In honor of my beloved Boston Celtics and their recent NBA Championship, I’m breaking down the exciting world of commercial real estate development into the four quarters of a basketball game. Today, we’re focusing on two asset classes: Small Bay Industrial Flex and Self Storage. Let’s dive into the game!
1st Quarter: Development
The first quarter is all about development. For Self Storage, the days of finding dirt at $3 per square foot or less are largely gone. New storage developments require prime “main and main” locations with at least 40,000 people in a three-mile radius. This has made affordable land challenging to find.
In contrast, Small Bay Flex doesn’t rely on prime locations. While being near a population base is advantageous, tenants—often plumbers, HVAC contractors, drywall installers, and other tradespeople—prioritize good access to their customer base over being in a high-traffic area. This flexibility in site selection can result in significant land cost savings.
A key advantage for Self Storage is the ability to build vertically. While three-story facilities were the norm, updates to the International Building Code in 2021 have made four-story builds more feasible by reducing fire protection costs. Small Bay Flex, however, is limited to single-story construction, requiring larger parcels to achieve comparable economies of scale.
When it comes to construction costs, the two asset classes are surprisingly similar. For example, in one market, we’re seeing $75 per square foot for Flex and $90 for Self Storage. However, Flex has a slight edge in build time, often shaving off 20% due to fewer individual units to construct.
The real differentiator in the first quarter is saturation. Self Storage has been the darling of commercial real estate for over a decade, with an average of 1,000 new facilities opening annually from 2017 to 2019. This trend, coupled with ongoing planning-stage projects, has led to oversaturation in many markets. By contrast, Small Bay Flex has far less competition. Much of the existing product was built in the 1980s, and the pipeline of new projects remains limited.
Score: Flex takes a 10-point lead heading into the second quarter.
2nd Quarter: Lease-Up
The second quarter covers the lease-up phase, from doors opening to achieving economic occupancy (when you hit your pro forma return expectations).
Flex has a major advantage here. Leasing can often start pre-opening, with agreements signed as early as Certificate of Occupancy. We underwrite our Flex projects to a two-year lease-up period, though market agents often call this conservative. Meanwhile, Self Storage has seen a dramatic slowdown. Where facilities once leased up in 36 months or less, it’s now taking 48 months or more in some markets.
The financial implications are significant. A typical Self Storage facility may take up to four years after opening to achieve positive cash flow, compared to two years or less for Flex. Flex also benefits from shorter construction times, further reducing cash burn during development.
While leasing costs are comparable, Flex owners can choose between self-management and hiring a broker (typically 6% in fees). Storage owners often hire third-party management firms at similar rates but also face additional costs for on-site staff and advertising.
Score: Flex extends its lead to 20 points at halftime.
3rd Quarter: Net Operating Income (NOI)
The third quarter is all about generating NOI—the lifeblood of any commercial real estate investment.
Self Storage makes a comeback here. Storage facilities’ month-to-month leases allow for aggressive rate adjustments. Existing Customer Rate Increases (ECRIs) have become a primary revenue driver, with some customers seeing rates climb to 300% of their initial rental price. Additionally, storage operators can monetize ancillary services like tenant insurance, keyless locks, and monitored units, significantly boosting income.
Small Bay Flex, on the other hand, typically involves multi-year leases with modest annual increases of 3-4%. While these leases offer stability, they lack the flexibility to capitalize on rapid market rent increases. Flex also faces challenges with tenant turnover, as small business owners may struggle financially.
Lease rates further tilt the scales in favor of Storage. In the same market, Flex rents might be $14 per square foot, while Storage commands $25. That’s a substantial gap to overcome.
Score: Self Storage cuts the deficit in half, setting up a nail-biter in the final quarter.
4th Quarter: Exit Strategy
The fourth quarter focuses on the endgame: exiting the deal. Investors typically choose between refinancing or selling the property.
Self Storage has a clear advantage in refinancing. A wider array of lenders—banks, life insurance companies, and private equity—are willing to finance Storage deals. This translates to better terms and higher certainty of execution. Additionally, there are more end buyers for Storage assets, including five publicly traded REITs (e.g., Public Storage, Extra Space, CubeSmart) compared to zero for Small Bay Flex.
This demand disparity is reflected in CAP rates. A Storage facility generating $1 million in NOI might sell for $17-$18 million, while a comparable Flex property would sell for $15-$16 million. The higher valuations for Storage are a direct result of its broader buyer pool and institutional appeal.
Final Score: Self Storage wins by five points, but Small Bay Flex puts up a strong fight.
Post-Game Analysis
While Self Storage emerges victorious in this match-up, Small Bay Flex is gaining momentum. Rising investor interest, limited competition, and more favorable development dynamics make Flex a compelling asset class to watch in 2025 and beyond. The Flex team might not dethrone Storage just yet, but it’s building a roster that could make waves in the commercial real estate arena.