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Evaluating Markets for Self-Storage Deals

The self-storage market is full of opportunities to acquire deals in major cities, growing suburbs, and rural towns. However, market data for self-storage lags other asset classes like multifamily, office, and industrial properties. What criteria do we use to determine if a market makes sense? How do we avoid markets in decline or where oversupply exists? That’s what we’re going to cover in this article.

Before we begin, we should define what we mean by “market.” The tenants for a self-storage facility typically live or work within a three-to-five-mile radius around the facility. This is known as the trade area, and this is what we’re referring to when we use the word “market.” A self-storage market or trade area isn’t the entire city or county. It’s the three-to-five-mile radius around the facility. That is why they say storage is a three-mile game.

Now we’ll cover the three data points we use when determining if a market makes sense. Keep in mind these are rules of thumb and exceptions to the rules can be found in multiple markets. Oftentimes one must dig a little deeper before disqualifying a deal. 

Three Data Points to Consider

1. No population declines

Rather than focus on population growth, we want to see no population decline over the past one to three years. This may seem counterintuitive but let me explain. 

If the population is dense, say 100,000 people living in a three-to-five-mile radius, then we don’t expect population growth above one percent because there isn’t enough land available to add new housing. If the population isn’t dense, say 20,000 people living in a three-to-five-mile radius, land should be available for residential development. In this case, we’d like to see a growth rate of one percent or more. Ultimately, population growth is a moving target and will vary based on the density of the market around a facility.

2. Median Household income 

We want the median household income in a market to be equal to or greater than the median income for the state. If incomes are lower than the state median, then we may have a hard time raising rents, and collections will probably be an issue.

We also want to see the average household income greater than the median household income. This means there are more individual households with incomes above the median than below the median.

3. Occupancy at competing facilities

Physical occupancies are over 90%,  indicating storage demand is strong. Strong storage demand improves the chances our rental rate increases will be absorbed by the tenant. Consequently, we will have an easier time backfilling units if they move out. The opposite is true if occupancies are low. 

For example, if the facility we’re underwriting is 100% occupied with a waiting list, and the comps are also full, or close to it, that gives us tremendous confidence in the demand for storage in that market, and our overall business plan. However, if the comps are at 75% physical occupancy, it indicates storage demand is soft. As buyers, we will not assume that our facility can somehow achieve 90% occupancy for some special reason. We never assume we can magically beat the market.

Self-storage owners are reluctant to share occupancy data, so how do we collect it? 

We make phone calls to all the comps, or stop by if we’re doing a market tour, and ask to rent a unit or two. Based on how the conversation goes, we will ask more questions to allow us to gather enough intel to gauge the occupancy of the facility. In some instances, we’ve had managers tell us their actual occupancy percentage! We then use this information to make informed conclusions about the occupancy, or demand, for storage in the market.

Supply and Demand Analysis

In the self-storage industry, it’s common knowledge that roughly six (sq. ft.) of storage per person exists in the U.S. (2021 Self-Storage Almanac, p. 18). That means there are six sq. ft. of self-storage space for every man, woman, and child in the U.S. to utilize. 

The self-storage industry uses this six sq. ft. per person number to determine if a market is over or undersupplied. For example, if a market has four sq. ft. per person, it’s said that market is undersupplied. If a market has ten sq. ft. per person, then that market is considered oversupplied.

However, determining storage supply does not account for storage demand, which can vary widely from one market to another. Demand is determined by occupancy, and occupancy is discovered by calling or visiting comps, as mentioned earlier. Focusing only on the supply side and excluding demand analysis is excluding half the data.

Why would some storage professionals only look at one side of the coin?

They do so because it’s hard to figure out demand without making phone calls or site visits, and some don’t want to spend the time doing it. This presents an opportunity for others willing to do the work.

We’ve covered a few metrics to use when sizing up markets and discussed how supply and demand analysis are both crucial to the overall success of a deal. I hope you’ve enjoyed learning how we analyze markets. Stay tuned for next month’s article on the resources I recommend for self-storage education.