Whatever city you are in, no matter where you go, you see new self-storage being built.
Even people who have nothing to do with the industry, when they hear you are involved with self-storage in some way, will comment, “I see it going up everywhere.”
All this leads us who are considering getting in self-storage, or who are in the business and trying to grow, asking “How Do I Know If A Market Is Overbuilt?”
We read and hear all the time comments like “Charlotte NC is heading for oversupply,” or “Dallas is overbuilt.”
Well…this may be true, but what is important is to ask the right question.
The Right Question
I think the more relevant question is, is the submarket I am looking at overbuilt?
I have specifically seen markets in Dallas/Fort Worth, with over 100,000 population in a five-mile radius, with less than 4 square feet per capita.
Would you build in that submarket?
Well, I would not say no because “Dallas is overbuilt.”
Yes, Dallas being overbuilt will have some downward pressure on rental rates which will probably affect the income in that submarket during the lease-up, but that does not mean you should not consider it. Put an additional 20% discount in income as incentives during lease-up in your Performa.
One thing you will also notice is that almost all these “overbuilt” markets are also the markets with the fastest and highest population growth.
In my opinion, population growth will solve most mistakes we in the business make.
So that leads us to the question, “How do I know if the submarket is overbuilt?”
The Benchmark Metric
If we were in any other retail business, there would be a host of benchmark numbers we would look at.
As a commercial real estate agent, I have helped different retailers analyze a location or market and find exactly the best place to put a new store in.
We begin by doing a “Gap” analysis. We are looking for where spending in that trade is light, but there is disposable income in that trade area to spend on that product or service.
I can look at a location and tell you how much money is being spent on beauty aid products and if there is a need for more retailers and about how much more spending power there is for that product.
Walgreens can pull up a demographic report and look at population, average household income, and where the competition is, and very accurately project what the per square foot income will be if a new location is built in a specific location.
However, we in the self-storage business are still primarily using one metric, “per square foot of self-storage per capita”.
How Do I Know What The Per Square Foot Per Capita Is?
The ultimate answer is, “Your feasibility report will tell you.”
If you are looking to bring new self-storage on line through new construction, expansions of existing facilities, or conversions, I suggest always get a feasibility report.
Unlike most other “retailers”, and remember, self-storage is becoming a retail business, we know where our customers are. In our portfolio, for example, 86% of our customers live within 3.2 miles of our facilities.
That is why self-storage feasibility reports can be so accurate.
“But how can I tell without having to pay for a feasibility report?”
I know of two main ways today. One is there are market summary reports you can purchase through subscription services such as Yardi or REISE. These are fairly accurate, but not exact. They will give you a sense of the submarket’s basic metrics and amount of self-storage per capita.
I use them to look into a location, so I am not wasting my time on one that is overbuilt. However, I still get a feasibility report if I am bringing on any new space to the market.
The only problem is they are expensive.
There is always the old fashion way I used to do it. It was far from exact, as well.
I would Google or drive and see how many facilities there were in the trade area, guess or go to the web sites and try to figure out their size. Then get the demographic fort that location from the marketing package or online service, and do the math. If there were six facilities with about 425,000 sq. ft. of self-storage, and there are 86,000 people in a five-mile range; then, there are about 4.9 square feet of self-storage per capita.
That would be enough to let me know it appears to be under the national average of 7 or 8 square feet per capita.
Conclusion
In today’s world, there is no reason anyone should build more space in an overbuilt submarket.
However, I have seen people do it time and time again. I guess it is human nature. People just hate to think they missed the party.
However, I have learned the hard way, having a facility lease-up in an overbuilt submarket isn’t much of a party.
I’ll miss that next party. My suggestion is you do too.
