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Why Secondary Markets Should Be the First Choice for Smaller Self-Storage Investors

With institutional capital focused on self-storage opportunities in large, tier-one markets, smaller industry investors can seek lucrative opportunities in secondary markets. Here’s some guidance to aid your search.

With the self-storage development boom in overdrive the last few years, the majority of new construction has been focused in large, tier-one markets. Some of these markets, such as Charlotte, N.C.; Dallas/Ft. Worth and Houston, Texas; and Nashville, Tenn.; have brought in upward of 20 percent additional self-storage space. No doubt about it—there’s a lot of supply out there!

Headlines touting how great self-storage is have caused many new investors to jump onto the bandwagon. Over the past few years, the industry real estate investment trusts have been igniting development and inspiring others to build or buy. But they’re focused primarily on large, high-population markets. If you look where their newest projects are going up, you’ll see they’re in the cities incurring the fastest job and population growth.

Due to the high yields self-storage can generate, there’s still a lot of sideline capital pointed at larger markets. That capital is chasing newly constructed multi-story locations sold at Certificate of Occupancy or once a property is north of 50 percent physical occupancy. For small investors, it can be advantageous to let institutional money chase and fight over these deals, while the rest of us focus on the properties and markets that are off that radar screen.

With a glut of industry growth taking place, new development opportunities are now largely in the secondary and tertiary markets. But how do you know where to go? Let’s look at some key considerations.

Choosing a Market

By nature, self-storage is a submarket product. For example, in my company’s portfolio, about 86 percent of customers live within 3.2 miles of their storage location. With that in mind, it’s important to focus not on a city or region, but on a particular submarket.

This makes sense for another important reason: The majority of U.S. self-storage facilities (about 62 percent based on the last statistic I saw) are still owned by independent operators who have only one location. Most of these independently owned sites are in smaller markets. They’re attractive for small investors because they generally aren’t chased by institutional money and often have room to expand.

In fact, most of the facilities that will go up for sale in the next decade are drive-ups that were constructed in the 1980s through the early 2000s. They’ll be ripe for repositioning and expansion. These kinds of deals can provide value-added opportunities that will produce desired yields.

As these promising facilities come available, you want to look for sound submarket fundamentals. In addition to examining current supply and the amount of storage available per capita, look at population and growth trends, along with median household income and education level. Here’s what I recommend:

  • Look for population of 35,000 to 40,000 or more, if possible. Population growth doesn’t have to be in the double digits, but you want to make sure the market is growing.
  • Annual household income can vary, but on average, I like to see $45,000 or more.
  • It’s important to look at education level. Job growth is a sure bet in technology and service sectors, and some higher education is usually required to achieve the level of future household income we want to see in a market.

You don’t have to be in a large market like Atlanta or Chicago to have strong fundamentals for self-storage. In fact, given that larger cities are where most new supply has been developed, the best opportunities to buy or expand a property are often in the outer belts and bedroom communities of these larger cities as well as in tier-two and tier-three markets.

The Time Is Now

The next decade or two should be strong for self-storage based on increasing consumer demand and population growth. You just need to be smart about where you seek opportunities. For the immediate future, this most likely means secondary markets.

When’s the best time to get into or grow a self-storage business? Yesterday. But if you didn’t do it already, that time is now. Be strategic, know your numbers and apply strong submarket fundamentals. In doing so, you’ll increase your odds of enjoying a long, successful industry career.

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 mark@helmproperties.com.

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