21 Oct 2022

Building Self Storage In the 2023 Recession

Marc Goodin

President

The bottom line is, due to high inflation and high-interest rates, it is going to cost you more to get started today, than in the past. But you will be ahead of the game by building now vs later if you have the funds required.

Should you build self-storage in 2023? it is not a simple yes or no answer but give me a few minutes and most of you will have your answer. In general, the answer is no. Not because of the Recession of 2023 but because few people (1% – 3%) are entrepreneurs ready to own their own business, even during the best of times. But given you are reading this article I am going to assume you are a 1 percenter, a go-getter, and are trying to decide to build now or later.

First, it is important to define a recession. Simply put, a recession is a significant downturn in the economy. It appears the Democrats and Republicans have different parameters but the writing is on the wall – we are either in one or one is on its way. A recession affects everyone but certain people more than others.

If you lose your job or you own a small business and go into the red due to less business, a recession might not be the time for you to get into self-storage. It looks like part of this recession could be a significant bear stock market. If some or all the cash you needed to build your self-storage is lost in the market, now is likely not a good time for you to build a self- storage. Maybe it is time to take your money out of the stock market so you have the money required to build now.

Let's say you are financially secure and have the required equity, the question is given the high inflation (high construction rates), high-interest rates should you invest in self-storage now or down the road? The first thing to consider is your investment time frame and the typical length of past recessions.

The length of the average recession varies depending on the time frame you are considering. The National Bureau of Economic Research places the average recession at 17 months if you look back to 1854.

However, if you only consider the post-WWII period, the Average American recession has lasted 10 months.

I remember the 81/82 recession. I just got out of college so I was making real money (as an engineer) for the first time. The high interest lead to high-interest rate money market accounts so I was excited and put half my paycheck in my money market account each week. Of course, my friends looking to buy a house were not so happy. This recession lasted 16 months. I was almost upset when rates came down.

I was not so happy during the two other recessions when the work at my engineering companies dropped off and we had to let staff go.

I remember The Great Recession of 2008 because I built my first self-storage 1 year before the recession and my second self-storage right in the middle of it. The recession started in Dec. 2007, when the real estate market started showing signs of trouble. It officially ended 18 months later in June 2009. Costs were up significantly and my loan interest rate was 8.5%. I am happy I did not wait to build because it has paid me millions in cash profits.

If you have equity resources to build in 2023 I believe the odds are, you will come out ahead if you start now vs waiting for two years down the road.

Remember, It takes 6 – 12 months to find land, 8+ months to design and obtain approvals for the site and building plans, and 3 + months to bid the project and get the final bank loan. So based on averages, the recession may be over before you start construction and even more likely before you finished construction and open.

I hear people say if you're going to build now you have to know what you are doing so you don’t step on any land mines. Well, that is at least half wrong. It’s been a long time since “build it and they will come” was true. You need to have the experience or great team members who know how to evaluate a property including its physical components (topography, wetlands, floodplain, driveways sight lines, easements, etc.) the zoning, demand, and overall feasibility (including P&L), recession or no recession. For example, site work costs can skyrocket if you are on a hillside/drop-off and have to haul material in or out. This is not the time to buy a property that requires an extra $500,000 or more in site costs.

You need to properly evaluate the existing self-storage and the needed demand, recession or no recession. It is hard to build and be a very profitable build self-storage if the rate of a 10 x 10 non-climate control is $120/month in your area. $200/month is a no-brainer and $160/month for a 10 x 10 non-climate is a good starting range.

You need to properly evaluate the zoning and prepare the site and building plans that are not run-of-the-mill plans but exceptional, recession or no recession. Again, it takes a great team to do this. If only your engineer is doing your layout plan or if only your architect is doing your layout plan, chances are, it will not be a premium or efficient plan. They each have much different expertise and need to work closely to develop a premium layout for your facility. And if you do not provide your designers with several items like percent climate control vs non- climate control and phasing square feet to meet your budget it is likely the plans will not be up to par.

If you have the proper 5-year outlook needed in self-storage, recession or no recession it comes down to, do you have the needed equity to build now. And are willing to take the time to find a good location, at a reasonable price, and prepare great designs.

The owner's equity required is based upon the land costs, development costs, how fast you rent up, interest rates and rental rates. Let’s look at each one.

While it costs more to build today, great profits can be obtained because rental rates and occupancy rates are generally higher. And a recession will typical reduce the amount of new construction for a while.

Development costs: I have built 3 self-storages I own and have helped many others build self- storage. There rarely has been a year where I did not say prices are up again. It seems like every spring we hear the price of steel is going up and often twice. In other words, if we see lower construction costs in the future they may be minimal in most cases and more likely higher in a couple of years.

We are seeing construction bids, with the owner's construction costs added in, anywhere from $85/SF to $115/SF for single-story construction where $85/SF is a perfect site in states with lower construction costs. It is important to remember there are often $2 to $5/sf owner construction costs for items not included in the contractor's bid.

Land Costs: While I do not expect land listing prices to come down or go up significantly in the next year or so, the recession may concern some sellers enough to sell at a reduction to the asking price. We advise our Storage Authority franchisees to start their land search and aim to purchase at least 6 usable acres for under $1,000,000 (for single-story development). The majority of our franchisees are finding land in the $500K to $800K range. An acceptable land price is dependent on the local rental rates and your cash investment.

How fast you rent up: In general the majority of existing self-storages are full (90% or more) and new self-storage is renting up faster than pre covid. This is a cost-saving compared to the past. Of course, you need to do a demand review. I recommend you check out your competition via RadiusPlus.com and if it passes the basics it is time to secret shop all the facilities within 3 miles to 5 miles in person. If you do not have the time or energy to do this, self-storage is not for you. You want to visit your competition to rate the quality of the facility and manager, determine how full they are, and confirm if they are charging premium rates. It might be they are not charging premium rates and not full but you still can, because they will not be competitive because they are a subpar facility and not a competition to your superior facility. features and sales, and marketing. Unless you have years of self-storage operations experience you Should NOT automatically write off your own.

Interest rate: This is the big one as it has gone up sharply. I am not an expert on predicting interest rates for sure but I can see certain interest rates around 8 to 9% next year. Most real estate business loans, including self-storage, have rates fixed for 5 years or 10 years (10 years has a higher interest rate). This means many existing facilities notes will be renewed this year and next year at higher rates. In other words, fluctuating interest rates are part of the business. We are doing our proformas for 7 and 9% interest rates. And also (for the fun of it) for 5 years from now, full with 5% interest rates and higher rental rates as well. When I refinanced my facility from 8.5% to 4% I was smiling for days.

Rental rate: with inflation comes higher prices on everything in this world. In the self-storage world, we have found that great operators can raise rental rates to match inflation but often 1- 3 percent more for additional profits.

Of course, in times of recession, you may not always want to put your last dollar into any new enterprise. (but for the record I used my last dollar for each of the self-storages I built). If you have built before you know it is common practice for banks to require you to include 5% of the total construction budget as a contingency fund. If there are no cost overruns, great the final amount borrowed will be that much less. Along the same lines, I recommend you have 2% of the construction cost in cash for peace of mind, and security in case it takes longer to rent up the facility and other unexpected expenses. This cash cushion will also make it easier to get a loan.

I often hear “you were lucky you built it back in 2008 when it was easy.” Well, it was not easy but for sure I am happy I did. And I bet some of you will say the same thing about 2023. For years I have been saying the best time to build was 5 to 20 years ago and the second best time is today.

Get more information on Storage Authority Franchise at www.storageauthorityfranchise.com


Marc Goodin is President of Storage Authority Franchising. www.storageauthorityfranchise.com He owns 3 self storages he designed, built and manages. He has been helping others in the self storage industry for over 25 years. He can be reached at marc@StorageAuthority.com or directly at 860-830-6764 to answer your franchising, development, marketing, sales and operations questions. His best selling self storage books are available at amazon.