21 Oct 2022
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.
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 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.
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.
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.
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.
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.
