Market analysis of a small town for self storage
Member since 2019 · 12 posts · 3 votes
I am looking to buy an existing self-storage facility in the Southeast TN/North GA area and just found one for sale. I am mostly just working on learning how to properly analyze these deals. I am struggling to figure out how to evaluate this particular market because it is a small, rural town. Any tips on how to evaluate these types of markets? I would like to do at least a little bit of my own market analysis to determine if it is worth paying Bob Copper or Chiswell & Associates for their market analysis. Maybe the answer is to stay away from the smaller, rural markets completely, at least until I get more experience? Thanks in advance for any insight/tips.
I actually gravitate TOWARDS the small towns/markets because the analysis is less cumbersome. As a starting point, use a census mapping tool like the "missouri.edu circular area profiles" to get a population in a 3,4 and 5 mile radius around the property. Then count up the square footage of self storage currently in the market. These two numbers will allow you to calculate square foot per person.
You'll also want to get rates from each competitor as well as feel them out for how full they are. Once you've done that, you will have enough to decide if further investigation of this deal is worth your time.
Happy to answer other questions that come up.
Mike
What town are you looking in. I am from the area. I just had a 20,000 sq self storage appraisal complete in jasper Tn and it was at a 9% cap rate. Now if it was a smaller self storage I would expect it to be around a 10% or 11%.
This one is 17,000 sq ft and in Athens. How can you tell the market isn't saturated in Jasper?
I actually gravitate TOWARDS the small towns/markets because the analysis is less cumbersome. As a starting point, use a census mapping tool like the "missouri.edu circular area profiles" to get a population in a 3,4 and 5 mile radius around the property. Then count up the square footage of self storage currently in the market. These two numbers will allow you to calculate square foot per person.
You'll also want to get rates from each competitor as well as feel them out for how full they are. Once you've done that, you will have enough to decide if further investigation of this deal is worth your time.
Happy to answer other questions that come up.
Mike
I'm beginning to look at these too and live in Atlanta. Has anyone used the self-storage model from these guys: https://www.adventuresincre.com/library-real-estate-excel-models/
Also whats the best way to find the mom & pop storage units if I only have an hour a day to look?
Thanks!
@Erik Peddle I never came across that site until seeing your post but took some time to pick thru it and walk thru some of their models. Everything looks top notch and at an institutional level. Not to nerd out on Excel models, but their modeling is very elegant--simple design but also robust.
A challenge though with using an institutional-grade template from scratch is not having a grasp on the complexity that's driving the model. I'd recommend playing with the model to understand how it works, then build one from scratch. It's a great exercise to walk thru each aspect of a potential deal from a modeling perspective to understand how the pieces fit together.
I have self storage there and we are full. On a 17,000 sq place I would go shopping for self storage and have your friends shop also. Tell them you have a lot of stuff and you need large unit and small units. You will get an idea of the demand after a few calls. In smaller towns I find it is hard to get someone on the phone right away because the owner has a real job also. That is a good thing because a lot of people need the unit right away. Also the place you are buying should provide how much money they are collecting per year.
@Michael Wagner thanks for that link! I guess this is direct link you are talking about http://mcdc.missouri.edu/applications/capsACS.html.
@Erik
@Erik Peddle Thanks for that library of models.
If you need any help tracking down information through Costar I’m happy to help
Agree with what @Michael Wagner and @Joshua Watts have said. Also, if the current occupancy is low, be sure to have a solid but conservative lease up plan. Speaking from experience the rural facilities can take longer than expected to lease up even when the supply/demand metrics are in your favor.
Update: So the self-storage facility I am looking at has not been actively managed for 2 years and is only 30% full with rates well below market value. There are units needing to be auctioned and it's basically a defunct mess. However I also took that to mean there is value add opportunity. I bought a report to analyze the market from radiusplus.com (found this service on @Michael Wagner's page) because I wanted to try this product out. It says this small town is at 10 sq ft/person, so not great. Also a big part of the cost of the property is a large 11,000 sq ft building that could be converted into climate controlled, but of course the conversion is an additional cost. Plus I'm a newbie and a little intimidated to take on a project like that right out of the gate. There is room to expand as well. What do you guys think? Too many red flags?? Especially for my first acquisition? Scott Meyers if you see this I am one of your students. Would love to hear your thoughts too along with everyone else. Thanks advance to all of you (especially the experienced investors) who are willing to give me your opinions.
Update: So the self-storage facility I am looking at has not been actively managed for 2 years and is only 30% full with rates well below market value. There are units needing to be auctioned and it's basically a defunct mess. However I also took that to mean there is value add opportunity. I bought a report to analyze the market from radiusplus.com (found this service on @Michael Wagner's page) because I wanted to try this product out. It says this small town is at 10 sq ft/person, so not great. Also a big part of the cost of the property is a large 11,000 sq ft building that could be converted into climate controlled, but of course the conversion is an additional cost. Plus I'm a newbie and a little intimidated to take on a project like that right out of the gate. There is room to expand as well. What do you guys think? Too many red flags?? Especially for my first acquisition? Scott Meyers if you see this I am one of your students. Would love to hear your thoughts too along with everyone else. Thanks advance to all of you (especially the experienced investors) who are willing to give me your opinions.
Hey Courtney,
Radius is a valuable tool but like any tool, it has its limitations. 10 sq.ft per person isn't great relative to the "national average" but there are markets that support TWICE that. You'll want to call the competitors in town to get a sense for how full they are. IF they are all full, that you might be onto something here. I LOVE properties that can only be described as a "defunct mess":)!!! Your goal is to figure out if the mismanagement is the primary cause of the low occupancy. With proper management, my guess is you can turn the property around....but I know nothing about it so can't say to what extent and how fast. I don't see too many red flags from your brief description but I do know that MOST new investors would pay TOO much for a property like this. Do you have the property under contract yet? What is your price per square foot to purchase? What is the POTENTIAL NOI once filled back up to say 88%? A property requiring this kind of turn around should probably be bought (and rehabbed/converted) for no more than HALF of what it will be worth in 18-36 months once you get it turned around.
Just some things to think about.
Hey Courtney!
Good for you for getting out and making things happen. Yes, the first step is to find a potential Facility (lead) and then to evaluate it to make sure that it is a "deal" - this means finding out what it is currently worth (value), how are you gonna pay for it (financing), and what is the value-add so you can increase equity & cash flow (pro forma).
@Michael Wagner hit the nail on the head in both of his posts regarding market supply & such so I'll try to address any of your remaining questions or else you'd just be reading his words again in my post.
Please note that most folks should be pricing a Facility based on the Income Valuation method - as it has been performing for the past 12 months. However, when you get one that is really defunct you'll have to factor in other methods and it doesn't become so black & white, but a lot of gray area.
For instance, hypothetically if the Facility only had one Unit occupied, it would obviously be negative cash flowing and they're not normally going to give you the facility for free or pay you to take it.
Also, we tend to believe that when you buy a Self Storage Facility you are buying a secured income stream backed up by real estate. What this means is at the end of the day they can always bulldoze the Facility, sell the scrap metal, and sell off the land so in theory your offer shouldn't necessarily be below the "worth" of the real estate.
I type that because at 30% occupancy you're flirting with the value being between Income Valuation vs. Real Estate Appraisal an if you don't offer FMV someone else who sees the potential may come in and offer higher and then you may miss out. Hopefully that makes sense?
(DISCLAIMER: However, in all this please remember that you are dealing with PEOPLE and time & circumstances changes all minds! Yes, we are all beautiful creations, but we are also have the capacity to be complete wild cards - for better or for worse. So take it all with a grain of salt. At the end of the day, this is about numbers, but it is also a people business.)
In regards to Market Supply Index, yes, what Michael said above. And please note that you need to put it into context as this is the national average and local communities can be different. One may say no outside storage at your residence not in a garage or under a carport, and another community may say it's perfect legit to store old washing machines & used tires in your front yard. I'm sure you know what I mean...
So call, or better yet, VISIT this Facility (you have already, yes?) as well as the other Facilities and count locks and that will give you a determination as to the supply/demand. In theory, the occupancy rates ought to be somewhat similar. Any variance is usually a reflection of good or bad management. E.g. if they're all at 50% then that's probably a reflection of too much storage, a dying town, etc. If they're all stabilized (80-90%) and yours is at 30%, then yes, that's bad management.
Please note that calling is nice but not always effective as a good manager will always stress scarcity & urgency and therefore it may be hard to get an accurate count. Counting Silver, green, or red locks - not so much.
Also, please note that you are buying an existing Facility so you can kind of expect it to perform as it has been (management practices notwithstanding). Meaning, a Desktop Study or Feasibility Study is typically done when bringing new storage online (conversion, development, expansion, etc.). So yes, it would be nice to get a 3rd party opinion, but a lot of this (meaning Market Analysis) can be done accurately on your own, and if you're not immediately expanding you could save yourself the monies needed to have it completed.
So in summary, I do not think there are too many red flags at all, but instead lots of opportunity, and opportunity capitalized upon equals money. Provided you don't get overwhelmed and then systematically tackle them collectively & individually.
My #1 piece of advice in this situation is the question I asked earlier: have you physically visited this Facility, the town, and the neighboring competition?
Best of luck to you, Courtney! Please let me know how I can help.
@Michael Wagner thanks so much for posting your thoughts. I don't have it under contract. Listing price has it at $40/sq ft but 2/3 of the sq ft is the building that needs to be converted to cc and therefore not immediately income producing (unless I just rented it to a commercial tenant or something while working on stabilizing the existing units). I estimate the NOI of the already existing units once filled back up to 88% would be $33,500. What are your best tips for estimating the cost of a conversion of a building to climate controlled? The seller claims he is just selling it for the price of the vacant buildings and land, the "business" that comes with it is free.
@Scott Meyers thanks for the response. My partner just visited the facility today actually as I currently am out of town for an extended period for my day job. I am also already familiar with the town as it is very close to where I grew up. Next step will be for my partner to visit the competition to get an idea of their occupancy rates. In my conversation with the owner over the phone he claims his pricing is simply FMV based on an appraisal he had done several years ago for just the land and vacant buildings. He of course is happy to share that appraisal with me. Should I bother getting another one done on my own? Also he is very keen to do seller financing which I think is a plus. Thanks again for chiming in with your $.02.
@Michael Wagner thanks so much for posting your thoughts. I don't have it under contract. Listing price has it at $40/sq ft but 2/3 of the sq ft is the building that needs to be converted to cc and therefore not immediately income producing (unless I just rented it to a commercial tenant or something while working on stabilizing the existing units). I estimate the NOI of the already existing units once filled back up to 88% would be $33,500. What are your best tips for estimating the cost of a conversion of a building to climate controlled? The seller claims he is just selling it for the price of the vacant buildings and land, the "business" that comes with it is free.
Hi Courtney,
Hard to say what the cost of conversion will be as that depends on the current condition of the building shell. The conversion kit itself will usually be in the $7-10 per rentable square foot range (you'll lose 25% of building space to hallways etc). The rest of the costs will be electrical, fire suppression if needed, insulation, new/repaired HVAC etc....that could be quick and easy at $5 per square foot or as much as an additional $25 plus....
Sorry I can't be more specific but your question is one of the many that fall into the "it depends" category.
Mike
@Courtney Glass 40 a sq ft for a facility in that bad of shape and also not even fully developed does not sound anywhere close to a good deal unless it is a high class A facility with gated access and cameras. I would not even worry about a paid feasibility study as much as shopping around to see potential and doing your own study. In a rural area like that I can't see you adding much more than 5 dollars a sq ft value so finishing the conversion puts you underwater in an area that already seems to have high sq footage per person.