California Self Storage Investing
 |
Southern California Self-storage is no longer the “if you build it, they will come” no-brainer, effortless investment it used to be, when there was little to no competition in the industry. Today's consumers want quality and convenience.
Before you start writing checks, you need to take some time to learn about self-storage customers, and understand their needs. So, let's look at self-storage customer must-haves.
Today's Southern California consumer wants security, flexibility, excellent customer service, and an aesthetically pleasing place to store his or her things. But today's consumers aren't just people who need a place to keep their extra furniture or personal possessions, they're also local businesses, from banks to retail shops to grocery stores; they're work-from-home employees, individuals with Internet-based companies, and pharmaceutical reps; they're RV and boat owners, wine collectors, military personnel, and college students; and many others from all walks of life, who have an ever-growing amount of “stuff” and nowhere to put it.
Let's focus on the first two segments of your likely client base to determine which is more appealing to you as a prospective investor. We'll begin with residential customers.
Several types of Southern California residential communities seem a natural choice for locating a self-storage facility. Consider areas with a large retirement or nearing-retirement population, or where many couples whose kids are grown and out of the house are downsizing from their large homes into smaller, easier-to-care-for homes (or condos). These people may not want to part with their possessions, but rather store them nearby.
People who are moving into expensive, but less spacious real estate – for example, downtown lofts, or trendy renovated urban-area condos – need handy self-storage facilities for storing (and occasionally, switching out) their belongings.
Now let's look at the Southern California commercial self-storage tenant. A small retailer may not need a large warehouse for additional inventory; and a local small business owner might not be able to afford to lease expensive office space simply as a storage closet for archived records. In both cases, a nearby self-storage facility is often the ideal mini-warehouse, or the perfect space for old files, documents, and other records. Another great use of the self-storage unit is as a small scale distribution space for stock that needs to be replenished quickly and at the last minute.
Each tenant group has its attractive points. For example, commercial tenants, as a rule, tend to stay longer, and pay their rent on time, so they're very desirable. Tenants range from pharmaceutical sales reps, to small business owners, such as painters, dry wall contractors, plumbers and more. The biggest bonus of commercial tenants – especially those that are solid members of the community - is that many will commit to a long-term rental, saving you the time, money, and effort of filling that unit every month. For this reason, many self-storage facilities have become exclusively commercial storage facilities.
The Build Versus Buy Proposition
For new investors wanting in on the Southern California self-storage market, the first thing they need to decide is whether or not they will be a buyer of an existing property, or a builder-developer of new property.
Someone buying a property needs to begin by addressing the construction basics – from finding the right piece of property with the right zoning, to finding the right contractor and developers. There are many development experts in the self-storage industry, and a poor plan could be the death of your project before it even gets off the ground, so work with a builder who knows the industry. After choosing your team, you'll work with them to determine the type of facility, the construction materials and infrastructure, landscaping, lighting, and building codes. Your general contractor can help you create a budget, based upon estimated costs plus his markup.
If you choose the development approach, there are higher rewards. A self-storage facility is easy to construct. It's not too difficult of a development process. Once you get past the zoning, it's pretty easy from there on. There are a lot of providers who can help you get across the finish line.
If you choose the buying approach, it is a lower-return, lower-risk option. The challenge with this option is finding available properties to purchase. The positive aspects of buying, in addition to the low risk factor, are typically strong cash flows, and a proven location.
How Do Self-Storage Facilities Measure Up?
In theory, the operating expenses of a self-storage facility seem far less than the expenses for other types of property investments, such as residential or other commercial properties. However, to be successful with a self-storage investment – as with any investment – it is essential that you step back for a realistic look at the numbers.
Let's start by comparing rents and total development expenses for self-storage versus those of office, retail, and multi-family properties. According to American Steel Buildings, Inc., which produces self-storage buildings for investors, self-storage facilities most often have rents that are slightly less than that of other properties on a square foot basis. More to the point, though, is the fact that self-storage property development costs are between one-third to one-half the development costs of multi-family, office, or retail properties. Bottom line? Less money upfront, yet comparable rents to other property investments.
Self-storage investors will want to keep a close eye on the following three expenses as they can add up quickly: taxes, advertising, and management. The 2005 Self-Storage Expense Guidebook breaks down the national average of operating expenses as follows: on-site management: 20%; taxes: 15%; off-site management: 12%; administration: 11%; repairs and maintenance: 7%; utilities: 6%; advertising: 6%; insurance: 5%; and miscellaneous: 18%.
Another advantage of self-storage compared to office, retail, and multi-family developments is what happens in a bad economy. During an economic downswing, multi-family development occupancies might drop as much as 25 percent, and office and retail occupancies as much as 30 percent. Not only are the vacancy rates for self-storage properties impacted less, but because of their smaller operating budgets and lower occupancy needs, they can better withstand slow periods.
According to American Steel Buildings, the typical leveraged self-storage facility's break-even occupancy rate ranges between 60 percent and 72 percent; while the leveraged multi-family, office, and retail properties have break-even occupancy rates between 80 percent and 90 percent. To the investor, this means that the self-storage development has more room in which to absorb market drops.
National Development Services conducted a 10-year study of the failure rates of multi-family, office, retail, and self-storage developments in Texas, Oklahoma, New Mexico, Colorado, and Louisiana. The study found the failure rates of each property type were as follows:
- Multi-family: Failure rate of 58%
- Office: Failure rate of 63%
- Retail: Failure rate of 53%
- Self-storage: Failure rate of 8%
Essentials of Self-Storage Investing
To assess the self-storage needs in your Southern California community, start by checking out the internet to see what's out there. Use a resource like Mapquest to determine where the various existing facilities are located, then visit them, posing as a potential customer.
When sizing up the competition, and determining whether there is room for another storage facility in your area, remember to consider the following important aspects of a self-storage facility, regardless of whether you decide to buy an existing structure, or develop a new one.
Size: While the majority of self-storage facilities are comprised of ground-level units, there are those that have built up, instead of just “out.” In such a case, the owner must install service elevators that are convenient for those carrying larger items from their vehicle to the elevator.
It is recommended that investors building their first project stick with the following requirements:
- The facility must have a minimum of 55,000 square feet net rentable;
- The facility should be located in a population center of at least 750,000 people;
- For a single-story facility, the size should be three to five acres.
If this is your first project, it is recommended that you build it, sothe natural buyers of self-storage, large self-storage companies, will want to buy your property. So, if you decide the business is not for you, your exit strategy is easier.
Security: Security is one of the top requirements for most consumers and businesses, so an investor should not skimp on this. Most Southern California investors hire security guards, and put many or all of the following measures in place: restricted access that requires all members to sign in and out during each visit to the property, no admittance of non-members onto the site unless they are accompanied by a staff member or security guard, 24-hour closed-circuit TV with or without on-site monitoring, motion detectors and other alarms, and a key code or swipe card needed to enter the entire facility and/or one's specific unit. Remember that even the most basic security measures should include general alarm systems – including fire and smoke detectors – electric or non-electric perimeter fencing, or the newest break-in deterrent – concrete walls (which also keep potential thieves from seeing into the facility and being able to plan a burglary).
Flexibility: Flexibility includes everything from your hours to the ease at which a customer can drop off and pick up belongings from his unit. Some self-storage facilities today offer a premium service – at a premium cost – to accommodate the customer's needs: they'll drop off a storage unit at the customer's home, where either the storage provider or the customer will pack it, and the self-storage employee will deliver it to the facility. This is a trend that is growing in popularity, so investors might want to consider implementing this service. However, keep in mind that this added service means buying or leasing vehicles, paying vehicle/moving insurance, getting bonded and insured drivers, and a host of other considerations.
Services: Service “extras” – which may be offered as fee-based or free, value-added incentives to the customers – can include dollies, loading trolleys, even workers, to help customers load and unload storage items. Some self-storage facilities (usually the larger ones) now offer amenities fit for a king – or, at least for a businessperson – including such perks as mailboxes, administrative services, meeting rooms, and more.
Location, Location, Location: The self-storage market area is the three- to five-mile radius around your facility. Do your homework at be sure that the property is feasible.
Insurance: Keep in mind that, with regard to tenant property, most self-storage facilities include a waiver of responsibility, along with a statement that the tenant must hold his own insurance for his stored possessions, within their rental agreement. Many facilities also offer their tenants the option of purchasing insurance to protect the contents of their storage units.
As a self-storage owner, you should be aware of the many types of insurance you need to consider purchasing, including property, business interruption, general liability, limited pollution removal, workers' comp, and umbrella policies.
The Opportunity is There
In his book, How to Invest in Self-Storage, RK Kliebenstein notes that despite the success of self-storage facilities, the industry remains “relatively unsophisticated and highly fragmented.”
“Today, roughly 75 percent of self-storage facilities are owned by small independent ‘mom and pop' operators,” said Kliebenstein. While consolidation is occurring in the self-storage industry, it is still not a common occurrence, simply because most self-storage facility owners find that self-storage is such a great, high cash-flow business, that they don't want to sell.
Your Commercial Real Estate Broker
If you have any questions regarding Southern California commerical real estate, please contact Joseph Dodge today. As your Southern California commerical real estate broker, you can be assured that we will always look out for your best interests. Please call or email today, and we'll be happy to assist you throughout your real estate transaction.