Self storage has seen some dramatic changes over the last few decades it has been in existence, especially in the last 15 years. In 1993, there were approximately 21,300 self storage facilities in the United States. Today, that number has more than doubled, with industry experts reporting roughly 60,000 facilities. Those facilities comprise more than 1.7 billion rentable square feet of storage space.
Along with this substantial growth has been a positive and progressive change in the industry's image. What was once considered the stepchild of the real estate world has become the darling amongst other non-performing real estate sectors. In addition, Wall Street has now been keeping tabs on self storage with the addition of some major investment firms and several new REIT's being formed over the past five years. Moreover, the self storage industry has become a more mature and sophisticated business than what its earliest pioneers probably ever predicted.
In the early days, self storage was a means to add income to a piece of property until it was developed at a later date into something more profitable. Today, it has become that “something” more profitable and is quickly becoming a more sought after end use for certain parcels of vacant land. Self storage facilities are moving from the warehouse districts and industrial parks to more desirable main street locations with high visibility and traffic counts. Many facilities are now being developed in upscale retail areas or close to high end residential neighborhoods. They are no longer run by mom and pop couples in their retirement job, but rather by professionals who are serious about their business.
These professionals are knowledgeable about every aspect of their business from marketing, to leasing and creating ancillary forms of income. These managers strive to excel in the areas of customer service and work to maximize the efficiency of all aspects of their facility.
As a result, it is becoming increasingly important for developers and investors to carefully consider each new self storage project. It has become essential for developers to painstakingly consider all factors when searching for a self storage site which includes, but is not limited to market and feasibility studies and the competition. Today's developer needs to spend more time meeting with others in their local market, especially the zoning and economic development offices. One can gain valuable insight into the trends and nuances of a particular area, and what the competition may be planning.
While the REITs are no doubt the biggest players in the industry, it is important to note that self storage as an industry is still dominated by smaller investors and developers. This is due to the fact that the top 10 companies in the industry hold only 12% of the market share in terms of the number of facilities, and roughly 16% when considering total rentable square footage. In addition, the top 50 companies represent a 15% market share in terms of the number of facilities and 23% in total rentable square footage. No matter how you slice it, the majority of self storage owners are most definitely smaller owner/operators.
Among this larger segment of owner/operators are many who are new to the business of self storage. Many of these investors are from other real estate sectors that have transferred their skill set to this industry. They have channeled their efforts into self storage due in part to its more positive return on investment as compared to other property types. These investors have realized that unlike other commercial and retail sectors that self storage success is not dependent upon having anchor tenants, providing a more stable income for the potential investor. In addition, many of the newer investors to the industry have deeper pockets and institutional partners that are bringing more dollars to the table.
All this means that a developer needs to be more responsible when launching into a new project. This includes a more thorough approach to due diligence when picking a site, and taking the necessary steps to educate one's self about the industry as a whole. It also requires attention to detail in all aspects of the operation of the facility which includes marketing, maintenance, and developing ancillary income streams.
Developing a facility means gathering and utilizing all the tools available in order to have a complete understanding of the dynamics of the self storage industry and the market in which you are going to build.
Never have the issues of site selection and project feasibility been more critical to the self storage developer than right now. Today's self storage industry is vastly different from 15 years ago when the “if you build it, they will come” attitude was the most prevalent view. What we now face all across the country is a competitive marketplace that in many areas is over built. That being said, there are still thousands of parcels that can be successfully developed for self storage.
The question now becomes whether a developer has the discipline and persistence in his or her research to find the right one. The keys are to be sure to ask the right questions and then to be realistic in your search and expectations. And above all else, don't compromise your research and force a site to work if it goes against your findings and the targets you have set.
Of course, the first question you need to ask yourself is why do you want to develop a self storage facility? I have seen many newcomers to the industry believe that just because the person at their local facility told them that they were full meant that there must be a huge demand in their market. Or another simplistic reason to get into this business in the past has been due to the fact that an investor “already owned the land, so it'll be cheap to develop”.
The investor who develops a facility based solely on the basis of one or even both of those premises may quickly become a “don't wanter” in the near future.
Greater care must be taken to find out how many facilities are in your target market and to find out what the average rental rates are. One must also become adept at determining land values and what zoning classification allows for self storage development in your community, and ultimately, who will manage the business once construction is completed. I'm also amazed at how many people have never attended an industry trade show, or don't subscribe to the multiple industry trade publications when entering the industry. Some planning should also take place with regard to an exit strategy should you decide to sell or retire from the business.
In summary, doing your homework is essential before jumping into the self storage business, and is absolutely critical when it comes to site selection and project feasibility.