As seen in Mini Storage Messenger, January 1, 2009
There is no question that the Self Storage industry has faced some of its most turbulent times in the last six months and there are many who might think that the future looks bleak. From already saturated markets, to the unwillingness of Banks to loan us our own money, to the evening news blasting away about economic doom and gloom, it’s really hard to see a bright side to the future. However, there is a major ray of hope! The Self Storage industry has some very unique qualities, “Silver Linings” you might say, which gives Self Storage developers and operators the ability to grow and thrive in economic downturns more readily than any other real estate class.
The very nature of Self Storage - individual storage created by mobility - is one of its shinning silver linings by itself. At the beginning of an economic downturn, there always seems to be a four to six month transition period in which the customer is trying to adjust to the changing economic conditions. Soon mobility begins to increase at the same rate, or close to the same rate, as it did before the downturn. The majority of this mobility is caused by homeowners downsizing to smaller homes and by businesses either downsizing or making more economical use of their space. At this point, some operators will offer incentives that will trigger a net decrease in revenues of 25% to 40% for the first one to three months. However, since most residential customers have a turnover rate of 6 to 8 months, and commercial customers have a turnover rate of 18 to 24 months, those incentives have a minor financial impact over the long term. Hence, unstable economic conditions often generate the same demand as stable conditions, the only difference being the motivation for leasing. In effect, there is very little economic difference.
Historically, Self Storage developers have also benefited during these “down” times. Another “Silver Lining” is that land prices can be rapidly reduced in a market; by as much as 35%. As an example, before the depressed economic conditions in Central Florida, commercial/retail sites ranged from $10.00 to $12.00 / square foot; well outside the range for self storage. Within eighteen months, the land prices fell to a range of $6.50 to $9.00 per square foot, creating land purchase opportunities that weren’t available a shortly before. Needless to say, purchasing land during these discounted circumstances gives the developer major market advantages, especially since land prices will eventually go up again making it extremely difficult for any future newcomers to compete in that market!
Another “silver lining” for developers is that the entitlement process for obtaining all the approvals necessary to develop the site tends to become less complicated and requires less time. Generally, this benefit is derived from less demand on County and City services due to the downturn. With less competition for government services, zoning & permit processing time can be reduced as much as 50%. This is extremely beneficial to developers, first, because it lessens the amount of capital necessary to get through the process. Secondly, it shortens the time the developer has to financial carry the project before closing the loan. Finally, and sometimes more in importantly, it limits the amount of “brain death” of the developer while going through the entire process.
As real estate development begins to slow down, so do the competition for be best real estate professionals. Immediately, the developer has available affordable lawyers, consultants, professional engineers and expeditors at his command. Prices for their services can drop as much as 15%. However, in an economically sensitive market, the real benefit to the developer is ability to hire the market’s best development team along with their business and political connections often reducing the time required for obtaining entitlement by as much as 50%! That time savings could be as much as four to eight months! In addition, those same connections can drastically reduce entitlement fees. For example, one developer in South Florida reined in permit and fee costs by over $250,000 by employing the right development team and their abilities to get things done!
During a tough economic period, it is not uncommon for interest rates set by the Federal Reserve to drop a quarter of a point to a full point, lowering a developer’s costs substantially. As an example, one point (1%) annually of a $5,000,000 interest-only loan will yield a savings of approximately $50,000 annually; an excellent gateway for the developer to reinvest in his new venture and make it competitive.
In addition to all the “silver lining” opportunities during the development process, construction brings on a whole new group of advantages of developing in an economically distressed market. The beginning reduction in construction cost is usually the first indication of a softening market! Recently, construction costs have dropped as much as 8% in some southeast markets and even more in other parts of the country. By the time this article is published, steel prices will have fallen by as much as 12%. Lower steel prices affect the cost of metal buildings, roll-up doors, air conditioning, electrical and concrete rebar, as major end items. This alone, on a typical all single story project of 50,000 sf., and a total (everything) construction of $40.00 / sf., means and overall savings of 4.1% or $1.65 /sf. If you add the average of 8% or $3.20 /sf. reduction of construction cost in general, coupled with the steel savings of $1.65, there is a totals savings of $4.85 /sf. or an overall construction cost decreased of 12.1%. Remember, construction cost savings may vary nationally; however, this “silver lining” can be the developer’s single most competitive advantage, especially since history show us that our economy cycles. With that said, there is better than a 98% chance that construction prices will be back to the original high in less than 18 months. Therefore, properties built during the downturn will have a major operating advantage over those built when the economy recovers.
Another construction related benefit to Self Storage developers is that during tough times which, normally are accompanied by major decreases in market construction, the best construction craftsman surface. Unfortunately for construction trades, less business means fewer subcontractors. The result: the best subcontractors by trade, and who are the best businessmen or women are those that will be afloat or haven’t moved on. When this occurs, the developer is essentially getting the best quality workmanship in the marketplace and at a price 12.1% lower. This “silver lining” also gives the developer the ability to add more amenities to his project, which not only adds value to his facility, but makes his facility more competitive.
In summary, the Self Storage developer has a variety of “silver linings” to fall back on when unstable economic conditions occur. Whether that “silver lining” relates to a savings of time, money or even “gray matter,” they are all major advantages of developing while the competition is waiting for better days! The real question one faces during a down-turn is, “Am I bold enough to leave the pack and grasp this opportunity?” If you’re having trouble answering this question, remember this adage; the lead dog always crosses the finish line first while enjoying the best view! Good hunting!
By Mike Parham