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10 Nov 2021

Six Days of Feasibility: Day 2 - Why a Feasibility Study?


Jay Garlick

CEO - Greenscape Development Partners

This post is the second in a series of articles entitled: “Six Days of Feasibility” designed to educate the reader on the world of Feasibility Studies. Over the 6 days Jay Garlick of GDP Feasibility will address the following:

Day 1: See the End from the Beginning: What are Feasibility Studies?
Day 2: Don't Make Business Risky: Why a Feasibility Study?
Day 3: Self Storage = Cash Cow: How a Feasibility Study Makes You Money?
Day 4: Buyer Beware: Why Not all Feasibility Studies are the Same?
Day 5: Get You in the Game: What Do You Do with a Full Feasibility Study?
Day 6: Deal Makers, not Deal Breakers: Do You Have Someone to Walk the Path with You?

Day 2: Don’t Make Business Risky: Why a Feasibility Study?

I am going to state this plainly right up front. Self-storage is truly an amazing, high performing asset class! Without a doubt the performance of this asset class is virtually unmatched. However, there is one issue that raises a challenge in storage, it's the lease-up period. Legitimate self-storage facilities have at the least hundreds of units and in some cases thousands. The time it takes to lease up a facility can take 12-48 months with a target of 24-36 months or less. That is a long time to see the interest clock tick for a bank or time to pass without a return to an investor. So how does one do what all good developers should do and minimize risk?

Before we get into that, let’s look at exactly why self-storage is so attractive for developers and investors.

As compared to other real estate sectors, such as retail, office, or industrial, the self-storage sector offers a number of advantages. GDP Feasibility has identified the following characteristics which, in its opinion, differentiate self-storage as an investment asset from other real estate sectors:​

Diverse Tenant Base - Self-storage serves a large and diverse tenant base, so no single tenant should generally have a material adverse impact on a property like a tenant would in retail, a large business in office, or a warehouser would in industrial for example.

The chart below shows that self-storage dramatically out-performs all asset classes in terms of default percentage over the last 20 years. Even in the great recession the spread was 5-6% between all other asset classes and self-storage and during the shut down of COVID 19 when retail, office, and apartments were hit hard, storage hardly moved off of near 0% defaults.

Self-Storage default rate as compared to all cmbs loans

Recession Resistant – Why does storage do so well in recessions compared to their peers? Storage is a “need-based” product. Life forces that drive demand for storage, such as death, divorce, business expansion or contraction, moving, migration, changes in employment, and other life events create need-based demand in both up and down economic cycles. Therefore, storage benefits from needs-based events that tend to mitigate the severity of down economic cycles felt in other real estate sectors, like retail or office, and even apartments in the 2020 volatility.

Inflation Defensive – Storage contracts are month to month. In inflationary environments, storage rates can rise faster and more broadly than other real estate types that have yearly or even long multi-year contracts. The ability to strategically raise rates monthly across the board can act as a dynamic defense against inflation.

​Easy Exit – Self-storage is highly fragmented as an industry. The large industry owners, mostly REITs, only own about 20% of the facilities in the nation combined. As those major players jockey for position and market share, they are aggressive in pursuit of quality targets to purchase. The post COVID stall in development and fewer properties on the market has transactions at an all-time high and cap-rate compression at an all-time low. If a property positions itself well as an institutional-grade facility, it has a near-built-in exit to a REIT at top dollar further minimizing risk to the developer and investor alike should they do their development right and make it “institutional-grade.”

Pie Chart of REITs and non-REITs

Higher Operating Margins - With no tenant improvement requirements, lower energy costs, property taxes that don't rise with inflation, and labor is not unionized, typically, with some fluctuation, storage costs are about 1/3 of revenue making for gross margins of 60-70% on average. Those numbers far exceed that of other types of investment real estate.

Lower Cost of Tenant Rollover - Tenant rollover for most real estate sectors requires making changes to the tenant improvements and incurring costs associated with brokerage commissions, thus requiring longer lead times and expense to replace tenants, whereas self-storage usually requires a simple cleaning of the unit.

Very Favorable Cost to Rent Ratio - With such a well-performing asset in self-storage, where is the risk to a self-storage developer? Certainly, there is plenty of incentive to have an asset that hedges against inflation, has a higher rent-to-cost ratio, is deflation-defensive and is nearly recession-proof. The comparison below is an actual study we did for one of our projects in Vancouver, Washington in the Portland Oregon Metro. When comparing Rent PSF to Cost PSF with apartments the differences are startling. Currently, rents are changing in both asset classes in an inflationary environment, but storage rents are out-pacing in-place apartment rents because of the month-to-month nature of the asset class.

Market feasibility diagram

But, again, there is a catch. Storage has potentially the longest lease-up period of all the major real estate asset classes. Storage lease-up to stabilization can take 12-48 months. The longer the lease-up to a stabilized rate of 90% the more risk to the project.​

If done right, storage will perform spectacularly, therefore it would not be a stretch at all to say that the whole storage project hinges on the feasibility study. It's in feasibility that you establish the actual risks to developing the project. Put the project in the wrong location, in an over-saturated market, with trade area rents that are too low, or in a construction market where your margins will be eaten by inflation and you could be drowning in a bad project before you start. Lease-up periods that exceed 48 months doom projects almost automatically.

Moving forward on a project without knowing the risks can be catastrophic:​ Questions that a developer should have solid answers for before they move forward or even purchase ground should include but not be limited to:

  1. Where will a project fit in its market and its trade area?
  2. What will be the strengths, opportunities, threats, and potential weaknesses of a proposed facility?
  3. What will the estimated projected lease-up period?
  4. Is the trade area ready for more supply and how much?
  5. What do the existing competitors look like (how old? how big? product mix?)
  6. How much will the market bear for rents?
  7. What are the demographic fundamentals that will either support or take down a project?
  8. Do the numbers work? Does it all pencil out?​
  9. What is the entitlement picture and what is the path to approval?

Establishing the feasibility of a project helps to know where you stand in project risk. You would not show up at an airport without a ticket, build a house without a set of floorplans and a budget, or purchase a car without a test drive, right?


Up Next: Day 3: Self-Storage = Cash Cow: How a Feasibility Study Makes You Money?

Who is Jay Garlick?

A self-storage developer himself, Jay Garlick is the Principal at GDP Feasibility and Partner/CEO of Greenscape Development Partners which specializes in self-storage development nationwide. Garlick began doing feasibility studies in 2004. Since then he has done studies on over 400 sites in the United States. Jay has a Masters Degree in Real Estate Development (MRED) and will soon finish a second in Masters in City and Metropolitan Planning (MCMP). Garlick has developed and or entitled his own projects coast to coast in UT, WA, MO, KS, and VA. Garlick can be reached at jay@gdpfeasibility.com. For more information please visit www.gdpfeasibility.com.

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