Want to Buy or Build Self-Storage? You First Need a Quality Market Analysis

There’s a reason self-storage has caught the eye of institutional investors over the past decade. Word is out on the industry’s generally low capital expenditures, recession-resistant demand characteristics and stable cash flow. However, a dollar of income is valued differently across various markets and product types. This is why you must fully understand your market before making an acquisition or building a new project.

A self-storage market analysis can be done proactively or reactively. A proactive approach involves studying multiple markets to identify the ones that make the most sense for investment, then seeking opportunities within them. A reactive approach involves finding a potential opportunity first, then studying the market in which it resides. Either method requires similar due diligence.

A deep market analysis is essential because the self-storage sector is extremely fragmented. Based on recent data, approximately 15% of facilities are owned by real estate investment trusts, with approximately 70% owned or managed by independent operators. The rest are in the hands of institutional investors. Some of these properties came online with little thought given to macro location, demographics or other market dynamics.

As an investor, you aim to acquire or build a self-storage property with the best chance of success. This requires a deep dive into your property’s locale as well as its physical condition. Let’s look at the essentials from an objective and subjective point of view. This honest evaluation will help you create a thorough picture of the market and make the right investment decision.

Objective Market Analysis: Metrics and Data

When performed correctly, an objective self-storage market analysis generates specific numbers and facts. Here’s what comprises that evaluation:

Supply. You must know how many self-storage facilities operate in the area. A market with low supply can provide upside in growth, though it could be riskier if you’re among the first to enter. One with more supply might put a ceiling on rent growth, but it can also indicate an expanding region.

Demand. Your target market should have enough households to justify buying or building. Population figures are an excellent place to start.

Also, examine historical data. Consistent population expansion over time is ideal for self-storage. Double-digit growth, as desirable as it might be, could be unsustainable. On the other hand, flat growth means fewer people, if any, are moving into the area.

Finally, figure out if enough housing stock is available to support a population boost. Nothing stops in-migration faster than a lack of houses, apartments or condominiums.

Market-saturation score. Supply numbers coupled with population data allow you to calculate total square feet per of self-storage per capita. Generally, a lower number is better, but it isn’t as simple as investing in a market with a low figure. A self-storage property can succeed in an area with a high saturation score, but you need a more nuanced understanding. For example, you must consider the average size of the typical storage unit, the average occupancy and demand growth.

Rent growth. If you’re acquiring, start with your target property, then research others in the area. You must go beyond the pro forma and current figures to examine data from the past five or 10 years. Consistent, positive net income is a good sign. If growth is flat, you could be in a static or declining market.

Subjective: Intangible and Conceptual

Numbers and metrics are great for building an objective view of a potential self-storage market, but there’s nothing like an in-person visit to create a subjective assessment. The following factors aren’t deal-breakers; many can be corrected with time, effort and capital. But they should be considered an essential part of your due diligence. (Please note: Some of these pertain to acquisitions only.)

Ingress and egress. Drive to your target self-storage property. Find out if it’s reachable from an adjacent street or highway. It isn’t the end of the world if getting there requires a U-turn down the street or traveling through an adjacent shopping center or industrial park; but you might have to add a driveway, which will require right-of-way or zoning knowledge. If you can’t correct the situation or aren’t willing to provide the capital to do so, this isn’t the site for you.

Curb appeal. Regard your target property as though you’re a potential renter. You want pleasant landscaping including healthy grass, trees and plants; graffiti-free and secure perimeter fencing; easy-to-read signage; and a great after-hours presentation, which includes plenty of lighting. Don’t forget about the parking lot and driveways. Check to see if they’re cracked or have potholes, or are freshly paved.

Other property condition. Consider the building’s age and how well it’s being maintained. Older properties can still be great opportunities when properly preserved. Pay attention to the condition of the paint on the buildings. Is it fresh or peeling? Does the gate open quickly without jamming or creaking? Ask whether a new roof, HVAC or other equipment has been installed and inspect all paperwork.

Office and staff. You don’t want to walk into a dingy self-storage office with peeling paint, dirty windows, old furniture and burned-coffee smell. You also don’t want to be assisted by someone with uncombed hair who looks like they rolled out of bed five minutes ago. You want a clean, bright space run by professional, competent staff.

Additional Thoughts

Investing in self-storage isn’t as simple as avoiding “bad” markets and investing in “good” ones. The goal is to assess risk. There are plenty of first-generation properties in tertiary markets that offer great returns at the right price. Alternatively, there are many shiny, modern facilities in the urban core that’ll never achieve a great return due to an elevated original basis.

Some self-storage assets and their locales might be more challenging than others. Getting a complete picture of what you’ll face when buying or building involves a thorough understanding of the market in which your facility will operate. An in-depth investigation of objective and subjective factors can be helpful to support your decision to move on a property or look elsewhere.

Rick Perdue is president of Rosewood Property Co., a real estate firm with interests in self-storage. He has more than 25 years of real estate experience. With this expertise, he guides the firm’s strategic vision and oversees its various asset classes, including office, retail, multi-family, self-storage and industrial.