Major cities, growing suburbs and rural towns present countless opportunities to acquire self-storage facilities. The problem is market data for this industry tends to lag behind that for other asset classes like industrial, multi-family and offices. To make an informed investing decision and determine if a potential deal makes sense, buyers need useful criteria. In this article, we’ll discuss three key metrics to examine.
First, let’s define what we mean by “market.” Customers typically live or work within a three- to five-mile radius or a five- to 15-minute drive of their self-storage facility. They’ll sometimes rent from outside this region, but for the purpose of evaluating a potential acquisition, it makes sense to focus on that defined area.
Keep in mind that the following are rules of thumb and there can be exceptions. Often, you must dig a little deeper before making a go or no-go decision.
Metric 1: Population Growth
I like to see population growth in a market of 1% or more; however, it isn’t always feasible. For example, if the population is dense—say, 100,000—I wouldn’t expect that kind of growth potential because there likely isn’t land in the area for new housing. In this case, a lower percentage doesn’t mean the market is stagnant. But if the population is only 20,000, I’d expect there to be land for residential development and a higher projected growth rate. If it isn’t 1% or more, we need to find out why.
It could be there’s a four-lane highway taking up land or a major retail center leaving little room for new residences. Neither is necessarily bad—in fact, they can be good things—but you might need to investigate further. Ultimately, you want to see population growth, but the level will vary based on surrounding market fundamentals.
Metric 2: Supply
The next data point to consider is self-storage supply. Typically, you want to see 5 to 8 square feet per capita or less. Nationally, there’s an average of 6 square feet for every man, woman and child.
What the industry does with that number is interesting. If you’ve ever ordered a feasibility study for new development, you’ve likely seen it referenced. It typically goes something like this: “The market currently includes approximately 10 square feet of self-storage per person. Adding the proposed project increases the total to 11 square feet. Based on these metrics, we feel the market is oversupplied when compared to the national average of 6 square feet per person.”
In other words, if a market has fewer than 6 square feet per capita, it’s considered undersupplied. If it has more, it’s oversupplied. Is that assumption correct? Isn’t supply only half the story? What about demand?
Generally, when looking at potential markets, the lower the supply the better; but an area with a high rate of storage per-capita can be intriguing. What if supply is high but facility occupancies are also elevated and operators have waiting lists? This is why it’s critical to understand our third metric: consumer demand.
Metric 3: Consumer Demand
If physical self-storage occupancies in a market are greater than 90%, it indicates strong demand. This is what we like to see because it means future rate increases will likely be absorbed by customers. It also suggests we’ll have an easier time backfilling units if tenants choose to move out. In contrast, if occupancies are low—say, around 75%—you’ll have trouble raising rents and filling vacancies. You’ll also likely need to spend more on marketing and fight for every customer.
Let’s go back to our example from above in which self-storage per capita is high but occupancies are also elevated. The fact that facilities are full indicates demand is strong. It’s likely there are new homes or apartments under construction and the area is booming. In this case, you shouldn’t let the per-capita figure deter you from considering the deal, especially if population growth will be positive in coming years.
In another scenario, let’s say you’re looking at a property in lease-up. The target market has only 6 square feet per capita, which should indicate undersupply; but local facilities are only 75% full. In reality, demand is soft. Residents and businesses aren’t using the self-storage available, which means this deal is likely a pass.
The obvious question is how to figure out self-storage supply and demand in any given market. There are several industry vendors who offer supply data, but they typically don’t cover demand. The best means to get that information is the old-fashioned way: secret shopping competitors. Call and visit local facilities. Based on your conversations with facility managers, you can estimate demand in the market. Combine this with the supply data you collect to make decisions on whether a deal is worth pursuing.
There are numerous other metrics you can use to in your acquisition decision-making, such as median household income, median house value, average age, average rent per square foot and number of households per income bracket. The list goes on and on. Median and average household income, and number of households per income bracket can be used to understand if customers can afford to rent storage. Median house value can help you understand what the surrounding neighborhoods will look like. Average age tells you which types of customers you can expect, including what percentage might adopt autopay.
All these data points will help you flesh out the picture you paint about the market and its potential customers. The truth is, though, it’s very difficult to find an area that’s strong in every category (high incomes, low supply, high demand, new homes under 2,000 square feet, etc.).
There’s a ton of data to review when sizing up self-storage acquisitions, but try not to let the wealth of information deter you from making decisions. Crunch the numbers and scrutinize what you learn about population growth, supply and demand. I hope these insights will help you better understand your target markets and lead to more informed investing decisions.
Kris Bennett is a self-storage managing partner at Passiveinvesting.com, where he leads deal sourcing, broker relations and overall strategy. He started his self-storage career in the Carolinas, sourcing deals for a self-storage acquisition fund. A graduate of the University of North Carolina, he co-hosts the “Storage Investor Nation Podcast” and hosts weekly webinars to educate industry investors. Reach him on LinkedIn.