Getting Started In Self Storage Series (3) – What You Need To Analyze

Once you find a self storage deal that looks good to you, my coaching is to jump into deal mode quickly.

What is essential as you enter deal mode is to know the steps, or more accurately said, the spaces of a deal.

As I have developed over the years as a Buyer of self storage, I have learned the hard way (i.e., lost deals) the importance of knowing exactly where I am and exactly what is involved in getting to the next step of a transaction.

The first space in “deal mode” is what I will call the preliminary analysis of the market and the deal.

That is what I cover in this episode.

The self storage market is evolving and changing fast. The heated market over the last few years has made entry difficult for the small investor. But mark my words, there still can be deals in these markets. Just be very careful.

Also, in the last few years, there has been a lot of new self storage construction going on. If you are getting in the business today, as a Buyer, you have to be fairly sophisticated in analyzing whether or not the market that the opportunity you are looking at is a healthy self storage market.

Ultimately, the feasibility report you are going to get (another space in deal mode we will discuss later in this series) will quantify it. Still, you need to do some preliminary work now to make sure you minimize your odds of tying up self storage facilities you don’t end up buying. This strategy will also help in the long run with the relationships you are developing to bring you these deals (See last week’s Episode 225). 

In the old days, how I would look at the market was very simple. 

I would go to the neighboring self storage facilities or call them, and if they looked full and weren’t doing a lot of discounting to get me in, the market was good enough for me. I know it would be quantified in the feasibility report.

That strategy worked in most cases, as well.

However, take my word for it; a lot of people are getting into the business, and not everyone is doing the study and research you are.

Let’s discuss three ways to do a preliminary market study (I almost hate to use that word because what I am doing and what a person doing a feasibility report are doing are vastly different).

Method One: Do It Yourself.

1. Get the demographics of the facility you are considering or the land you are considering. Most, but not all of the time, the demographics are in the package. You may have to subscribe and pay for demographics (I do).
   1. This is critical for understanding the “Demand” portion of the analysis. It is the people in this area for the most part, that will rent units in your facilities (for our company, it is about 86% on average live in a 3 to 5-mile range).
2. This parts a little harder. You will want to try and quantify how much self storage there is in the market area. You can start with the information in the same package. If there is no information, or there is no package, I will go to Google and map out the facilities they are showing in the area.

This is not always a complete list, but it is a good start. 

Next, you will have to try to estimate their size. This is the hardest part. If you are lucky, the sizes are in the marketing memorandum.

Sometimes the websites of the competing facilities have the size. In the worst case, I use Google Earth and look at them and try to measure how big they are. This is not always accurate, but I am trying to get a feel for the market, not be exact.

I try to learn about how many square feet of self storage are already in the market area, and I usually at this level define market area as 4 to 5 miles’ radius of the site or facility of interest.

Then I list them with my estimate of square feet.

3. Next, you take the population in the 5-mile radius (or whatever area you are using as your market area) and multiply it by the average square feet per person in that area. If that metric isn’t available, you can use state or the US average (which changes, but 7.3 is a safe number). Just know in some markets it is higher or lower. Again a feasibility report will ultimately flush this out.
   1. These numbers are found in the SSA and ISS storage almanacs, as wells as other publications. 

On a project I did a couple of years ago, here was a sample:

5 –mile population = 59,840

59,840 x 7.33 = 438,627 square feet of potential demand

4. Then look and see if you think there are more square feet of supply or demand. This metric will give you a feel of the market supply/demand. Not exact, but a feeling. The feasibility reports are always much better than mine. But, at this stage, I am just trying to get a sense of the market dynamics.

Method Two: Get an Area Report or Facility report from a Subscription Service

If I am looking in a larger market, like Atlanta or Houston, or one of the major markets, there are a lot of reports you can purchase for $100 or so (last one I bought was from the ISS on the Houston market from Colliers). It gave a snapshot of the market, average occupancy, rents etc.

This is not a supply/demand for the facilities market area, but it is a good start.

You can also consider subscribing to a data provider that has more exact storage data for much of the country. The subscription is not cheap, but it can be tailored more to your project’s market area. REIS and Yardi sell such services. I do this when I am in acquisition mode.

Method Three: Go To The Facilities.

Do what I said earlier, go to each facility in your market area. Ask how they are doing. Sometimes I rent a unit so I can get in and walk around, look at doors see how many are vacant.

The reason we are doing this is to get a feel of what the Feasibility Report will say. As the self storage buying market heated up or overbuilt market, more and more these reports are going to come back with low demand numbers. I don’t want to put a lot of projects under contract to walk away, so I am putting more energy in the early stages, trying to get a sense of the market myself.

Just remember, this work does not replace a good feasibility report during the due diligence.

Analyze The Facility

The next space in preliminary deal mode is the Preliminary Analysis of the Facility.

I don’t want to go over that here because I have covered it in a lot of other Episodes and training programs. 

Here is my most recent training on How to Analyze Expansions or Conversions. If you would like it, click here and enter your name and email, and the videos will be sent to you.

So after you find a project that you think can work, you have dome some analysis of the area and market it is in. Your Preliminary financial analysis of the facility looks good; you are ready for the next step of “Deal Mode.”

That is to get control of the property.

We will discuss that in the next Episode.