How much does an adaptive reuse/conversion project cost to build?

The cost to do an adaptive reuse or conversion of a building into self storage is often less than the cost of building ground up. By using an already existing shell or “envelope”, you can reduce expenses dramatically depending on the condition of the shell. Self storage is primarily made of steel and concrete, with steel being a highly traded commodity susceptible to supply chain disruptions, geopolitical factors, and economic events. As a result, the cost to build any type of self storage can vary greatly from location to location, month to month. However, with an adaptive reuse or conversion project, you are not as exposed to the price of concrete and steel because not as much is needed with the exterior shell already existing. As opposed to structural components, the steel will be used for framing out units. As of the time of this writing, we have seen the cost of adaptive reuse or conversion projects of turning a building like a former big box store into self storage fall in the range of $45 to $85 per square foot. The condition of the shell- the roof, walls, foundation, electrical, HVAC, and fire suppression system- will greatly effect the project cost. If the shell is not in good condition, there becomes a break even point of using the existing shell vs. building a new shell from the ground up. Some pre-existing buildings will have enough ceiling height to consider building a mezzanine second level which will effect not only the price of the build-out but also the potential revenue the footprint of a given building can generate.

How do you price or value a self storage facility?

We price a self storage facility based on 3 different methodologies: financial, replacement, and highest use. Financial valuation is the most common and widely used methodology since self storage is a commercial real estate asset and commercial real estate is typically traded based on capitalization rates or “cap” rates. Determining a cap rate is taking the capital deployment (i.e. the purchase price) and dividing by the net operating income. It results in a percentage, like an 8% cap rate.

Net operating income is calculated by the annual gross operating income- all of the revenue that a facility generates before expenses- and subtracting the annual expenses the facility experiences. This results in the net operating income figure or “NOI”. Debt servicing is not included in the expenses used for calculating net operating income. Once you have a net operating income, you can reverse calculate the value of a facility if you establish what the market cap rate is. If it’s a nicer facility in a nicer, more populous area, it will most likely trade for a lower cap rate and thusly a higher premium.

A different valuation methodology from financial is replacement cost. This methodology is often best used for severely underperforming facilities, recent builds, or facilities in lease up because their financial performance may not be an accurate assessment of its current or future value. For instance, if you spend $10 million building a beautiful ground up development of a Class A self storage facility, and it just received certificate of occupancy so it is 0% occupied, financial valuation of the facility would put it at a value of $0. Actually less than $0 because there are expenses like property taxes and insurance that make it a negatively performing financial vehicle. 3 years from certificate of occupancy when the facility is leased up and performing, it now can garner a financial valuation of higher than $10 million potentially. Replacement cost valuation looks at how much it would cost to rebuild a facility using current construction costs but factoring in the wear and tear that the subject facility has experienced. So in that same scenario that we just discussed of the $10 million dollar new build facility, a replacement cost valuation would account for it costing $10 million to build. But now, construction and land costs could be higher and the fact that its already built as opposed to having to go through planning, zoning, and construction, provides a premium, so the replacement cost valuation could be even more than $10 million and it could make sense for the owners to sell as-is instead of leasing it up for a financial performance valuation. That’s not to say that people don’t buy facilities based on pro forma, or the potential financial performance of a facility. We certainly agree that should be accounted for in any valuation methodology, but we are not of the mindset where we want to pay the previous owner for our future work dollar for dollar.

Besides the financial and replacement methodologies we use to price and value self storage facilities, there is the highest and best use methodology. One of the benefits of self storage is that it can be built in a number of ways. If you have an empty box, it can typically be filled with smaller boxes making self storage. Highest and best use takes a look at the current performance and use of a property and determines if there is a better use for the property that would result in better performance. For instance, this could be converting non-temperature controlled self storage into temperature controlled. It could be taking larger units and making them into smaller units by using dividing walls because there is pent up demand for smaller units in the market and the rental rate per square foot is higher with smaller units. The most common scenario is a warehouse that needs to be converted into traditional self storage lockers as opposed to a wasted open space that is inefficient in its rental potential. Or a vacant piece of land that could have self storage built on it. Vacant land is not the highest and best use of that parcel. By changing the use to the best use of a property, it can bring a higher value to the property.

With these three different valuation methodologies- financial, replacement, and highest use- we can accurately value any sort of self storage property. Stating the obvious, the highest price with the best terms will usually get the deal done. So we employ these three different valuation methodologies to determine which route will allow us to make our best offer with the highest chance of getting accepted.