No doubt about it, there is a lot of self-storage out there today.
One thing about it, however, is that the majority of the new self-storage construction has been focused in the larger, tier one markets.
We have all heard about Dallas/Ft. Worth bringing on 16% to 20% additional self-storage to its market. Or Houston, or Nashville, or Charlotte, all as metro’s bringing on a significant amount of new self-storage relative to the existing inventory.
We have all read the headlines, “Self Storage Rental Rates Dropping,” or “Downward Pressures on Storage Rental Rates.”
Yes, no doubt about it, there is a lot of storage out there.
I often find myself wanting people on the sidelines who are contemplating jumping in self-storage to chase the newest shiny object to read these headlines. It was headlined touting how great self-storage is that had them focusing on jumping on the self-storage bandwagon in the first place.
The reality is REITs, which have been the main driver in the last few years bringing on and/or driving others to develop then buy self-storage. However, they have been focused primarily on the larger, high population growth cities.
If you look where the newest self-storage is going, you will also see these are the cities with some of the fastest job growth and population growth. Yes, Charlotte is probably overbuilt now. But here is one thing I know, population growth solves almost any problem development creates in the self-storage sector.
What Insider’s In Self Storage Know
Here is what people in the industry know today:
Self-storage opportunities today are in the secondary markets, or tier two and three markets.
Self-storage is such a submarket product. In our portfolio, on average, 86% of our customers live within 3.2 miles of our facilities. What we need to focus on is not the city or region, but what is going on in that particular submarket.
What is the population and growth trends? What is the median household income? What is the education level? And yes, what is the current self-storage supply and amount of storage per capita in the submarket?
You don’t have to be in a Chicago or Atlanta to have a strong sub-market for self-storage. In fact, given that the larger cities are where most of the new self-storage supply has been developed, we know that in the outer belts, bedroom communities of these larger cities, and in tier two and three markets is where the best opportunities to buy, or to buy and expand are.
CAP Rates
Because of the high yields that self-storage can generate, there is still a lot of capital on the sidelines looking for self-storage opportunities. Much of that is focused on larger markets.
Because of this, CAP Rates are still very low. CAP rates are lowest in markets where there has been the most development, the larger markets.
I predict that they will eventually drop in these cities as lease-up slows down. However, as of the third quarter of 2019, I see no evidence of this happening yet.
What we are seeing is much of this capital chasing the larger, newly constructed multi-story self-storage at the time of C/O or after the properties are north of 50% occupied.
For the smaller investor, we often let the institutional money chase and fight over the 5% CAP rate deals, while we focus on the properties and markets they are not that focused on.
Where The Opportunities Are
Here is what we know. The vast majority of the existing self-storage facilities in the US are still owned by someone who just owns one. The last statistic I saw indicated this was 62% of all facilities out there.
The vast majority of these projects are not in the larger, tier one markets.
What drives these properties to the market are not usually CAP rates or market conditions. What usually drives these facilities to the market is a life change for the owners — a death, retirement, illness, or some other life circumstance that has altered.
Often these are properties the institutional money doesn’t chase after.
For the smaller investor, when these hit the market in the outer belts of the larger cities and in the secondary markets, opportunity awaits. Especially if there is expansion land.
These are the value add opportunities we need to get the yields that we seek.
Much of the new construction in the larger markets have been the multi-story self-storage because of land cost.
Most people, however, still prefer to drive up, especially in the secondary markets. The vast majority of the existing self-storage facilities that will hit the market over the next decade are the drive-ups that we constructed in the 1980s through the early 2000s.
These will be ripe for repositioning and expansions.
Submarkets
You do not have to be in a larger market to have sound submarket fundamentals.
As we find good facilities that hit the markets in these secondary markets. Just make sure the submarket is a healthy one for self-storage.
What is that? What makes a submarket healthy for self-storage?
Again, a good population (we seek 35,000 to 40,000 or more if possible).
Population growth. It doesn’t have to be double digits or anything. We just want to see the market growing, not shrinking.
Household income. This can be very dependent on where in the country, but on average, we like to see $45,000 or more.
We are also starting to look at the education level. We know the growth in jobs is going to be in tech and service. Education is usually required to get the household income in the future to where we like to see it.
Future for Self Storage
I believe we have a strong next decade or two for self-storage. As more of the population begins to use self-storage, coupled with population growth, the demand will be strong.
As investors, we need to be smart over the next few years as to where we go to find the opportunities we need.
I am convinced of the immediate future; this most likely means the secondary markets in the U. S.
When is the best time to get in and/or grow your self-storage business?
Yesterday. But if you didn’t then … today.
Just be strategic, smart, and know your numbers and the submarket fundamentals. You do that, and you will have a long and successful self-storage career.
