By Jo Beth White
Gone are the days of “build it and they will come” in the self-storage industry. In today’s competitive market, where you choose to build is key. Let’s review the process of land selection and how it impacts the viability of a project. There are many pieces to this puzzle, but taken together, they can give you a clear picture of how to proceed.
To begin, you must determine how much land you need. Before going into escrow on a parcel, order a feasibility analysis to answer this question for you. Beyond size, there are other market criteria to consider. Let’s discuss some of these items.
Equilibrium and occupancy. Asking if a targeted area is overbuilt is a leading question when looking at a potential self-storage market. It’s critical to understand how much storage can be built in an area prior to determining the size of your land. Steer clear of markets that are in equilibrium, meaning there’s zero net gain in tenants overall and not enough population growth to sustain new business.
Physical unit occupancy also plays a role in shaping your evaluation. Some markets can have directly opposing characteristics; for example, an area might have high occupancy despite being overbuilt. I once reviewed a project in a deep urban market that had occupancy levels of 92 percent to 98 percent within a two-mile radius. On the surface, this might seem like the perfect place to build, but the market already had 15 self-storage facilities, with 1,200 empty units.
Storage per capita. Self-storage use is quantified on a per-person, or per-capita, basis. Each market has its own per-capita rate, regardless of state assumptions. If you use statewide numbers without understanding the rate in your particular market, you might over or under build.
For example, one local market may have 3.85 square feet of self-storage per capita and be approaching equilibrium, while another market three miles away may have 11.12 square feet per capita and still be absorbing new square footage. The rate determines the future equilibrium footage absorption based on demographic growth as well as its inherent impact on new storage absorption.
Dwelling type. In addition to the per-capita rate, pay attention to the percentage of single-family homes vs. apartments. In any given market, approximately 30 percent of apartment dwellers move during the course of the year. This creates greater self-storage absorption without the population increase typically necessary to fill more units. Be aware of this criteria so you don’t ignore an apartment market when the density isn’t increasing.
Rental rates. In addition to needing pent-up demand to sustain new storage growth, rental rates play a role in deciding the size and viability of a potential new facility. If they’re too low, regardless of a great market that needs storage, they won’t support the cost of land, development and construction. In addition, once you’re in lease-up, your rates may not be able to meet the needs of your expenses and debt service. Similarly, just because an area has exceptional rates doesn’t mean it can absorb new self-storage.
Hunting for Land
Let’s say we’ve completed our feasibility analysis and determined the market is viable and able to absorb 60,000 square feet of new self-storage. Land-selection criteria has its own set of puzzle pieces. Let’s take a look.