Zombie Supply and over built markets in self-storage

[AJ Osborne]

I thought I would put this up because what I have to write can save you, however few are talking about this point. When buying or developing self-storage facilities in new markets it is so important that you understand and underwrite for new supply and zombie (as i call it) supply. What is zombie supply? When reporting occupancy, the REIT's have a secret. Whats the secret? Zombie supply. This is vacancy that is not reported. Like the living dead it will kill you. They are able to not report their vacancy because the facility is not "stabilized". While many major markets are showing 90% occupancy, this is an illusion! And like a mirage, you will end up in trouble when, after the fact, you realize it was not reality.

Let me give you a example. There are markets in Texas right now that 3 major REIT's show 1 million square feet as 90% occupied. The reality? They have 500,000 square feet that have come on to the market, but are still in their stabilization period ( most 3 years ). Most of these new facilities are under 50% occupancy, but for the sake of this example I will just give them 50% occupied.

Now, this market that you thought had less than 100,000 square feet of occupancy on the market actually has 350,000 (100,000 as reported plus 250,000 as not reported). That's 350,000 square feet of the top self-storage competitors in the market. Let's say you were planning on building a 50,000 square feet facility in this market, you now have 7 competitors that are your size and they are REIT's that have essentially unlimited funds, cutting edge technology, low debt and 350,000 square feet to fill.

What does that do to your fill up time? Rates you can charge?

Make sure you know the real vacancy in the markets before you jump in! Find good markets make good money!

[Michael Wagner]

Great post and very valid points. This is in fact one of the driving forces behind my decision to focus on secondary and, more often, tertiary markets where the REITs don't play. Plus the market analysis in these small markets is a whole lot quicker and easier. Of course this brings with it the need to emphasize "forced" appreciation as we can't count on the economy at large to drive appreciation for us like so many of the larger operators can.