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The Rise of Secondary and Tertiary Self-Storage Markets and What It Means for Buyers and Sellers

It’s no secret that self-storage is a desirable investment, but why has there been so much focus on secondary and tertiary markets? Let’s examine the factors that have created hot market conditions and how buyers and sellers can strategically position themselves for success.

Jane H. Sauls

May 17, 2022

6 Min Read
The Rise of Secondary and Tertiary Self-Storage Markets

For today’s self-storage owners and investors to hit their strategic business goals, it’s important to understand how we’ve arrived at current property valuations, particularly in hot secondary and tertiary markets, which have become the new primary targets. Your range of foresight determines the level of success. Since predicting the future with 100% certainty isn’t an option, we must evaluate past events to speculate on possible outcomes.

The basics of Economics 101—supply and demand—are the obvious drivers, but the twists and turns of self-storage real estate aren’t always predictable because each site is dependent on a 5- to 7-mile radius. The true challenges are determining the future need of self-storage square footage per person and defining actual population.

In recent months, as people have fled cities in search of a better quality of life, they’re flooding secondary and tertiary markets. The ease of remote working has also thrown a curve ball in how to anticipate population growth. As a result, you must consider the following questions when attempting to predict market performance:

  • Has the per-capita need for storage truly increased, or is the population understated?

  • Is the heightened demand for self-storage temporary as residents sell their homes for crazy money and live in a camper until they build a new house, or is it here to stay?

This isn’t the first time secondary and tertiary markets have risen to the forefront. Several years ago, investors who had expectations of meeting historical returns were driven to these regions when capitalization rates compressed on the limited product available in primary markets. These were typically seasoned self-storage owners, crossovers from multi-family assets or local landowner entrepreneurs who were already in these areas.

Impact of Automation

As rural markets gained attention, self-storage management platforms evolved due to enhanced technology and customer expectations. Previously, onsite payroll was often the reason a potential buyer’s underwriting was halted. Many owners felt it was mandatory to have a retail-like office and a manager to greet each customer with a smile and hold their hand through the rental process. After all, how could a renter possibly determine on their own what unit size they needed, let alone find their space on the property?

Keep in mind, self-storage was born as an “unmanned” business model, and several groups have recently become pacesetters in refining the idea to make it truly effective and efficient. The coronavirus pandemic accelerated the acceptance of the automated concept, as customers demonstrated that they prefer the ability to rent a unit online 24/7and sign a lease without any in-person interaction.

Not having to encounter anyone on site has become ideal for consumers. As a result, proven automated processes have made ownership in smaller self-storage markets easier. Facilities in secondary and tertiary markets shine brightly when given the opportunity to become even more desirable to investors near and far. Thanks to the strong performance of the sector during a down economic climate and other market uncertainties, investor sentiment is stronger than ever.

A Seller’s Market

Valuations are dependent on underwriting a self-storage buyer’s expectation of returns, which today ranges from historical investment results to deploying a particular amount of cash by a given time. The market has become so competitive it’s no longer focused on seller motivation. Instead, it’s about presenting a more attractive offer than other buyers. In other words, the thought process has turned from “What will the seller take?” to “What does my offer include to make it better than anyone else’s?” In many cases, the highest and best offer comes from an investor who bases theirs on comparative returns of other options, not their own storage-portfolio history.

Currently, self-storage investors are aggressively purchasing small, rural facilities with the intention to flip them as a portfolio over the next few years or gain control of an entire market. Growth-minded, seasoned investors continue to contact facility owners and quietly make off-market offers. The hub-and-spoke business model and economies of scale will ensure that strong offers continue.

Strategic Positioning

For independent self-storage owners with a single facility or small portfolio, now’s the time to be sure you understand your asset-class status and current market circumstances. If you intend to exit a property in the next five years, sell now. Analysts have been saying for several years that we’re at peak valuations, and they continue to be in awe of buyer actions. However, we also know that no good thing lasts forever. Real estate is truly cyclical. Whether an adjustment is felt through higher interest rates and inflation or due to oversupply, the dust will eventually settle.

If you aren’t a seller, position yourself wisely for the coming years. Review your current debt-to-equity status, and maintain a healthy relationship with your banker. When considering a facility expansion because you’re 100% occupied, be conservative in your projections. Be sure the increased construction costs are justified by first ensuring that you’re getting every dollar out of your self-storage property before you put another dime into it.

In addition, position yourself to serve the traditional three- to five-mile tenant base, even though today’s customers are driving more than seven miles to your site. Also, research the financial soundness of your local municipality because officials’ immediate reaction to budget crises is often to raise property taxes via the mileage rate or assessment valuations. Keep in mind, too, that recent sales within the self-storage industry don’t support the tax-appeal arguments.

Future Outlook

The self-storage business model is versatile, which makes it appealing to investors and resilient against downside market factors. It serves the needs of all customers, whether they’re happily renting a unit because they just sold their house above list price within hours of it being on the market or they just lost their job and are moving back in with their parents as inflation and interest rates rise. This flexibility will likely ensure that self-storage properties fair better than most other asset classes.

As the sector gains recognition as an overachiever, the prospect of oversupply in your local market remains the primary threat. I don’t have a crystal ball, but for an industry in which the most prominent recent picture has been painted through rose-tinted glasses, it’s wise to consider the possibility of uncertainty in the long term. For now, “Make hay while the sun is shining,” and enjoy the substantial increase in rental rates, valuation and sales.

Jane H. Sauls is a broker and co-owner of Sauls Storage Group LLC, a Carrollton, Georgia-based brokerage and consulting firm specializing in self-storage and other commercial real estate. Her career has included involvement in construction and project management, site selection, feasibility studies, exit strategies, and building pro formas for self-storage owners of all sizes. She’s a graduate of the University of West Georgia and holds a Certified Commercial Investment Member designation. To reach her, email [email protected].

About the Author(s)

Jane H. Sauls

Co-Owner, Sauls Storage Group LLC

Jane H. Sauls is a broker and co-owner of Sauls Storage Group LLC, a Carrollton, Georgia-based brokerage and consulting firm specializing in self-storage and other commercial real estate. Her career has included involvement in construction and project management, site selection, feasibility studies, exit strategies, and building pro formas for self-storage owners of all sizes. She’s a graduate of the University of West Georgia and holds a Certified Commercial Investment Member designation. To reach her, email [email protected]

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