I've been looking into self-storage, but market evaluation seems very different than residential. Does anyone have some tips on how to analyze a market when evaluating deals?
I'm primarily looking into purchasing a self storage facility with low economic occupancy with the strategy to improve the business through capital improvements and technology.
All commercial real estate deals (I am not talking about residential 2 plexes and 4 plexes, which no self-respecting commercial investor or agent would classify as commercial) are evaluated on CAP rates and Cash-on-Cash basis. Self-storage units are no different.
There’s a lot that goes into it but I’ll give it a 10,000 foot view shot:
- Self Storage is a very localized market. Meaning, your market is 1, 3 and 5 miles in your basic urban environment. Those measurements grow and shrink as population density decreases. Rural area markets are more like 5, 10 and 20. It’s your Trade Area and it basically depends on how willing people are to drive to your business.
- Is the property on a main road or side street? Highly visible on a street with high traffic counts are preferred.
- In a residential, industrial or commercial area? Residential and commercial are preferred.
- Is the market high growth or stabilized? Storage is a Transition business. Typically does well when people are moving in and out of town or moving in and out of houses.
- Is it near high-density housing/apartments? If it’s in a neighborhood with large houses with lots of garages, it might struggle to draw customers, unless they’re storing large RV’s and other toys. General rule of thumb is you want at least 25% of the housing within 1 mile to be high-density. The kind of housing that is light on storage space.
- Current population growing or declining? I prefer growing populations but because storage is a Transition business, money can be made in declining markets.
- Market Description:
1. Undersupplied? Demand > Supply
2. Oversupplied? Supply > Demand
3. Equilibrium? Supply = Demand
- Watch for concessions (I.e. 3 free months with rental)
- Calculate the Supply Supply Index
Net Rentable Square Feet/Population = Square Feet per Person (7.5 to 7.8 sq ft per person is generally considered to be equilibrium. Less than that it’s undersupplied. More than that and it’s oversupplied.)
- Ideal Market Demographics as defined by the Self Storage Association
- 5,000 people within 1 mile radius
- 40,000 people within 3 mile radius
- 80,000 people within 5 mile radius
- Median income of $45,000 or more
- Traffic count of 10,000 cars/day
- 25% of housing is high-density
Neil just gave you the single best 10,000 ft view you could ask for!!!!! I would just add emphasis to the fact that his awesome advice is "general" in nature. I sometimes see folks look at a project and throw it out if traffic count is too low or if median income isn't $45K....Most Properties won't meet all the criteria above but that doesnt mean that they cant still be very profitable. The more they meet the better though. Also, take the demand projections with a grain of salt. 7.5 sq. ft. is a perfect National average but as Neil said, this is a MICRO market industry! So there's any number of things that could effect that number....to the extent of more than doubling it in some markets.
@Michael Wagner is absolutely correct. This was very much a 10,000 foot view of analyzing a self storage market.
I know this is a little backwards and all, but we bought a small mini-storage with a maxi-storage with tenants and a track record. We knew the rents were under priced. That is a nice way to both earn more income and increase the value of the property. The interesting part came while owning them. When we advertised a unit on Craigslist or people just called the number on the sign, they asked for different things - sizes, outdoor storage, power, heat, water, etc. When people start asking for the same thing, you might be onto something. It might be worth trying to find a property that fits that bill. The info that @Neil Henderson gave is spot on but it doesn't always help you figure out if you could rent up an open yard of RV and boat storage. So, while I'd start with Neil's info, I'd start to think intuitively about the surrounding area and what types of other things you can do with the property. Outdoor storage is a great return on little to no investment. But you also have to check zoning requirements as not all places allow for that stuff. I'm mainly mentioning this so that you don't get too focused on what you're looking for. Maybe you can find a full property with too low of rents and a bunch of additional land that you can do outdoor storage and leaves you room to build more buildings in the future.
I've always thought that if I could figure out a system to streamline small mom and pop storage facilities (under 100 units), you could probably kill it. For one, you can buy and higher cap rates, you can probably raise rents, and they probably let things get a little run down. However, small properties are as much work as large properties so keep that in mind. I just think the returns could be better if you could systematize them all.
I hope my last post wasn't too confusing (or seemingly off-topic from your original post). I would probably look at all the minis in your price range in the geographical area you want to buy in. I'm guessing the list isn't going to be super huge. Then I would start with a quick glance of the numbers to make sure they aren't on crack, then I would immediately start analyzing additional profit that can be made - raise rents, outdoor storage, Uhaul rental, etc. Then, lastly, I'd analyze the area. Ask yourself, "Will this stay full?" I think most markets have an under-served niche. It's your job to exploit that! Like other value-add items, this can make an ordinary property, extraordinary.
In the end, if you buy an underperforming property, there is the risk that the area doesn't need storage rentals. I think of some more rural areas where anyone can put up a pole shed in their backyard. That's going to be a tougher area to rent up even if the numbers match Neil's numbers above. Finding an underperforming, full property might be better for you.