By Michelle Gigowski
Now more than ever, self-storage operators are stretching themselves to offer as many add-on products and services as possible, with the intent of generating additional income. However, I would recommend against investing in any amenities without sufficient data to support the decision.
To achieve a competitive advantage, you must fully understand your markets and the requirements of potential tenants. Before you integrate ancillary products or services, it’s imperative to understand the dynamics of the surrounding area and how they’re likely to impact your business goals. Whether your market spans a quarter-mile radius in Manhattan, N.Y., or a three- to five-mile radius in a rural town, understanding its undercurrents will help you build a balanced investment plan to meet and exceed the needs of your customer base while limiting your exposure to unnecessary risk.
Mining Your Market
Following are several metrics and questions to help you gather market intelligence and grow more comfortable with the particulars of your area. Together, these items form a great starting point for analyzing your market. In self-storage, this is typically a three- to five-mile radius surrounding a facility, where potential tenants live or work.
- Population: This is the total number of people present within your market.
- Tenant mix: Though the typical self-storage base is dominated by residential customers, it also includes businesses, students and military employees. If your facility is near commercial businesses, a military base or university, you can tailor your marketing to these audiences.
- Basic demographics: What’s the average age of customers in your market? Are they mostly male or female? What’s the average level of education? What’s the average home value and level of household income? This type of statistical data can easily be found via a Web search or U.S. census data for the surrounding city.
- Rent vs. own ratio: Using online search tools, identify the city’s ratio of apartment and home renters to owners.
- Crime rate: What is it in your area, and how does it compare to state and national averages?
- Microeconomy: Is the community expanding, contracting or constant? Your advertising and move-in promotions may vary depending on demand and how the market is performing.
- Available supply: Is the area undersupplied, oversupplied or at a comfortable equilibrium? A common way to understand this is to quantify the average rentable square footage per person in the area. The national average is roughly 8 rentable square feet per person.
- Real estate and construction outlook: Is your facility in an urban area with lots of building? Will it soon be surrounded by housing developments or assisted-living communities? Knowing the outlook for expansion can help you develop attractive promotions and tailor amenities to your new tenant base.
- Competition: Who and where are your competitors?
- Rate-increase tolerance: Think about your current tenants. Do they visit the facility often? Is their billing address within your target market? If the answer is no, they’ll likely tolerate a 1 percent to 3 percent rate increase every three to nine months.
- Permits and zoning: Are you legally able to lease space for cellphone towers or signage and billboards?
After completing this thorough market assessment, identify or revisit your business goals. Once you understand the market, you can evaluate potential amenities to add at your facility.
Weighing Risk vs. Opportunity
Because it’s generally easy to enter the self-storage industry, market research and due diligence are necessary to justify facility improvements. Make decisions based on the requirements of your specific area, not on general information from the real estate investment trusts. Know what your business and customer base requires, and then look for ways to give your facility a competitive edge.
The goal should be to generate additional revenue, build customer loyalty or support increased occupancy without the need for move-in promotions and concessions. Your most profitable idea may not be innovative or glamorous, and that’s OK.
Every investment in add-on products and services comes with risks and opportunities. The trick is to determine what works for your market and customers. For example, you might want to install state-of-the art wine-storage solutions complete with wine-tasting and meeting space. It’s an exciting idea. However, if you live in a rural area where there’s little interest in buying and collecting wine, it may not work for your business. Conversely, a leading-edge wine-storage offering may be just the ticket in a metropolitan or affluent market.
Any added amenities should increase your facility value, either by generating revenue or stabilizing cash flow. Value is a derivative of the future benefits your business will provide minus the riskiness of the operation. For example, consider this exercise in which we weigh two investment options:
- Investment 1: We’re 95 percent certain it will pay for itself within six months and then provide a stable revenue stream for the following three years.
- Investment 2: It’s trendy, but we’re only 60 percent confident it will generate sufficient cash flow to cover upfront costs. It’ll generate twice the monthly income of the investment above, but not until three years of continuous operation.
While attractive on the surface, that second investment clearly carries more risk. It’s going to take two and a half years longer to recoup our investment dollars, and we’re less certain it’s going to be a viable three years from now. If both options would benefit our current and potential tenants and require the same upfront costs to implement, we should choose the first option 100 percent of the time because risk-adjusted returns matter. Regardless of how fashionable the second investment may appear, there’s significantly less risk with the first option and greater certainty it’ll provide a profitable, stable revenue stream in much less time.
New business ideas are exciting, but they won’t necessarily provide the required cash flow to justify the upfront costs. At the end of the day, you’ll sleep better knowing you’ve invested wisely because you understand the requirements of your market, have validated your anticipated cash flow, and are satisfied with the overall risk profile. Regardless of how glamorous an add-on product or service may appear, making choices that support the needs of your tenant base at an acceptable risk level will help you drive greater long-term revenue.
Michelle Gigowski writes, participates in speaking and training events, and consults on self-storage valuation and entrepreneurship. Her focus is on business development and value creation. She’s a senior financial analyst at Thermo Fisher Scientific Inc. and the senior consultant at Stratford Valuation Advisors LLC. She’s also the co-author of the “What’s It Worth?” valuation series. For more information, e-mail [email protected]; visit www.valueitpress.com.