AAI Guide to Commercial Storage UnitsJanuary 7, 2019
This Assets America® Guide to Commercial Storage Units discusses important features about the business of buying, building and financing commercial storage units and business storage units. For many real estate investors, commercial storage units provide a compelling proposition for low-cost, low-risk revenue streams that are relatively immune to the business cycle. With the right management and financing, many investors have profited handsomely from their investments in commercial storage units.
What Are Commercial Storage Units?
These are facilities in which customers rent space to temporarily store their belongings. The first dilemma facing investors is whether to buy or build their commercial storage units. The answer isn’t simple. It hinges on factors such as your business needs, the availability of facilities for sale, and your location. One thing is certain, your first task is to master the self-storage industry as well as the particular markets that interest you. This includes current and future competition, and the various partners, vendors and tools you’ll require to run your business.
Naturally, buying commercial storage units is easier and faster than building them. However, when you buy, you are more or less locked in to someone else’s vision. This is unless you want to extensively rebuild or extend the facility, in which case you are both purchasing and building your storage facility. Building a facility is a slower and riskier proposition, but the upside is that you can design it specifically to your needs. It will be based on all the internal and external factors that apply to your situation. Let’s look at both scenarios so that you can consider which one makes the most sense/cents for you.
Buying Commercial Storage Units
Your financing will help determine the scale of your acquisition of commercial storage units. Assets America® provides commercial real estate loans starting at $5 million, with no upper limit.
Exploring Secondary Locations
Depending on your budget, you might benefit from a secondary location, where property is readily available and less expensive. Uncovering little gems that have escaped the notice of huge REITs requires a significant amount of research and due diligence. And, with the additional effort, you can yield properties with excellent returns over the long-term. The main problem with the purchase of suburban and exurban commercial storage units is that its easier for competitors to jump on the bandwagon after you prove the business profitable. Naturally, barriers to entry will help you, especially if you buy a facility in an area that won’t permit the construction of new commercial storage units. This could be, either because of zoning restrictions, infrastructure obstacles, lack of available land, or other barriers.
Primary Storage Facility Locations
On the other hand, a larger budget allows you to purchase an urban storage facility that will benefit from the surrounding population density. In an urban setting, constructing commercial storage units is much more expensive than it is in secondary locations. Not only is land more expensive, but so is labor and materials. Therefore, should an existing facility in a densely populated area come up for sale, you can bet it will receive a lot of attention. That’s no problem as long as you have the financial firepower to aggressively bid without overpaying. An intriguing strategy is to convert existing buildings, such as warehouses and factories, into commercial storage units. By doing so in under-served locations, you are likely to tap strong demand that can bolster your bottom line. For formerly industrial neighborhoods that gentrify into urban residential communities, the prospects for conversions look especially bright.
Questions to Ask When Buying Commercial Storage Units
You’ll want to ask a number of questions when considering the purchase of business storage units, including:
- How has the current owner set rates? Do they mirror the facility’s current value, and are customers experiencing rates that increase consistently over time?
- Does the original unit mix reflect current demand? If not, how much will it cost to alter the mix?
- Will the facility benefit from improved marketing, and if so, how much should you budget?
- Can you expand the current facility, and does it make sense to do so?
- If missing, should you introduce climate control to the facility? How much will this cost, and what will be the incremental profit impact?
- Could a technological overhaul reduce headcount and operating expenses? If so, by how much and what is the payback period?
- What are the deferred maintenance costs, if any?
You’ll likely need a new construction loan to build commercial storage units from scratch. There are the costs associated with land acquisition and improvement, building the facility and stabilizing space rental. Because Assets America® provides access to a large network of private lenders, you have an excellent chance of qualifying for an affordable interest-only construction loan when you work with us.
Assuming you are starting with a clean slate, you can consider features that add value to your commercial storage units. These include things such as climate control, high-end security, and on-premises personnel. Your marketing survey should give you a good idea of how large to build the facility and parking, what types of units to offer and what to charge. Remember that certain locations, like ones adjacent to military bases and universities, have heightened demand for commercial storage units and might require a larger facility. In addition, you can consider whether to add certain services. These services can include truck rental, sale of packing materials, and even “white-glove” service. White-glove service is when your people pack up and move the customer’s belongings to the facility.
Once you receive your certificate of occupancy, you can take on a mini-perm loan to pay off the construction loan. It can take about three years to stabilize rentals at your expected average occupancy levels. At that point, you can refinance with a long-term take-out loan (mortgage).
Minding Your Finances
Whether you buy or build, you’ll need to closely monitor your revenues and expenses to make your investment a success. What are your revenues and costs per square foot? You must do sufficient due diligence to answer that question in advance. This is a task that usually requires the assistance of skilled professionals. Luckily, Assets America® works with a whole array of professionals that can help with many aspects of commercial storage units investment.