Ground-up storage at $95/sf hard cost vs buying stabilized at a 6.2 cap

Question

I've got a construction background and I'm working the investing side of a development-vs-buy question that keeps flipping on me depending on which line I touch.

Site in a secondary metro, 78,000 net rentable sf across two buildings, mix of climate and drive-up. My GC pricing is landing around $95/sf hard cost, call it $118/sf all in with land, soft costs, and the interest reserve. Stabilized pro forma NOI is roughly $1.05m if I hit $14/sf annual effective rent at 90 percent, which puts me around $9.2m of cost against a value somewhere near $15m at a 7 cap. That spread looks great on paper.

Meanwhile a stabilized 3-property portfolio in the same region is being shopped at a 6.2 cap on trailing NOI, no lease-up risk, existing management platform.

What I can't get comfortable with is the lease-up. My steel and metal building quotes have moved on me twice, and everyone tells me lease-up is where storage development gets people. If I model 30 months to stabilization instead of 18, most of the development premium disappears into the interest reserve and the concessions. Is there a way you all sanity-check the lease-up curve before committing, or is it just supply study and pray? And does the aggregation argument change the answer, given three properties come with a platform I'd otherwise have to build?

Rena Expert · Accepted Answer

The development premium you're describing is almost entirely lease-up compensation, so the question is whether roughly 520 basis points of yield-on-cost spread, 11.4 percent on your $9.2m of cost against a 6.2 cap, actually pays for the risk you're taking. At 78,000 sf you need roughly 700 to 800 units rented. In a market absorbing 2,500 sf a month you're at 31 months to 90 percent, and that's before you account for the fact that early rentals come in at concession rates you'll spend two years burning off.

So model the absorption in square feet per month drawn from actual comparable lease-ups in that submarket, not months to stabilization backed into from a target. Get the operators of the last three facilities built within five miles to tell you what their first 24 months looked like. Some will. That number is the whole deal.

Your interest reserve is where the sensitivity bites. On $9.2m with roughly $6m of construction debt, twelve extra months of carry is real money and it comes out of equity right when you have no cash flow to service it. Size the reserve to the pessimistic curve, because a reserve that runs dry mid-lease-up puts you back at the lender's table with no leverage.

The piece your framing skips is what happens to rate growth if that submarket takes more supply while you're in lease-up. Storage rents move fast in both directions and a second facility breaking ground eighteen months behind you doesn't just take your units, it caps your street rate for years. Check what's in entitlement, not just what's built.

On the portfolio: three facilities with an existing management platform is not much of a platform. You're getting a website and a manager. Real operating advantage in storage shows up somewhere north of fifteen or twenty facilities where you can afford centralized revenue management and a call center. Don't pay a premium for scale you aren't getting.

sonia_alvarez · Answer

The interest reserve point is where I'd push hardest. Construction lenders on storage have been sizing reserves to the lender's absorption assumption, not the sponsor's, and when the two differ by a year you find out at month 20 when the reserve is exhausted and the extension fee conversation starts. Ask for the reserve sizing memo, in writing, before you sign anything, and ask what the extension terms look like. A lot of the deal flow right now is extensions rather than new originations for exactly this reason.

stephen_ok9 · Answer

Something I'm still working out on the capital side: a 6.2 cap on trailing NOI on three stabilized facilities is a very different asset than your development. If the seller has been managing at street rates below market you might have real upside in the trailing number, which effectively lowers your entry cap. Have you looked at their existing tenant rate spread against current street rates on the same unit mix? That gap is the cheapest NOI growth in storage and it doesn't require you to pour concrete.

marcus_hale41 · Answer

I pulled apart a similar comparison on a two-facility offering and the thing that decided it for me was the age of the tenant base. Facilities where the average tenant has been in place four years have almost no room left for existing customer rate increases without a churn spike, because they've already absorbed six or seven of them. The offering memo won't tell you that. I had to ask for a tenant-tenure distribution and the broker acted like I'd asked for their tax returns. Girder, if you go the acquisition route, make that request early and see how they react.

nicole_adeyemi · Answer

Nobody's asked what's in entitlement around your site, which is the question I'd want answered before the GC quote. Storage zoning approvals in a lot of jurisdictions have gotten harder, and moratoriums on new self-storage have shown up in enough municipalities that a bad neighbor can be legally impossible rather than just unlikely. That cuts both ways for you. Check the planning commission agendas for the last two years yourself rather than trusting a supply study, since the study probably only counted permitted and built square footage. Zoning rules vary by municipality and state so what's true one county over may not apply.

hannah_west29 · Answer

Running girder's numbers with a 30-month curve instead of 18: at $6m of debt and say 8 percent, the extra year is roughly $480k of carry. Yield on cost drops from about 11.4 percent to something near 10.5 percent depending on how you treat the concessions. Still above 6.2, so the development wins on paper even in the bad case. What kills it is the case nobody models, which is 30 months of lease-up plus rents landing at $12/sf instead of $14. That combination puts NOI near $900k and yield on cost under 9.5, and now you're taking construction risk for maybe 300 basis points. What's your rent comp set actually showing on climate-controlled 10x10s?

Ground-up storage at $95/sf hard cost vs buying stabilized at a 6.2 cap

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