Convert the build rate from gross to net rentable area, then add land, interest to stabilisation and the lease-up deficit before dividing NOI by cost.
Quote it per net rentable square foot, all in, because that is what the rent is earned on. On an illustrative 75,000 sq ft multi-storey store, a shell at £85 per gross sq ft becomes construction of £168.98 per net rentable sq ft once the 72 per cent efficiency, fit-out, fees and contingency are counted, and £256.90 per net rentable sq ft with land, finance and the lease-up deficit. Against stabilised NOI of £17.68 a sq ft that is a yield on cost of 6.88 per cent.
Worked in full in Self-Storage Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Self-storage cost comparisons go wrong in two places. The building is priced per gross square foot, but only the net rentable area, the floor inside the units, earns rent; corridors, lifts, stairs and the office do not. And a store has no anchor tenant to take the building on completion: it fills over two or three years, losing money while it does, and that lease-up deficit is as much a development cost as the cladding.
| Input | Value |
|---|---|
| Gross building area, sq ft | 75,000 |
| Net rentable efficiency | 72% |
| Shell and core, £ per gross sq ft | 85.00 |
| Unit fit-out: partitions, doors, security, £ per net sq ft | 18.00 |
| Externals, of shell and fit-out | 8% |
| Professional fees and contingency, of the above | 10% and 5% |
| Land and planning, £ | 2,650,000 |
| Debt: loan to cost, rate | 55%, 7.5% |
| Build programme, lease-up to stabilisation, months | 14 and 30 |
| Operating losses during lease-up, £ | 600,000 |
| Stabilised: rent £ per sq ft, occupancy, ancillary income, opex | 30.00, 88%, 8%, 38% |
| Cap rate, purchaser's costs | 6.00%, 6.8% |
Net rentable area = gross area × efficiency = 75,000 × 72% = 54,000 sq ft
Any cost per gross sq ft becomes a cost per net sq ft by dividing by the efficiency: 85.00 ÷ 72% = 118.06
The same shell costs 38.9 per cent more per square foot that earns rent. A single-storey drive-up store can run above 85 per cent efficiency; a tall urban building with lifts, a loading bay and wide corridors may sit below 70. Efficiency is a design output, and it moves the cost per rentable foot more than most negotiations with the contractor.
Shell on the gross area is £6,375,000. Fit-out is priced on the net area: 54,000 × 18.00 = £972,000. Externals add 8 per cent of the two, then fees and contingency 15 per cent of the subtotal.
| Line | Total | Per gross sq ft | Per net sq ft | Share |
|---|---|---|---|---|
| Shell and core | 6,375,000 | 85.00 | 118.06 | 46.0% |
| Unit fit-out | 972,000 | 12.96 | 18.00 | 7.0% |
| Externals | 587,760 | 7.84 | 10.88 | 4.2% |
| Professional fees | 793,476 | 10.58 | 14.69 | 5.7% |
| Contingency | 396,738 | 5.29 | 7.35 | 2.9% |
| Construction | 9,124,974 | 121.67 | 168.98 | 65.8% |
| Land and planning | 2,650,000 | 35.33 | 49.07 | 19.1% |
| Interest during construction | 283,335 | 3.78 | 5.25 | 2.0% |
| Interest during lease-up | 1,214,294 | 16.19 | 22.49 | 8.8% |
| Operating losses during lease-up | 600,000 | 8.00 | 11.11 | 4.3% |
| Total development cost | 13,872,604 | 184.97 | 256.90 | 100.0% |
Interest during construction = (construction + land) × 55% × 7.5% × 14 ÷ 12 × 50% average draw = 283,335
Interest during lease-up = (construction + land) × 55% × 7.5% × 30 ÷ 12 = 1,214,294
Excel: =(Constr+Land)*LTC*Rate*(Build/12*0.5+Lease/12)
The lease-up lines together are 13.1 per cent of the cost, more than fees and contingency combined. A loan fully drawn on completion runs for thirty months before the store is stable, and the store's operating losses over the same period have to be funded on top. How long that phase lasts depends on move-ins and length of stay, as worked in how long a self-storage lease-up takes.
Stabilised revenue = 54,000 × 88% × 30.00 × 1.08 = 1,539,648; NOI after 38% opex = 954,582, or 17.68 per net sq ft
Yield on cost = 954,582 ÷ 13,872,604 = 6.88%
Net value at a 6.00% cap rate after 6.8% purchaser's costs = 14,896,719, or 275.87 per net sq ft
Profit is £1,024,116, 7.4 per cent on cost. That is a thin margin for a scheme whose income depends on a lease-up nobody has yet seen, and it is the honest figure only because the lease-up has been charged to the cost. The valuation side is set out in how to value a self-storage facility.
| Efficiency | Shell £75 | Shell £85 | Shell £95 |
|---|---|---|---|
| 65% | 260.31 / 6.79% | 281.85 / 6.27% | 303.39 / 5.83% |
| 72% | 237.46 / 7.44% | 256.90 / 6.88% | 276.34 / 6.40% |
| 80% | 216.23 / 8.18% | 233.73 / 7.56% | 251.23 / 7.04% |
Eight points of efficiency are worth about as much as £10 off the shell rate per gross foot. A design that lifts efficiency from 72 to 80 per cent on the same footprint adds 6,000 sq ft of rentable space for the cost of partitions and doors.
Multiplying the shell rate by the net rentable area. That gives £4,590,000 for this building, a third of the true cost, and a yield of 20.80 per cent that no store will ever produce. The two quieter errors are leaving out the lease-up, which treats a store that opens empty as if it opened full, and comparing a cost per gross foot from one scheme with a cost per net foot from another.
Convert every rate to net rentable square feet, add land, interest through to stabilisation and the lease-up losses, and only then divide NOI by cost. Here £85 a gross foot becomes £256.90 a net foot and a yield on cost of 6.88 per cent. Self-Storage Real Estate builds the lease-up from cohorts of arrivals and departures, and the free workbook for this case computes the losses a store runs before it first earns money.
It depends on the building. A single-storey drive-up store can exceed 85 per cent; a multi-storey building with lifts, corridors and an office may sit between 65 and 75. On the illustrative 75,000 sq ft store at 72 per cent, the net rentable area is 54,000 sq ft, so every cost per gross foot is 38.9 per cent higher per foot that earns rent.
Yes. A store opens empty and fills over two to three years. On the illustrative scheme, interest during a 30-month lease-up is £1,214,294 and operating losses £600,000, together 13.1 per cent of total development cost. Leaving them out overstates the yield on cost and treats a store that opens empty as if it opened full.
Enough above the exit cap rate to pay for the lease-up risk. The illustrative scheme yields 6.88 per cent on cost against a 6.00 per cent cap rate and makes 7.4 per cent profit on cost. Raising efficiency from 72 to 80 per cent alone lifts the yield on cost to 7.56 per cent.
This article is one calculation from Self-Storage Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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