REAL ESTATE ROUNDUP
|Copyright 2014 by Virgo Publishing.|
|By: Michael L. McCune|
|Posted on: 01/02/2007|
Marketing experts profess the easiest way to sell is by eliminating your competitors—although this is certainly extreme and not completely practical advice. Reading this magazine’s articles on Yellow Pages ads, Internet access, flashing signs, decorative sales areas and more will guide you to becoming more competitive against facilities in your market. However, your greatest competitor may be someone that you don’t even know about: the new development not yet built.
You may think it’s impossible to compete with a phantom project, but you’re wrong … and you could end up sorry! To avoid the agony, you’ll have to complete a marketing homework project. The best part about the assignment is current competitors will love it too—and may actually be eager to help you.
Most self-storage owners dread the news about an 80,000-square-foot facility being built down the street. The best way to remain calm—and competitive—is to not compete with another project, especially if your market is overbuilt. But how can you persuade decision-makers not to build a new site? A forewarning: This assignment requires creativity and energy.
The task is to convince developers another facility may horribly harm the market. Research tells us if occupancies are in the mid-80 percent range or lower, you can make a very persuasive argument that a new project could hurt both existing owners and the new facility.
You first must find the decision makers and share your concerns. You can track down the developer, but be prepared to find him inaccessible, not approachable or a poor listener. Ultimately, you should discuss matters with a city council representative and at planning board meetings. Planners are especially interested in knowing more about markets, and politicians are always accessible for constituents (or donors). Neither group wants to see projects fail.
Sharpen Your Pencils
Gather market facts by collecting data about the size and occupancy of all facilities within a five-mile radius. Table 1 shows a hypothetical market with an 85 percent average occupancy.
As you see, the market is productive but not a stellar performer, although most facilities have decent net operating incomes. The problem, of course, is the existing excess vacancy; another project will only exacerbate it. The question is: How long will it take to grow out of the problem?
Since we know a new project won’t bring new tenants to the market, the average occupancy rate in our little market will fall and slowly vacancies will distribute across the board according to each facility’s attributes. If a developer comes to our hypothetical market to build a 70,000-square-foot facility, let’s see what will happen to our numbers (see Table 2).
We can estimate demand relative to the market in many ways, but research by the Self Storage Association, Self Storage Economics and other groups indicate the most important is by number of households in the market. In other words, more households equal more self storage renters. And since we can’t exactly pinpoint size, shape or household ratio (sf/HH), the most accurate number is occupied square footage. For our example, we’ll say households create a demand for 200,000 square feet of self-storage.
We also know current demand equals current occupancies. Therefore, growth in numbers of households will produce approximately the same ratio of self-storage occupied square footage currently in the market. There’ll be some difference depending on new apartment-renter ratios and incomes relative to existing household base, but we’ll be pretty close.
To complete our analysis, we must estimate household growth rates in our market, apply it to the existing actual demand (occupancy), and see how long it will take to absorb the new facility.
As an example, I chose a random Denver suburb, located a demographic report and found its five-year growth was 1.9 percent with a five-year projected growth of 1.6 percent. It’s not unusual for growth to slow down in suburban areas as amount of developable land decreases. The highest U.S. growth area for an MSA is 3.4 percent and the average is 1 percent.
Now let’s look at the impact of a new facility coming into the area. Compounding our 200,000-square-foot occupancy at 1.9 percent and 1.6 percent indicates it will take 17 years and 20 years, respectively, to create demand to rent up a new 70,000-square-foot project, returning the market to its current equilibrium at 85 percent.
Although we’ve made many assumptions here and no one can predict the future, speculatively it’s not a pretty picture. It’s worse if the new project promises modern bells and whistles in a good location, meaning leases will slow at older projects.
Take this homework assignment—compiled in a concise, authoritative way—to planning and council authorities. They’ll find it useful and convincing, and you want them on your side! In any case, I hope this homework project lands you an A-plus facility that maintains a long-lived competitive marketing edge.
Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In 1994, he created the Argus Self Storage Real Estate Network, now the nation’s largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE; visit www.selfstorage.com.