Wherever you live in the United States, you don’t have to go far to find a self-storage facility under development. Even people who have nothing to do with the industry comment on its prolific visibility, noting that facilities are going up “everywhere.”
For facility owners and developers looking to enter the business or expand an existing operation, its logical to want to know if the market you’re targeting is overbuilt. There are constant discussions about whether certain cities or areas are in oversupply, or “saturated.” To know the truth, it’s critical to ask the right question and know how to arrive at an accurate answer.
Submarkets and Benchmarks
When contemplating market saturation, it’s often better to look at specific submarkets than an entire city. Take the Dallas/Fort Worth area of Texas, for example. Many say it’s overbuilt, however, I’ve seen submarkets with a 5-mile-radius population of more than 100,000 and less than 4 square feet of self-storage per capita. Sure, there might be some downward pressure on rental rates, which will probably affect revenue in some submarkets during lease-up; but that doesn’t mean you shouldn’t consider it. In your pro forma, you could include a 20 percent discount as a lease-up incentive.
A common denominator between nearly all so-called overbuilt markets is they tend to have the fastest and highest population growth, which I believe will solve most mistakes you’ll make. So, how do you know if a submarket is truly saturated?
In other retail sectors, there’d be a host of benchmarks to examine. Commercial real estate agents analyze markets to find exactly the right spot for a new store by conducting a “gap” analysis. They’re looking for a market where spending within a specific retail category is light, but the demographics show decent disposable income.
For example, Walgreens can look at a location and tell how much money is being spent on beauty products and approximate how much more spending power there is for that category, examining population, household income and the location of competing stores. It can then very accurately project what the per-square-foot income will be if a new store is built at a specific site. In self-storage, we primarily use one metric: square feet per capita.
An advantage self-storage operators have over owners of other retail businesses is we know where our customers live. For example, for the facilities in my portfolio, 86 percent of tenants live within 3.2 miles. This is why the accuracy of a feasibility report is so valuable.
If you’re looking to build a new self-storage facility, expand an existing site or convert a building from another use, you should absolutely obtain a feasibility report. It’ll tell you how much storage square feet per capita exists in your submarket. To get a per-capita figure without the expense of a formal feasibility study, you can consult market-summary reports from one of several online services. While these aren’t always exact, they can give you a sense of a submarket’s basic metrics. My strategy is to use an online tools for initial research. If I believe a the location is promising, I get a feasibility report to confirm or dissuade the decision.
Another way to look at demand without conducting a feasibility study is to Google (or drive around) an area to see how many self-storage facilities there are. You then have to guess or visit all their websites to try and determine their size. Next, pull demographic information for your target location from a market package or online service and do the math.
Let’s say there are six facilities comprising about 425,000 net rentable square feet of self-storage and 86,000 residents within a five-mile range. That equates to about 4.9 square feet per capita, which is less than the national average of 7 or 8 square feet.
With all the tools at our disposal, there’s no reason anyone should build self-storage in a saturated submarket; yet we see developers do it all the time. Perhaps, it’s human nature. People hate to think they missed the party! I’ve learned the hard way that trying to lease up a facility in an overbuilt submarket isn’t much fun. I’ll skip that party next time. I suggest you do, too.
Mark Helm is a commercial real estate agent and self-storage investor. He began working with real estate investment trusts in the mid-1990s to locate and purchase self-storage properties before striking out on his own. He’s the author of “Creating Wealth Through Self-Storage” and the creator of “Storage World Analyzer,” a cloud-based, financial-analysis software tool designed to help self-storage operators and investors evaluate potential real estate acquisitions or development projects. To reach him, e-mail firstname.lastname@example.org.