A 60,000 sq ft shed with a mezzanine against a purpose-built store on the same road: cost per net rentable foot, yield on cost, and the rent discount that decides it.
Converting an existing warehouse is usually cheaper per rentable square foot than building a new store, but by less than the purchase price suggests, because a conversion lets less of its floor area and starts from a building priced for another use. On the illustrative case below, the conversion costs £176.27 per net rentable sq ft all in against £190.41 for a new build, an 8.14 per cent yield on cost against 7.54. If the converted store has to accept a rent 4.9 per cent lower, the advantage is gone.
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 →
Same town, same catchment, same operator. Scheme A buys a 60,000 sq ft single-storey warehouse with enough eaves height for a mezzanine over two-thirds of the floor. Scheme B buys a cleared site and builds a three-storey store. Every figure is illustrative.
| Input | Conversion | New build |
|---|---|---|
| Purchase | £6,300,000 (£105 per sq ft) | £1,800,000 of land |
| Gross area after works, sq ft | 100,000 | 95,000 |
| Efficiency (net rentable over gross) | 68% | 80% |
| Net rentable area, sq ft | 68,000 | 76,000 |
| Main works | 40,000 sq ft mezzanine at £32 | 95,000 sq ft at £88 |
| Lifts, fire, M&E, security, office | £1,150,000 | in the build rate |
| Partitions and doors, per net sq ft | £12 | £12 |
| Works programme | 8 months | 15 months |
Common to both: acquisition costs of 6.5 per cent, fees and contingency of 12 per cent of works, finance at 7 per cent, a stabilised rent of £24.00 per sq ft a year at 88 per cent occupancy reached in a straight line over 30 months, fixed operating costs of £5.50 per sq ft and a 6 per cent management fee.
1. Hard and soft costs.
Conversion works = 40,000 × £32 + 68,000 × £12 + £1,150,000 = £3,246,000; fees and contingency £389,520
New-build works = 95,000 × £88 + 76,000 × £12 = £9,272,000; fees and contingency £1,112,640
2. Finance during works. The purchase is drawn on day one, the works evenly, so on average half the works balance is outstanding.
Finance = (purchase + costs) × 7% × months ÷ 12 + (works + fees) × 7% × months ÷ 12 ÷ 2
Conversion: £397,939 over 8 months. New build: £622,066 over 15 months.
3. Lease-up losses. Month by month, interest on the cost so far less net operating income, added to cost while it is negative. The conversion's income covers its interest in month 27, the new build's in month 29.
Monthly shortfall = cost × 7% ÷ 12 − (NRA × occupancy × rent ÷ 12 × (1 − 6%) − fixed costs ÷ 12)
Conversion: £1,243,638. New build: £1,547,563.
4. Stabilised NOI and yield on cost.
NOI = NRA × 88% × £24.00 × (1 − 6%) − NRA × £5.50
Conversion: 68,000 sq ft gives revenue of £1,436,160 and NOI of £975,990, a 68.0 per cent margin. New build: £1,605,120 and £1,090,813.
Excel: =NOI/TotalCost and =TotalCost/NRA
| Line | Conversion | New build |
|---|---|---|
| Purchase | 6,300,000 | 1,800,000 |
| Acquisition costs | 409,500 | 117,000 |
| Works | 3,246,000 | 9,272,000 |
| Fees and contingency | 389,520 | 1,112,640 |
| Finance during works | 397,939 | 622,066 |
| Lease-up losses | 1,243,638 | 1,547,563 |
| Total cost | 11,986,596 | 14,471,269 |
| Cost per net rentable sq ft | 176.27 | 190.41 |
| Stabilised NOI | 975,990 | 1,090,813 |
| Yield on cost | 8.14% | 7.54% |
The conversion is £2,484,672 cheaper but has 8,000 fewer sq ft to let, so per rentable foot it saves £14.14, 7.4 per cent, and earns 0.60 points more on cost. Its seven-month shorter programme is already in the finance line, which is where most of its advantage in time shows up.
The three numbers a conversion appraisal should be tested on, each against the new build's 7.54 per cent:
| Variant | Cost per sq ft | Yield on cost |
|---|---|---|
| Rent 5% below new build (£22.80) | 177.39 | 7.53% |
| Rent 10% below (£21.60) | 178.65 | 6.92% |
| Efficiency 60% (60,000 sq ft net) | 198.86 | 7.22% |
| Efficiency 75% (75,000 sq ft net) | 160.65 | 8.93% |
| Bought at £90 per sq ft (£5,400,000) | 159.16 | 9.02% |
| Bought at £120 per sq ft (£7,200,000) | 193.58 | 7.41% |
A lower rent also raises the cost per sq ft, because the store takes longer to cover its interest and the lease-up loss grows. Two break-evens follow. The conversion matches the new build at a rent of £22.81, a discount of 4.9 per cent, and at a purchase price of £7,035,944, £117 per sq ft. A rear-of-estate unit with no road frontage, a mezzanine floor that customers must reach by lift, or a loading bay shared with neighbours can each cost that much rent. And a shed that a logistics buyer would pay more than £117 a foot for is worth more as a shed.
Dividing the purchase price plus works by the net area and calling it the cost. That gives £140.38 per sq ft and a 10.22 per cent yield on cost, two points better than the scheme actually earns, because it leaves out acquisition costs, fees, finance and the 27 months in which the store does not cover its interest. The same omission on a new build is what makes development appraisals look attractive; the full stack is set out in what a self-storage facility costs to build per sq ft, and the lease-up assumption deserves its own test in how long self-storage lease-up takes.
The rent assumption is the weakest input in both schemes. A store with no leases earns whatever its customers will pay this month, so a conversion's rent should be evidenced from the street rates of stores with the same access and visibility, not from the best store in town.
The book follows one 590-unit store, and the free workbooks for this case include the cohort engine every figure in the book is computed from, and a lease-up tracker.
Less than a new build, because the column grid, existing loading bays and stair cores fix the corridors. The illustrative conversion lets 68 per cent of its 100,000 sq ft gross against 80 per cent for a purpose-built store. At 60 per cent the conversion's cost rises to £198.86 per rentable sq ft and its yield on cost falls to 7.22 per cent, below the new build.
Work back from the yield on cost a new build on a comparable site would earn. In the illustrative case the conversion matches the new build's 7.54 per cent at a purchase price of £7,035,944, £117 per sq ft of existing building. A warehouse priced for logistics use above that is worth more as a warehouse.
Because a store opens empty and the interest runs from day one. In the illustrative conversion, interest and operating costs exceed income until month 27, adding £1,243,638 to the cost. Leaving it out gives £140.38 per sq ft and a 10.22 per cent yield, a scheme that looks two points better than it is.
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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