Construction costs, including those for self storage, are on the rise even though the amount of inflation fluctuate from location to location. If you’re planning to build or expand a self storage facility this year, it’s more important than ever to do your homework when it comes to research, design plans, and bids. (See our blog “A 10-Step Plan to Keep Your Next Self-Storage Development on Track.”
As the owner, it is key that you manage the day-to-day planning, coordination, and execution. It’s your vision, end stake, and money, so take the lead and educate yourself about the forces affecting the market.
In 2021, self storage facility construction spend in the United States dropped to $3.75 billion from its 2018 peak of $4.89 billion. This is a 19% 1-year decrease compared to 2020, a 926% 10-year increase, and a 294% 20-year increase. As the U.S. economy continues to grapple with the economic downturn caused by COVID-19, construction has slowed and will continue to be depressed in the short term despite increasing demand for self storage. (Neighbor.com, 2022)
Despite those statistics, the tremendous industry growth in this sector experienced over the last 25 years can be attributed to greater public awareness of the economic and personal advantages of this industry. Continued increase in demand, teamed with excellent investment potential, has made self storage one of the leading growth industries in the country since 1978 (The Parham Group, n.d.).
Given the current climate, below are some of the variables to be aware of, potential miscellaneous costs, bidding and contractual pitfalls, and other ways to mitigate overall development expenses.
Within the last year the cost of single-story construction jumped from $65 to $85 per square foot. What this means is that with a $6 million, phase-one budget from the Small Business Administration, you’ll likely build closer to 40,000 square feet than 50,000 (Goodin, 2022).
Annual price increases are very typical in the construction industry. COVID-19 over the last several years reduced steel manufacturing and stockpiling. Crippled supply chains have also caused prices to double. Today, however, steel production appears to be on the rebound, and demand will increase once the auto-chip deficit is over, and more cars and planes are built.
If you delay building or expanding your self storage property until prices stabilize, this could take months or years. The income benefit coupled with the growth and latest industry trends makes self storage definitely a great return on investment.
When you are considering building, construction cost is only part of your total development burden. There are many ways to reduce costs and avoid overruns when it comes to building your self storage property. The biggest way to avoid any pitfalls is to thoroughly review your potential self storage property in detail by use of a complete site plan. Look for:
It would be wise to leverage a civil engineer to review properties and local regulations to understand any potential extra costs that can be expected before you start your project.
To maximize your savings and optimize the cost of construction, it’s key to fully understand the expenses tied to certain building and site-design features that can lead to incremental extra dollars per square foot. Below are several other considerations that can impact your project costs. The team at Forge is here to help you make the best building determinations and evaluate your options based upon your budget.
Finally, pay attention to your roof. Many self-storage business owners make the common mistake of using screw-down roofing because it's generally more affordable. The team at Forge urges you to consider using standing seam roof panels instead because this installation doesn't require penetrating the roof with screws because of its joining rib design. The screws typically aren't a problem for the first year or so (depending on your environment), but those screws must be tightened or replaced over time. It's important to remember that each roof penetration increases the risk of leaks and ultimately disappointing your customers. Our services will help you retain your customers and protect their possessions. For more details, see Metal Building Re-Roofing with Standing Seam Metal Roof Panels.
Often times poor or incomplete bidding specifications can lead to higher construction costs. For this reason, every construction contract should include an addendum to list items that might otherwise be unaccounted for. These include:
Also, if there are specific brand or quality requirements, these should be stated in the addendum with a note that no substitutions are permitted. A bid addendum helps guarantee that everything is communicated clearly to all parties involved.
Additional items you must account for in the total cost of self storage construction and financing include:
When bids are incomplete, this can lead to higher prices and unexpected cost overruns meaning you may then have to later downgrade a part of the construction.
Part of the project-planning process is to include a lease-up plan. The average self storage street rate for a 10x10 storage unit is $131/month, up 4% year-over-year.
The other good news is that the self storage industry has grown to more than 1.6 billion square feet of space so far in 2022 (StorageCafe.com, 2022). According to the latest Storage Café statistics, over the span of the last 5 years, 255.5 million square feet of storage space was built – that's equivalent to 16% of the total inventory. In 2021 alone, almost 44.3 million rentable square feet were finalized, an area that would cover either the whole of Central Park or the Grand Central Terminal. New supply in 2021 represents 3% of the existing inventory.
In even better news, a third of Americans planning a change of residence or needing more space at home reported that they use self storage. (Storage Cafe, 2022) A recent report from Storage Café found:
Self storage is relevant for both homeowners and renters who use it to better manage their belongings without cluttering their living space. In addition, with the COVID-19 pandemic, many customers started using self storage space for clearing space in their homes to work remotely.
These factors all result in greater facility value and the ability to recuperate project and construction expenditures more quickly. One of the other added benefits of commercial real estate is that it appreciates. Self storage owners also receive benefits from depreciation and amortization.
Your biggest expenses are in the land and building. Once you build, the cost doesn’t increase. Each year, you can typically raise rental rates to stay ahead of expenses and generate more profit. And, of course, when you sell, you’ll have an asset that’s worth more than when you built it due to inflation and the work you’ve put into increasing property value.
2021 was a record year for the number of self storage facilities sold. Higher occupancy and record rental rates have laid the groundwork for incredible increases in profit. This has also factored into newly constructed facilities still in lease-up being sold to buyers and providing multi-million-dollar returns for owners.
As you can see, there are a lot of factors that impact self storage construction costs. In the end, working with a company such as Forge to help put together a knowledgeable development team before you make an offer on land and properly executing each phase, from due diligence to bidding to design to operation, is necessary to keep everything on track and on budget. Give us a call! We’d love to help.