$85 Per Square Foot Construction costs - now what? Part 1

Updated: Jan 17

$85 Per Square Foot Construction Costs – Now What?

Part 1 By Marc Goodin

Single story self storage construction has gone from $65 to $85 a square foot in what feels like overnight. Of course, prices do vary from location to location, site to site and, facility to facility, based upon many variables including your definition of construction costs. But no matter the cost, we all can agree construction cost has risen. In this case, it appears to be due to both typical inflation and the bonus “covid inflation”. But even with the increase in costs self storage was the number 1 real estate business in 2021 .

So now what? So now you must research, plan, design, bid, and learn how to adjust and execute much better. So now it is more important than ever to get the development process right and not leave it up to your real estate agent, engineers, architects, and contractors. You must be a major part of the day to day development process and if you do not have the experience you will need a self storage industry development expert to help you plan, design coordinate, and execute thought out the process.

So now what? So now for the same phase 1 SBA $6,000,000 budget, you may build closer to 40,000 square feet than 50,000 square feet. Or you can increase your $6 million SBA development budget by $600,000 to build closer to 50,000 sf. For years I have been telling people “The best time to build self storage was 5 years ago and the second-best time is now”. Nothing has changed.

It is important to remember the builder’s construction cost is only part of the total development cost. And other costs like land, soft costs, and carrying cost have not risen like the price of steel. There are many ways to reduce development and construction costs and avoid cost overruns. For example, if you are ready to do learn and do the hard work of “Ritz Sales and Marketing” you can cut your rent up time significantly which saves a significant amount of the carrying cost required until breaking even. But this does not happen simply because you say it you are going to do it. If the Ritz Sale and Marketing plan is not detailed and written long before you start your design it most likely will not happen.

If you want a certain kind of financial success, it will require obsession plus the good luck to find the right thing to obsess about. There are few, if any business that provide their owners an opportunity to become a multi-millionaire in 3- 5 years after opening like self storage can. The average Self Storage REITs are up 70% plus while the DJIA is up 19% for the first 11 months of 2021, one of many signs self storage is the right business.

I built my first personal self storage during the 2009 banking recession where many people gave up on real estate and self storage. You may recall gloom and doom was the outlook in 2009. Self storage construction costs seemed to jump 10% plus the night before we bid the project and that was not even the worst of it. My mortgage interest rate was over 8% with a clause if I ever refinanced the bank got paid $150,000. I would do it again in a heartbeat but most people are never going to own a self storage. The facility was profitable in a year and has produced millions in profits since then.

It was not easy by no means but waiting would have cost me more. It was not risky for me because I was willing to do what it takes. And you must be willing to do what it takes whether the construction cost is $65 or $85 or $110 per square foot. I am sure many people thought I was crazy when I took vacation time off from work every snowstorm to hand shovel the foundations all winter to keep the building construction going. But I also retired at age 50 and people thought that was impossible as well.

Yearly price increases are typical in self storage construction and that is a great thing once you build you facility. Every spring I hear the price of steel is going up. Covid has reduced the manufacturing and the typical stockpiling of steel. This along with the crippled supply chains has caused steel to double in price. (Note double steel prices does not equal a double of development cost by far). Some will even advise to hold off building self storage until the Steel price comes down, but this could be months or years or never and quickly turn into a back to zero strategy where you may never build.

Several self storage building manufactures are reporting they have seen a leveling off the price increases. Of course, it is impossible to predict where prices will end up and how long to get there. But over the long haul most things cost more. Steel production by US steel manufacturing and other major producers is on the rebound. But the demand will also increase when the auto chip deficit is over, and more cars are built. And when travel gets back to normal, and more steel will be need to build planes. Not to mention that more steel will be required when commercial development picks up.

Appreciation (due to inflation and rent increases) is one of the benefits of real estate and self storage. And we also get the significant benefits of depreciation and amortization. In self storage your biggest expense is the land and building. And once you build or buy, this expense does not go up. But yearly you can typically raise your rents more than your increase in expenses for higher profits. And of course, when you refinance or sell you have an asset that is worth more then when you purchased/built due to inflation and the increased rental rates.

The good news is recent nationwide occupancy has risen from approximately 88% to 94% for significant increases in profits in the last year. The “new covid work from home” which allows people to live anywhere is one major reason for the increase in occupancy. And businesses are using more self storage too.

2021 was a record year for the number of self storage sold. And record selling prices as well. One of the first things new owners often do when they buy a self storage is raise rents. The higher occupancy and record rental rates have provided for incredible year over year increases in profits. We recently had a new 52,000 net rentable facility open for 6 months, 60% full sell for $11,500,000 for a several million-dollar profit. While not every self storage is going to sell for over $200/sf it is clear that building a self storage is still cheaper and more profitable than buying a facility. Again, the higher construction cost means you may have to build less square footage in phase 1 or invest more money.

$85 Per Square Foot Construction Costs – Now What?

Part 2 By Marc Goodin https://www.storageauthorityfranchise.com/post/part-2-85-sf-construction-cost-now-what

Check out www.StorageAuthorityFranchise.com FAQ’s for more details on the basics of what it takes to get started in self storage.

Marc Goodin is President of Storage Authority Franchising. 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. You can get more firsthand information on owing a Storage Authority Franchise at www.storageauthorityfranchise.com/opportunity3