Here’s how to conduct a self-storage feasibility study before investing in a facility.
What Is a Self-Storage Feasibility Study?
A self-storage feasibility study is an examination of the practicality of a proposed facility. A feasibility study is carried out by an industry expert familiar with the local market, who can analyze the viability of the project and determine whether it will succeed. The study should determine the return on investments and reveal potential risks and issues that might appear if the project is pursued. Ultimately, the study is designed to help project managers determine whether they have enough resources to pursue a project.
Elements of a Feasibility Study
1. Site Analysis
The site analysis includes a thorough assessment of the location of the proposed facility. Self-storage facilities usually rely on drive-by traffic, therefore, it’s essential to build an asset on a site that can provide great visibility and access to roads and nearby residential or business areas. When it comes to site analysis, it’s also essential to find out everything about the site itself, including zoning regulations or even site contamination, in case of adaptive reuse projects.
2. Market Study
The first step of the market study is to assess the supply and demand dynamics, or the demographics and the competition in the area. It’s important to study the current population, the projected population growth, the median age, and income in the area — typically within a three- to five-mile radius of the site. This helps determine the demand in the neighborhood and provides an idea of the unit mix the building should include.
A market study also includes the careful examination of the competition within the market radius, including the square footage, age, location, unit size, building characteristics, occupancy, and street rates. It’s also important to look at development projections and how that could impact your facility. At the same time, it’s also essential to find out about abandoned projects in the area and the reason behind them.
Comparing local market fundamentals to national trends can also be beneficial. Comparing numbers, such as street and occupancy rates, available net rentable square feet available per capita, and investment or development activity to national rates can provide a picture of the market’s overall health.
3. Financial Projections
A feasibility study also includes the examination of the potential costs and returns. This includes the total construction costs, including soft and hard expenses, estimated operating costs, and lease-up rate — which is calculated based on local market conditions. Financial projections also include a month-by-month estimation of expenses and net operating income.
What is a feasibility study in commercial real estate?
A feasibility study in commercial real estate is an analysis conducted by an appraiser to determine the financial feasibility of a proposed property use. The appraiser will create pro forma financial statements by conducting a full market analysis, estimating development and construction expenses, OpEx, potential cap rates, vacancy rates, and a variety of other factors. With this information, the appraiser can create an estimated Internal Rate of Return (IRR) for potential developers or investors to determine whether it’s sufficient for their return requirements. Additionally, the appraiser can calculate the Net Present Value (NPV) of a property with a specific required return in mind. Developers can also use Discounted Cash Flow Analysis to calculate the potential Equity Multiple over a specific time horizon. In certain cases, developers may also look the estimated Residual Land Value of a property after potential improvements.
What are the benefits of conducting a feasibility study for a commercial real estate project?
Conducting a feasibility study for a commercial real estate project can provide a variety of benefits. It can help investors and developers determine the potential return on investment (ROI) of a project, as well as the potential net present value (NPV) and internal rate of return (IRR). It can also help them determine the potential equity multiple of a project, as well as the residual land value after potential improvements. Additionally, it can help reduce the tax burden for beneficiaries, as they will only need to pay taxes on the amount the property has appreciated, not the entire sale price.
For more information, please see the following sources:
What are the key components of a feasibility study for a commercial real estate project?
A feasibility study for a commercial real estate project typically includes a full market analysis, estimates of development and construction expenses, OpEx, potential cap rates, vacancy rates, and a variety of other factors. An appraiser can use this information to create an estimated IRR (internal rate of return) and discounted cash flow analysis to calculate the net present value of a property with a specific required return in mind. Developers can also use this information to calculate the potential equity multiple over a specific time horizon, and the estimated residual land value of a property after potential improvements.
What are the potential risks of not conducting a feasibility study for a commercial real estate project?
The potential risks of not conducting a feasibility study for a commercial real estate project include:
- Higher construction costs due to lack of research and planning
- Construction delays due to supply chain issues
- Investment outcome not meeting expectations due to lack of research
- Higher risk of tenant default due to longer lease terms
- Slower leasing velocity due to lack of research
It is important to conduct a feasibility study before beginning a commercial real estate project to ensure that the investment outcome meets expectations and that the project is completed on time and on budget. Source and Source
How can a feasibility study help to secure financing for a commercial real estate project?
A feasibility study can help to secure financing for a commercial real estate project by providing lenders with evidence that the project is viable and will generate income. A feasibility study should include a detailed business plan that outlines the project's goals, objectives, and strategies for success. It should also include financial projections that demonstrate the project's potential for profitability. Additionally, a feasibility study should include an analysis of the project's risks and potential challenges. By providing lenders with this information, a feasibility study can help to secure financing for a commercial real estate project.
What are the best practices for conducting a feasibility study for a commercial real estate project?
The best practices for conducting a feasibility study for a commercial real estate project include:
- Conducting a full market analysis to estimate development and construction expenses, OpEx, potential cap rates, vacancy rates, and other factors.
- Creating pro forma financial statements to examine the project as if it were already in existence.
- Calculating the Internal Rate of Return (IRR) to determine if it is sufficient for the investor's return requirements.
- Using discounted cash flow analysis to calculate the Net Present Value (NPV) of the property.
- Calculating the Equity Multiple over a specific time horizon.
- Estimating the Residual Land Value of the property after potential improvements.
- Getting to know the building and area, including any potential environmental or structural issues.
- Setting up a clear budget early on to negotiate more effectively.
- Deciding how much space is needed and how important location is.
- Hiring a lawyer before signing any paperwork.
- Knowing your rights and obligations, and understanding the entire contract.
- Signing a Letter of Intent (LOI) outlining the terms of the transaction.
For more information, please see the following sources: