Phasing Your Self-Storage Project:
Why Building In Phases Can Increase Profits
By Dan Curtis
No matter what industry you’re in, phasing and expanding are
synonymous. After all, the best projects always leave space to
expand when the time is right. And timing is everything. Waiting too
long will lose the opportunity.
This was a lesson learned the hard way by some self-storage
developers in New Orleans who hesitated to proceed with expanding a
project. There was an opportunity to double the size of their site
by buying available land with a building on it immediately next door
to their property. The price was right and the owner was anxious to
sell. The large group of investors however, were divided as to the
size of the market. Even though rentals were going very well on
their present property, several of them worried that the market was
over-saturated. This concern came from a situation of market
saturation that had occurred 12 years earlier. There was no way to
convince them that the self-storage market had changed and increased
in size.
During the six months this issue was being argued, the owner of the
adjacent property took matters into his own hands. He bulldozed the
building and sold the raw land to another investor. Since the
self-storage market was actually underserved, two competitors
started construction on properties within two miles of the subject
location. At the present time they are renting up quite rapidly.
The owners of the initial site in question have finally decided to
expand in what amounts to Phase Three since occupancies at their
facility are nearly 100 percent and their competitors are also doing
well. Had this phase or expansion been completed earlier, the
project would have been at least double the size. Income would have
drastically increased and their competitors probably would have been
discouraged about entering the self-storage market in their area.
Historically the storage market continues to expand.
Making Fewer Mistakes
The timing of phasing an expansion is all-important. One large
project in South Florida had the opportunity to double the number of
units at their facility with the second phase. The new buildings
were delayed however, due to owner indecision. In the meantime, a
large national competitor fast tracked a project just down the
street. The end result was that the owner never did build the second
phase of his facility. Instead, he lost interest in the property and
eventually sold the land to a large national self-storage company.
The sale was made at a discounted price, which was a definite
disappointment. In essence, underestimating the size of the market
or the absorption rate not only reduces gross income, but also
lowers the ultimate value of the property.
In addition to increasing profits, phasing also dramatically
decreases mistakes initially made in construction and unit mix.
During rent-up of the first phase, it is sometimes clear that the
unit mix is wrong. There may be too many small units and not enough
larger units, which is a common mistake. One property in the Midwest
had an average of 100 square feet per unit in Phase One. In Phase
Two, the average unit size increased to 140 square feet per unit.
Not only did the unit size increase, but the owners were also able
to add a sizeable increase in rent because of the demand for larger
units.
Some common construction mistakes include making the buildings all
the same width, which dictates unit size. It is more sensible to use
varying building widths and to design the property so that Phase Two
buildings can be constructed to allow all sizes of units. It is
common knowledge that we learn from our mistakes, but we don’t have
to pay the whole price for mistakes when we put to use what we have
learned from them. Phasing provides that opportunity.
The Advantage Of Phasing
Phasing offers many benefits for today’s self-storage developer,
owner or operator.
Here are some of those benefits:
- The profit is maximized by increasing the return with the
least risk, meaning the least risk to the owner and also to the
lender as well as to the owner’s available cash. The less the
risk the more secure the prop-erty is for both owner and lender.
- Pre-planning the initial development involves buying enough
land up front, then not finishing the project until occupancies
indicate a need for additional units and what kind of unit mix
is most desirable.
- The plan best fitting the property will take phasing and
these other factors into consideration:
Utilities– Plan for the phased expansion.
Setbacks and Easements– They must allow for growth.
Competition– Can you keep up with the competition?
Construction Costs– Will first phase unit prices hold?
Types of Buildings– Can we change to meet competition?
Available Capital– Do we have the commitment for the next phase?
Planning It Right
It is during the early stages of planning that phasing should be
considered. Generally, phasing delays the final decisions of
unit-mix and construction, allowing them to be based on results
during rent-up and not relying on estimates. Lenders like to deal
with facts, not estimates.
The types of self-storage projects that can and need to be phased
are:
- Conventional
- Climate Controlled
- Multi-story
- Conversions
- Combinations of two or more of the above
Usually a conventional site with long rows of units and narrow
buildings will allow only 40 percent building to land coverage. If
50,000 square feet of units for rent are planned, three acres or
more of land must be purchased or available. Depending on
conditions, possibly four or five acres of land may need to be
purchased or optioned initially. Even a small property needs room to
expand. If you are in a major or rapidly expanding market, even a
larger land purchase should be considered.
Morningstar Mini-Storage, headquartered in North Carolina has a
long-standing policy of tying up as much as 20 acres initially. The
company builds 30- or 40-thousand square foot facilities, then waits
for rentals to get above 50 or 60 percent before adding another 20
to 30 thousand square feet, and so on. One of their projects that
followed this philosophy now features 150,000 square feet of
rentable units. It is a good idea to pour extra slabs during initial
phases of a project. These can be used as parking spaces for
recreational vehicles, boats and other vehicles, which can generate
extra income that is not budgeted.
When occupancies indicate it, the construction of the second phase
should begin. The slabs can then be cleared and the construction
should only take about half as long as did the first phase. Phase
Two will always be able to take advantage of construction
improvements and technical innovations, as well as similar unit
pricing.
When building climate-controlled facilities, the builder can
estimate 70 to 80 percent rentable units to the gross square
footage. As an example, a 40,000-square-foot building will only have
28 to 32,000 square feet of rent-able space. The rentable square
footage should be at least 75 percent of the gross area. As land
prices in many areas escalate, the need for larger or multistory
buildings have increased. Phasing of these larger buildings is
accomplished by not immediately completing the electrical, HVAC,
doors, hallway partitions and alarm systems. Until there is a need
for additional space, this work can be delayed on one or more
floors.
Conversions And Multi-Story Projects
Conversion of a building offers the easiest opportunity for phasing.
A hallway can be interrupted by simply closing it off with a
five-foot swing door unit. Later, the hallway can be reopened by
removing the five-foot unit. The hallway can be completed prior to
that removal. And the installation will have been completed without
disturbing any of the existing tenants.
Initially, the layout must consider future units, but changes are
usually simple, fast, and inexpensive to complete. Many conversions
plan for the second phase to open when rent-up on the first phase
has reached 70 percent. This is done to insure that the facility is
never without a particular size unit. Losing a tenant because there
is not a unit available in the desired size is never a pleasant
event in self-storage ownership. Multi-story buildings need to have
all floors ready for build-out in Phase One. Elevators, lighting,
and mechanical systems need to be ready for later phases. Doors and
partitions can be left for future phasing.
One recently converted Atlanta four-story project was to eventually
have all floors climate controlled, but the lowest was left for a
second phase. The fourth floor was completed, but temporarily left
as nonclimate controlled space, which rented at lower prices. After
less than a year, the lowest floor of this facility is now being
converted into climate-controlled storage. It should be noted that
the floor now being completed will have nearly all large units, as
the 10-by-20, 100-by-25 and 10-by-30 units have all been rented in
the Phase One. A 50 percent lease-up of the climate-controlled space
is expected within 10 months. Three months later, the phased floor
will be available for rent, and the project will be fully climate
controlled.
Fort Knox Self-Service Storage in Tallahassee, Fla., had three
60,000-square-foot buildings constructed one year apart. Demand was
high, so the owner moved ahead with the three phased buildings. They
are now all rented showing a wise expenditure of capital.
Multi-story buildings are usually larger than conventional buildings
and are placed on expensive land. The usual height is two to four
stories with 60,000 to 100,000 square feet of storage units for
rent. The phased build-outs will be at least one floor at a time.
Conversions offer the best and easiest opportunities for phasing in
multistory projects. Those with 20 or more feet in ceiling heights
can allow a mezzanine level, thus leaving the large open upper floor
to be phased later. Elevators need to be installed during the first
phase although not used until the second phase begins. This
situation usually occurs on converted warehouse buildings that have
high ceiling heights.
Single-story conversions can be completed one area at a time.
Usually, the size of unit mix gets larger with each phase. These
buildings are gener-ally called “big boxes,” and are becoming
available at a rapid rate. Service Merchandise, K-Mart, Wal-Mart®
and any number of other grocery stores or specialty retailers are
names that have available, empty large buildings. These buildings
are usually well located and have good demographics. They are
relatively easy to convert to a self-storage use and can be phased.
The heating and air conditioning, lighting, and signage are usually
in place. The buildings require a small amount of demolition and the
construction of a small office is easily accomplished. With the
installation of cameras and security systems the job is nearly
complete. Since they often occur in an area that does not have
storage, it is important that they be phased in a way that gets the
correct unit mix. These buildings may vary in size from 40,000 to
180,000 square feet. Most markets will eventually rent all the space
but it is more important to phase the larger storage projects. These
large projects are where the largest mistakes in unit mix can be
made.
Other Factors
Vacancy is expensive for both the owner and the lender. Loan
payments are being made on empty units or buildings. Expenses pile
up and the lender begins to pressure the owner. Phasing can be the
solution to that problem. Phasing keeps loan costs down, and if unit
mix is sound, the lender can be kept content. Delaying construction
until units are needed is a much better use of capital. A lender is
more easily convinced to loan on a property that has low vacancies
and proven demand for additional spaces.
Interest Reserve is needed in every budget. A cash flow budget will
list expenses of operation, including taxes and loan payments. Of
course, there is no income generated during construction, only
interest, which must be paid or added to the loan. After the
project’s opening date, income is projected and expenses are
deducted from them. As months go by, the accumulated difference must
be covered or it comes out of the owner’s pocket. Phasing delays
cost without using income and can be the issue that makes a project
profitable more quickly than anything else that can be done. Phasing
reduces the cost of management, staffing and utilities. Total cash
flow after a two year period can be as much as three times more,
assuming that normal rates and rent-up occurred.
Lender confidence with construction loans generally requires
collateral of at least 20 percent of the amount loaned. When the
project is phased, less collateral is required because less money is
borrowed at any particular time. Lenders are more confident about
the funds extended until the rent-up phase proves the project sound.
This lender feeling of confidence should make it easier to receive
permanent financing at a reasonable rate at a later date.
Conclusions indicate that phasing should be considered on every
self-storge project. The owner is offered flexibility in making
market changes, and both risk and capital exposure is reduced. It is
a process often used by the largest and most successful operators in
the self-storage industry, who have learned from the past. Phasing
works on small projects as well as those of larger size.
Dan Curtis is the president of Atlanta, Georgia-based Storage
Consulting & Marketing. He is also the vice president of the new
door and partition company, Janus International, based in Temple,
Georgia.
This article is provided courtesy
of Tech-Fast Metal Systems
with the permission of
Mini-Storage Messenger
magazine. © MiniCo, Inc. All Rights Reserved. It is not
intended for further reproduction/distribution without the exclusive
permission of MiniCo, Inc.
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