Today, it is more critical than ever to make sure a trade area is healthy and ripe for self storage as you are considering buying, building, converti9ng, or expanding in a particular trade area.
It has always been important, but never more than today.
So, when I say trade area, what do I mean.
Well, one of the beauties of self storage is that in most cases, it is fairly easy to define a “trade area” or “submarket” (I often use these terms interchangeably).
In most cases, it is a 3-to-5-mile radius.
Sometimes it is drive-times. For example, if you are looking at a property on the coast or my hometown Louisville, Kentucky’s downtown. The river separating Indiana from Kentucky is a barrier most won’t cross to store in. Indiana is a quarter of a mile from a facility we developed, but it may as well have been 20 miles (I will leave the Hoosier jokes alone here).
In our portfolio, the average customer lives 3.2 miles from our facility.
In rural areas, or less densely populated cities and towns, the average distance may vary.
Ultimately, a feasibility report usually defines the trade area.
So, what do I look for in a preliminary glimpse into a particular trade area before I spend a lot of time analyzing the storage opportunity?
Square Foot Per Capita
Even with all my thoughts around this metric that I outlined last week, I still have to know it. You can click here to see those thoughts if you are at all interested.
In many ways, regardless of what I think about it, is still the most important metric. Banks (good ones at least) still want to know it and lend accordingly.
My partners usually want to know.
And I need to know if the person completing a feasibility report is going to say the trade area is overbuilt, underbuilt, or at equilibrium for self storage.
So, until a better metric comes along, this is what we all use.
This metric is usually determined by how many square feet are in the trade area divided into the population.
If you think about it, every self storage has its own trade area. Not every square foot of a facility three miles ways is going to be in my trade area. Perhaps only 40% or 60% of it will be in my trade area. But usually, today, every square foot is included.
Perhaps this is where we go wrong with this metric, and it sometimes doesn’t match reality, as I discussed last week.
Population
This brings us to the next critical metric I look for, population.
In the old days, I used to say, “I want to be in a trade area that has 50,000 or more within a five-mile radius.”
I don’t say that anymore.
Why?
Well, because REITs don’t say that anymore.
Our business strategy has us exiting by selling to REITs or institutional buyers.
Not necessarily the best business strategy, just ours. It’s a good one, but certainly not the only one, and I am in no way saying it should be your strategy.
Your strategy should be a reflection of your goals and reason for being in the self storage business.
We want to see some population (not sparse like rural markets), population density, and, most importantly, population growth.
How much population growth?
More is better, but I don’t have an exact number.
In densely populated areas, population growth is harder because most land is already taken.
I don’t want to see the population declining.
Population growth is the main driver for self storage. Most mistakes we make when buying and building self storage can be fixed with population growth.
Income
When I first got into the storage business, there was more focus on per capita income than there is today.
$40,000 to $50,000 was the number I was the income target my customers (I was brokering self storage to as a real estate agent) were looking for.
I don’t necessarily target a specific number anymore for per capita income.
Why? Because it would eliminate a lot of good opportunities.
But, because of this, we have to put a lot more effort into figuring out just how financially healthy the submarket is.
$40,000 personal income, or let’s say, 58,000 to $65,000 household income in Alabama works well.
In San Francisco, it is probably poverty.
I don’t want the submarket I am looking at be in a low-income area. I have nothing against low-income areas, and for some real estate deals, we would target this sector, just not with storage.
I have made every mistake you can make, I think, and I have made this mistake. How it shows up is (1) the average length of stay is less than half of the rest of our projects, so (2) the average value of a customer is low, and (3) the lease-up is much longer.
There is (4) constant turnover, so the cost of acquiring a customer is very high. And (5) we spend a lot more time, energy, and resources collecting the rent than other facilities.
We can use income per capita, household income, average home cost, and even education levels to get a feel for the spending health of the trade area.
But usually, early on in a potential transaction, like before I write my Letter of Intent if possible, I drive the trade area. I look at the houses, the cars, and trucks in the driveways (during business houses and after).
Not too scientific, but I look for a Starbucks or something like that in the three-mile radius. I look at the other national or regional retailers in the area. Do they cater to lower-income folks, like furniture rental, etc.? I look at the grocery stores in the trade area.
And finally, I look closely at the self storage in the trade area. How finically healthy do they really look.
When I say we look at the personal income in a trade area, all of this is what I am really talking about.
Conclusion
There is a lot of data out there to support you.
But ultimately, at least for us, to proceed on with a preliminary analysis, or the decision to tie up a site or property, still (as always) is subjective.
Fortunately, in our business, the feasibility reports we should always get tends to shine a light on our correct assumptions as well as any errors in thinking we may have made.
So when I say we look at the square feet per capita, the population, and the income of a trade area, hopefully now you get a sense that there is a lot more than just a specific number we are looking for.
Ultimately, I think I am looking into the world of the potential customers who will visit that site and trying to get a sense of what their lives are really like on average.
And sometimes, that is not always easy and clear. But no matter what business you are ever in, your success depends on (1) do your customers want what you have to sell (are you really meeting a need) and, if so, how well you provide that product or service to your customer.
For us, it all starts with the “preliminary glimpse into the trade area.”
