It can sometimes seem hard to get in the self storage business or to get your next self storage project today with prices being what they are now.
People new to the space will often review countless for-sale projects, scratch their heads, and wonder, “How does anyone ever buy these things at these prices and make any money?”
“I’ll just build one.”
Sound familiar?
Well, countless people did just that.
Too many people for some of the markets they built in.
Perhaps 20% of what I see today for sale are projects built from 2018 through 2020, sitting around 30% to 50% physically occupied and perhaps 35% economically occupied.
I can remember naively talking in 2016 about “soft landings” in this industry because, with all the information out there, there is no reason to bring space into an overbuilt market.
But I’ve done it as well. I sure didn’t mean to, but I have done it. I’ve brought space into an overbuilt submarket.
How?
Glacial Speed
I talk of all the benefits and positive features of self storage compared to other real estate sectors and why this business is so superior for the small investor.
Let’s look at one of the drawbacks.
Sometimes, most of the time, going from raw land to a fully stabilized self storage project is a long… long… slow… slow… slow… process.
Often to me with my hyper-mind, it appears in slow motion, like what it must be to watch a glacier move from the north to the south over thousands of years.
I have experienced big market shifts from the time I have received my initial feasibility reports to the time we are moving towards stabilization.This can take two to four years in many cases for projects over 50,000 square feet to be out of negative cash flow. In four years, a lot can happen in a submarket.
Approvals, planning, and construction can be slow. Shifts in the economy, and let’s say a pandemic can impact lease-up (absorption) speed. Countless external factors can impact lease-up.
This can also cause many internal problems with partner expatiations, but that is another episode.
Let’s take a look at some markets.
Top Markets Today For Self Storage Development
Here is a fun list to be on today. It changes a lot. At one time, many of these “markets” were on a list of the most undersupplied markets.
So, people quickly moved to create some supply. Then…the glacial effect.
For many under construction and development now, it might look like a slow-motion train wreck coming straight at them, so they list their project for sale.
Perhaps not.
This is from a recent article in the ISS (Inside Self Storage) news section of their website. Let’s look at a few of the top five markets.
- New York City
- 64 projects under construction
- 100 in planning phase
- 12.3 million square feet of new self storage
- Las Vegas
- 14 projects under construction
- 21 in planning phase
- 2.8 million square feet of new self storage
- 16.2% of new self storage hitting the market
The other three of the markets are Sacramento, Portland, and San Jose. All have similar numbers averaging with about an additional 15.8% of new space hitting those markets.
Secondary Markets
So many of us, myself included, go to the secondary markets for opportunities.
And there are real opportunities there. I have found many and profited immensely.
But going to secondary markets today does not guarantee anything. Remember the glacial effect.
Let’s look at an article from the same website in July of 2020. Find it here.
- Augusta:
- 6 projects under construction
- 7 in planning phase
- 1.02 million square feet of new self storage
- 24.5% of new self storage hitting the market
- Providence:
- 4 projects under construction
- 14 in planning phase – 18 in pipeline
- 5.7 million square feet of new self storage
- 24.2% of new self storage hitting the market
And the list also includes Knoxville, Rochester, and Worchester-Springfield.
Now, I know there are most likely submarkets in these cities where one can find demand below supply. But even in those submarkets, I would bet the oversupply downward pressure will affect rents, concessions, and economic occupancy compared to physical occupancy.
Hence, a lot of partially leased projects on the market.
I bet there will be some deals there.
The Silver Lining
All of this is why I like using expansions and conversions as the vehicle today for our self storage growth.
I wrote about it in last week’s episode found here.
The glacial effect can impact these, but if so, to a much lesser degree. The pathway to stabilization and profitability is shorter, and the risk is less.
Perhaps the returns on paper are not as high, but those make little difference when you feed the negative cash flow on a slow lease-up project. Believe me.
That is why in most, not all, cases, I recommend using conversions and expansions as a way to create value today as one purchases existing projects. For someone new in the business, I think this is the best way.
Yes, it may be a longer learning curve, but the rewards are there.
There is a lot of training on my website CreatingWealthThroughSelfStorage.com on that can support you. There are also the Storage World Bootcamps I do. There is also training from others as well. Go to the ISS website for more resources if my style or personality does not sit with you and seek more information.
This is too good a business not to learn what you need to know to get in or grow your self storage business.
In today’s world, one just has to strategically utilize data and feasibility reports, and know the overall market dynamics of your market and submarkets and how any new space will affect them.
But the rewards are tremendous.
No other business affords the smaller investor the cash flow, security, and wealth potential this business does.
Like I said last week, don’t be a victim of the market or your thinking. Just adjust to reality and move forward.
