Self-storage — How to tell if a market is too saturdated?

Question

I am from Central Illinois and have been reading a ton of blogs about self storage success. It’s something I would be interested in trying out, but my question is: how do you determine whether or not a market is too saturated? The city population is about 130,000 people and I’m guessing there are roughly 10-15 self storage complexes. On paper it sounds great but I’m a bit resentful knowing there are people who have beat me to it. Any advice?

Michael Wagner · Answer

National average for equilibrium is 7-8 square feet per person.  SO using that, 130K people x 7.5 = right about 1 Million square feet of storage.  Of course, averages are just that so this is just a starting point.  Many markets support double that or more! Call competitors or doing site visits will give you more insight into saturation levels If they all have waitlists, you'll put more wirght on that fact than on how your numbers compare to national averages.  The other thing to keep in mind is that a property in a market that size is not likely to draw customers from the entire area but instead will draw from a 2-3 mile radius.  As such you should be drawing a 3 mile radius around in each property and then looking at which ones overlap your three mile radius and by how much.  They you can do supply and demand around your property allocating just a portion (say 50% if the circles over lap by half as an example) of the properties from 6 miles away as competitive against your supply. This is perhaps the stickiest part of analyzing a storage deal...and to be honest is one of the reasons i LOVE working in more suburban or rural areas:) HOpe that helps some.

Erik W. · Answer

Depends.  Saturation assumes that all storage is equal.  Clearly some is not.  Before anyone starts a business, they should research the local market.  What kinds of units are in the highest demand?  What kind of features: security cameras, electronic gates, shipping/packing materials sold on site, easy access to many local living spaces, etc?

Here's a fun fact: people who get into self-storage talk about the 1, 3, and 5 mile radius.  That is, MOST of your business comes from people less than 1 mile away.  Some comes from 3 miles or less.  A few come from 5 miles out.

So location, location, location!  If the 7-8 complexes you talk about are concentrated in one area, then perhaps there is another area that is in the same city but under served.  Also, think who is your clientele?  Are you in the section of town where people want climate controlled storage for their painstakingly restored 1969 Mustang Shelby GT, or are you on the developing side of town where contractors just want a place to store excess building material in a box?  Do you want to open a space that includes wine seller storage or for other types o rare/vintage items?

We need to get out of this thought that self-storage is just rows of metal boxes with doors on a asphalt parking lot.  Every facility is different and provides a different mix of sizes, shapes, amenities, and security.  Every location is also different and caters to a different market.

Here's another example: less than 2 miles from my house a guy with a mobile home park also has open air storage.  That is, he has a 3 acre lot surrounded by a chain link fence where people can park RVs, trailers, boats, etc.  The fence in only about 4 feet high and the "security" is a pad locked gate.  He charges $60/month for a small space and $90 / month for a large space.  Grass lot, no pavement.  He's 95% full.  His costs?  Negligible.  No structures to build or maintain.  No lights, gates, and I think no cameras.  He's making BANK on that kind of storage.  A comparable unit close by with full amenities, 24/7 security, electric control access gate, paved parking, etc for an RV wants $150+ for a small spot, $200 for large.  Some folks can't or don't want to pay that much.  He found a niche in the storage business.

This applies to regular rentals too.  For example, I own SFH rentals in a town with there are currently about 1000 vacant residential rental units.  Does that mean my market is "saturated", or does it mean those units are too poor quality or location to attract good renters?  My vacancy rate is less than 3% annually and I can fill most vacancies in less than a week, so I assume my market isn't saturated in spite of have "excess" units.

Michael Wagner · Answer

My preferred strategy is to by existing properties, optimize operations and then expand if prudent.  To me this is a way to mitigate some of the exposure that comes with development projects while still tapping into some of the "equity explosion" that comes with developing/expanding.  I like the shorter timeline of turning around an existing property as well as the fact that you are usually started with a bit of a head start when it comes to cash flow.  That cash flow can then fund the expansion.  Now this is not to say that there's anything wrong with Development.  It all depends on what your investment objectives are, your own personal risk tolerance profile and what resources you have to deploy (time and money)!

Greg Dickerson · Answer

You can call the facilities check occupancy. Also check to see if there are any units in the development pipeline. You could check with The city to find out if there are any projects pending approval or under consideration.

Ronald Rohde · Answer

Absolutely accurate. I would even take it further to say that the average is never accurate, a market will either be trending upwards or trending downwards. If there is residential movement (coming or going) that increases demand. In addition the 3 miles is good if you're dealing with consistent density (think pure rural or pure urban) but in many areas, 3 miles may be 5 minute drive, so if its located along a highway, you can extend distance to a 15 minute drive time. It will reflect natural willingness to visit.

Zach Quick · Answer

@Steven Cowles All the things mentioned above as well as checking out radius.com they have some good software for upcoming development/expansions.

Steven Libman · Answer

When a property and initial underwriting seems to pencil, the next step is a feasibility study, which is basically a storage specific market analysis that will rate your chances of success given demographics, competition, population growth, etc.  This step is an important one as it can prevent a costly mistake, and banks even utilize the information in them to underwrite on for financing, so this report can help you clarify your pro forma numbers further during your diligence period.  We are in the process of building 3 facilities in Orlando, all ground up, all over 100k sq ft.

Heather DeGeorge · Answer

^^This.  We've owned rentals in incredibly competitive markets and have almost never had unplanned vacancy.  But we also know the market and we keep our units in above-average condition.  We know how hard that is to find because when we first relo-d here, we wound up renting and looking for rentals.

Steven Cowles · Answer

@Michael Wagner would you suggest building new or buying someone else’s?