Sponsored By

Inside Self-Storage Magazine 07/2004: The New Face of Overbuilding

July 1, 2004

7 Min Read
Inside Self-Storage Magazine 07/2004: The New Face of Overbuilding

The New Face of Overbuilding

By Michael L. McCune

Over the last 30 years, self-storage overbuilding has been anissue much talked about, even worried about; but so far, it hasnt become asignificant problem. The reigning consensus is if there is overbuilding in anarea, time will cure the problem, and all will be well again. Many believe thatsince overbuilding has not yet becomea problem, it wont. But the reality is it may indeed become a challenge on alarger scale, and time may not be the cure-all for this difficult situation.

Overbuilding is really an imbalance of supply and demand. If weunderstand these two elements of our business, we can evaluate the state ofoverbuilding in a market. However, information on these topics is practicallynonexistent in our industry. While some sources purport to know how many totalsquare feet of storage space exist in the United States (supply), many peopledoubt their validity because the numbers usually rely on assumptions,computations and limited surveys.

The quantifiable numbers relating to demand are equallysuspect. For example, demand is usually expressed in number of squarefeet per capita. But the unresolved issue is why some markets are overbuilt at 4square feet per person, and other markets thrive at 8 square feet per capita.

In case you didnt know, the Self Storage Association is soconcerned about this long-neglected void of information that it has severalprojects in the works to improve the situation. While this will be helpful inthe future, at present, it leaves us with little or no reliable quantitativedata through which to understand the all-important balance between supply anddemand.

Why the Demand Equation May Have Changed

In the past, the major source of self-storage demand was pentup. That is, in the beginning, no one used storage, though there were a lotof people who needed it. To better understand this concept, think about cellphones. When they first became available, no one had one. Then everybody boughtone. Thus, it was easy for the market to grow 50 percent per year. The samestory holds true for self-storageit just took longer for people to recognizetheir need for the product. And, unlike cell phones, self-storage isntprogrammed to break every two years.

Also, there isnt much of a replacement market inself-storage. It is clear everyone who wants a storage unit probably lives orworks within 5 miles of a facility and has for several years. In addition, somestudies indicate as much as 25 percent of the national population is usingself-storage at any given time. In the past, this factor was the mostsignificant impetus to growth.

The demand for self-storage was also uneducated in thatpeople didnt know much about various uses for the product. As they started touse it for one purpose, they slowly discovered others. I like to call this the learning-curve factor. No one trulyknows the effect this factor has had on total self-storage demand, but commonsense tells us it is a lot less today than in the past. Certainly, most people are now familiar with self-storage andits multitude of uses.

Pricing is another issue that has an impact on demand. Earlyselfstorage projects were constructed economically on relatively inexpensiveland. As the industry matured and zoning boards got involved, facilities becamemore sophisticated. This, of course, cost moresometimes a lot moreand,thus, rental rates had to increase. When prices increase and demand goes down,this is what economists call price elasticity. No one has successfullymeasured self-storage price elasticity, but we know it is there.

For example, lets say someone decides to throw away the oldliving-room set he was saving for his kids future apartment when he figuresout the total rent on his self-storage unit will actually cost twice what a newset of furniture would. In some markets, a 10-by-10 unit can equal 5 percent ofthe per capita income (remember, this is pretax income). In light of this, afamily may think twice about spending a significant chunk of its budget or, atleast, reconsider how long to leave items in storage.

The last issue impacting self-storage demand is the densityincrease of the market in which a project is built. Many facilities are inpartially developed suburban areas. As the area fills in with houses orbusinesses, demand in that specific market will increase at a much faster ratethan for the greater surrounding city. As the area matures and fills, growthwill slow, declining until all of the available land is gone, even though thecity may still be growing.

This works fine for existing facilities, as long as none ofthe infill development is competing self-storage. The net result is ourindustry, like a lot of other real estate, now depends on population increasefor most of its net growth. It appears the growth accelerators discussed aboveare having less impact on the market in general. Clearly, there are areas thatwill still be very attractive to self-storage developers and continuedownership; but extraordinary growth in demand cannot be guaranteed everywhere,or even in most places.

Supply

Again, actual data on new supply is not very substantial. Wehave the Dodge Reports, which show some of the new development, but not all; andwe dont have a very good idea how much information we are missing. There are, however, several things that indicate supply islikely to increase:

  • Loans for development are readily available and cheap, at their lowest rates in 40 years.

  • Project sizes are getting biggerin part, to offset high land costs.

  • Lots of little projects are also being built.

  • There is a huge demand for self-storage investments.

  • Everyone thinks they are an expert in self-storage development.

Somewhat offsetting the increase in supply is the lack ofavailable land for development. But even this has a dark side in that if a builder has toaccept a sub-par location, he can charge lower rent and compete on price.

Its a Fine Kettle of Fish

Depending on the circumstances of a particular market, manynew projects may face slower demand than those developed in the past. As growthslows, lease up of new projects will also; and operators will likely be forcedto compete for market share based on lower rents. Unfortunately, overbuildingaffects not only a new property, but all existing facilities in an area. Newfacilities tend to be larger, have all the latest amenities, and be very toughcompetition in every way, including price.

Let me describe a hypothetical market and show you what canhappen to a good market when demand is limited by population growth. Our markethas five properties of 50,000 square feet each, and the average occupancy rateis 88 percent. This translates into a total supply of 250,000 square feet andactual demand of 220,000 square feet. A new developer builds an 85,000-square-foot facility in the area. Supply is now up to 335,000 square feet, butdemand is still at 220,000, because the builder didnt bring any new renters.

Now, if we have hit the point where demand is no longerexponential but only grows with the population, we have a fairly serious problemon our hands. Lets take a look at how fast population grows in this country.According to appraisal source Integra Realty Resources, top population growthfor a metropolitan statistical area (MSA) in 2003 was 3.39 percent (Naples,Fla.). However, the top 10 MSAs only had to grow a minimum of 2.21 percent. Theaverage MSA grew 1.38 percent. If our hypothetical market grows at the highestpossible rate, it would still take 10 years for it to return to its previousoccupancy level of 88 percent. If our market is just average, that same recoverywould take a whopping 23.5 years!

If self-storage demand in a market has slowed to the rate ofpopulation growth or even just approach that level, we are in for some strangetimes in the self-storage business. It may be time to review your building plans and asset-holdingdecisions.

Michael L. McCune has been activelyinvolved in commercial real estate throughout the United States for more than 20years. Since 1984, he has been owner and president of Argus Real Estate Inc., areal estate consulting, brokerage and development company based in Denver. In1994, he created the Argus Self Storage Real Estate Network, now the nationslargest network of independent commercial real estate brokers dedicated tobuying and selling selfstorage facilities. For more information, call800.55.STORE or visit www.selfstorage.com.

Subscribe to Our Weekly Newsletter
ISS is the most comprehensive source for self-storage news, feature stories, videos and more.

You May Also Like