I give them the right unit mix that’s going to lease up fast. And I have a track record, a long list of successes.”
Newcomers to self-storage also commonly hire an architect to design a facility for them without understanding the market or having talked to a self-storage operator, she says.
“I love the architects who work with all of us,” Ballard says. “They do a great job for us. But architects have never operated self-storage. So, we like to give the architect what we’re looking for instead of the architect giving us something they think will work. Consultants would be the person who helps you get the detailed answers and recommendations and not what is hypothetical. And a good consultant is going to save you thousands of dollars in mistakes and change orders.”
Self-storage is continually becoming more sophisticated and automated. This means “you need to understand the drivers of income and the value of training as part of your decision,” says Ballard. “And any consultant worth their salt is going to have a good rapport with all the industry vendors to help you get the things you’re going to need, and sometimes get them at a discount, like I do for my customers.”
Some people “might scoff” at Ballard’s consulting rate of $3,000 a day plus travel expenses, “but I’m going to give them back $30,000 in improvements or more.”
“I’m going to give them ways to enhance revenue, sales, marketing, and cost per lease,” Ballard says. “I typically have all the data I need to back up my processes. So, I prove to them that if you try this, here’s what you’re going to get back. I usually leave them with more homework than they ever thought they’d have and a huge to-do list.”