America is the land of opportunity, and big cities like Chicago, Los Angeles, New York, Philadelphia and San Francisco have always been seen as good places to cash in and set up shop. But in recent years, the Sun Belt has taken the lead when it comes to business and population growth. Growing metropolises like Austin and Dallas in Texas, Phoenix in Arizona, and Tampa in Florida have become preferred places to seek opportunities.
In fact, a bumper crop of secondary markets is gaining national attention. According to an article from personal-finance website gobankingrates.com, Apex, North Carolina; Bentonville, Arkansas; Elk Grove, California; and Frisco, Texas, are among the fastest-growing U.S. cities for small businesses. These types of burgeoning areas are becoming prime targets for self-storage investors, too. Let’s explore why and how to choose and area for your next acquisition or project.
Why Secondary Markets?
Since the pandemic, more people are migrating to secondary markets, which means greater opportunity for self-storage investors. For example, St. George, Utah, is enjoying an influx of residents who are leaving California, primarily for economic reasons. Many have sold their homes for a sizeable profit and are moving to the east and south to enjoy lower housing prices and a higher quality of life. Flush with cash, these consumers are buying lots of “toys” that require storage, which they can now easily afford.
Similarly, a large number of residents from New York City have re-evaluated their priorities and moved upstate to enjoy a slower pace, work remotely or start a new career. They’ve shown they aren’t afraid to put quality of life above their professional goals. But most of these transplants are finding a low inventory of houses for sale. Now they’re renting apartments and waiting for interest rates to drop. As such, they’re storing their property in self-storage until they can find an affordable home.
The pandemic also fueled consumer expectations around contactless services, in self-storage and many other industries. This push to adopt new technologies has opened secondary markets to investors. It’s now more affordable to run multiple facilities, as they can be operated remotely with less staff. My company operates 50-plus locations in secondary markets using a hub-and-spoke model. All day-to-day operation is centralized to a main office, which allows us to share resources across many sites and create cost efficiency. It also allows us to offer better customer service; a single facility couldn’t support such a wide team of experts.
Selecting a Secondary Market
Hopefully, you’re seeing secondary markets in a more positive light than you were a few minutes ago. But the idea of establishing self-storage facilities in smaller, growing cities might have raised an important question: How can you tell if a given market is the right one in which to invest? When considering a location, answer these five questions:
1. How many potential customers are in the market? A good rule of thumb is to select a location with at least 10,000 people within a one-mile radius, 30,000 within three miles and 50,000 within five miles. This yields a large enough base of potential self-storage renters. That said, if the existing competition is very low, then a smaller population might still make sense.
2. What are the market rents? The most important factors in determining potential investment return are average rent per square foot and rent growth over time. A market with rents of $15 per square foot will yield a much higher property valuation than one at $6. Many assets in secondary areas are leased below true market rent, creating the opportunity for significant upside at purchase.
3. What’s the level of supply? In addition to knowing the existing population, find out how much storage is available per capita. Markets with 7 square feet or less will have significantly better economics than those with more. Go for markets with medium to low competition.
4. How does your offering compare to the competition? Are the existing self-storage facilities in the area full? Are they well-maintained? What’s their unit mix? It’s important to recognize unfulfilled needs in the market. If you can build a better facility with more amenities or upgrade an existing site, you’ll be better able to capture potential new business.
In summary, self-storage investors should seek secondary markets with decent population size (more than 10,000 per one-mile radius), strong rents (more than $10 per square foot per annum), lower than average supply (less than 7 square feet per capita) and, ideally, competition that’s outdated and nearly 100% occupied. If you can manage this, it’ll give you good control of supply and pricing in the region.
The majority of return on investment in self-storage is determined by the market you choose and the terms of purchase (if you’re acquiring rather than building). If you buy into a great market at a good price, over time, the asset will perform. On the other hand, acquiring a facility cheaply in a very competitive market with low rents usually doesn’t result in much growth.
The Path to Success
Success in any endeavor is never guaranteed, but investing in a secondary self-storage market can be a very smart strategy. When looking for places to build or acquire facilities, consider whether you can add value to the community. Properties with expansion potential or in need of capital improvements can have phenomenal upside for revenue growth.
The real return in secondary markets comes from the ability to implement great remote-management systems. Technology has opened thousands of potential new markets for savvy self-storage investors, and these secondary areas are now ripe for the picking!
Jeremiah Boucher is founder and CEO of Patriot Holdings, which owns more than 100 commercial real estate assets. Since 2001, he’s aggregated a $300 million portfolio, with a focus on self-storage, manufactured housing and industrial assets. His vision is to grow the Patriot portfolio to more than $1 billion within 10 years. To reach him, call 702.550.3808 or email [email protected].