What about square foot per capita? This analysis is as overrated as it gets. The premise for determining market saturation when measured by square feet per capita seems very logical. The reality is this analysis could not be more wrought with trouble. Lets consider this. The 2002 Self Storage Almanac, produced by MiniCo Inc., indicated the following statistics:
What is interesting is the occupancy levels in the two city markets are not entirely dissimilar, despite the huge gap in supply. So is the market-saturation level .73 or 8.56? Remember that Las Vegas, at some point in the data set, had been at .73. At some point, it was also at the U.S. average of 4.59. Does this mean New York City has a supply capacity 10 times what it was in 2002? Was the market, by this definition, already oversupplied when the last development was in the consideration stages? When is enough enough?
First, consider that in arriving at the numbers for square foot per capita, the Almanac made some assumptions. To completely buy into the analysis, we would have to believe all self-storage facilities in both markets are 38,808 square feet. It would be a challenge to support that assumption, but the Almanac has done the best it can with the limited data available, so we give it credit for starting somewhere to create a data set.
The reality may be that, in metropolitan areas, the actual number of square feet could be substantially higherpossibly double. One of the problems is we simply do not have good data with which to start. Does anybody really know how many storage facilities there are in the United States or how many square feet are in each one? What about those 20 spaces run out of a car-repair business do you count them? Do you count shipping containers for rent in a yard?
What defines populationevery man, woman and child? Do 2- year-olds use self-storage? At what age bracket do I exclude a group? Doing so would greatly increase the number of square feet per capita. That statement alone should give every banker who made a loan based on this statistic instant heartburn.
Lets make the case against this analysis even stronger. What is the saturation level for square feet per capita? Is it the U.S. average? Is it the average from the top 50 markets? Is it the average from the top 100 markets? Is it the New York City supply or the Las Vegas supply? Do you count footage in development? What about footage under construction?
Finally, what about the commercial factor? How does square foot per capita measure commercial demand? Who could ignore a segment that produces 25 percent to 40 percent of the typical selfstorage customer base?
Market OwnershipA Better Analysis?
If we discard square foot per capita and attempt to define a market by concentrating on potential customers, we may be able to forecast saturation levels. Here are the assumptions connected to this analysis:
- There are two existing competitors in the market.
- The market is a perfect circle with a 2-mile radius.
- The competitors market is a perfect circle with a 2-mile radius.
- The population in the market is evenly disbursed. There is no area more or less dense than another.
- The population is 10,000.
Already I see problems with this approach, and we have not even gotten past the assumptions. But here is the popular methodology. First, on a map, draw a 2-mile circle around your subject property, as well as a 2-mile circle around each of its competitors. Any area in the subject propertys circle that is not overlapped by a competitors is the area the facility owns. Then you measure the population in that area.
Lets say, for the sake of example, that 25 percent of your area is not covered by a competitoryou own 25 percent of your market. If the total population of the two-mile area is 10,000, your target population is only 2,500. What is the storage use among this group? If the per-capita analysis worked, you could multiply your owned customer base by the number of square feet per capita, and that would give you the number of feet you could justify building. Uh-oh. Were back to square foot per capita again.
Now the appropriate test is to temper the results with the average occupancy levels in the market. This further qualifies the number of square feet anticipated for absorption based on the market ownership. The dilution serves to provide a more correct result.
These exercises only point out there may be flaws in traditional theories of demand. Many believe the only true test is the continued absorption of space. Once measured in a market, the actual absorption level promotes and predicts future assimilation. If the most recent projects have rented at 2,500 square feet per month, and no other drastic changes are noted in the market, there is validity to the suggestion that the market will continue to absorb at the same level.
I subscribe to this theory. I also suggest that if there is a high level of discounting and rental-rate growth has been stagnant, demand may be soft in a market with those characteristics. Developers should be cautious about a market in which no new projects have been built, or one that has not had high occupancies (above 95 percent) in all stores. While each project must be evaluated on its own merits, there will be many influences that can alter demand potential.
In most feasibility studies, there is insufficient time to measure the many differing amenities that may give rise to absorption. These would include:
- Climate-controlled vs. standard space
- Multistore vs. ground-level space
- Geographically challenged competitors
- New, state-of-the-art projects in first-generation dominated markets
- Price concessions
- Marketing effort
- Quality of management
These discussions have solely focused on predictive analysis. They have no relevance to forging new product in markets. I recall a market in which, when developers proposed to build a self-contained, completely climate-controlled building, competitors encouraged them to throw their money away, because the consumer will not rent that space. Whos laughing now? These projects are wildly successful, and many of the operators who thought these developers were crazy now have climate-controlled space in their projectsso much for predictive analysis.
For those readers who are experienced self-storage developers, you have already wrestled with many of these issues, and perhaps had interesting and lively debates with banks and investors. Most worked their way through the morass of misinformation and speculation. For those who are novices, you may be best served to hire a consultant to answer these tricky questions. Make sure you hire someone who owns, operates and is currently developing self-storage properties. He is in the trenches with you and can give the best advice.
RK Kliebenstein is a consultant and the team leader at Coast-To-Coast Storage, a self-storage consultancy firm. With a home office in South Florida and affiliate offices in Dallas-Fort Worth, Orlando, Southern California and other locations, Coast-To-Coast specializes in demand and feasibility studies. For more information, call 877.622.5508, ext.81, or e-mail [email protected].