Once upon a time before I began raising capital for self-storage projects, I had a piece of property and eye for developing it for storage. I paid a quality consultant good money for a first class education and feasibility study to determine the viability of my property. I carry that knowledge with me when I see a self-storage investment come across the wire.
I want to pass on to you 5 factors the experts consider when evaluating a self-storage facility for building or purchase. Add these 5 factors to your own personal knowledge base so when I send a new project over the wire, you can quickly assess what is important.
Factor 1: 1, 3, 5 miles.
Put a dot on the map where your facility is located. Draw 1, 3, and 5 mile radii circles around your dot. This is your ‘trade area’.
Now ask, what’s inside those circles?
How many competing storage facilities are in each radii? How much rentable square feet (sqft) do they supply?
How many people live in each radii?
What is the mean income of three areas?
This information is important to calculate if the market can absorb another facility and how much demand exists.
Each area has a multiplier provided by the “Self Storage Almanac” (yes, there is such a thing!) representing the number of sqft of self- storage the average person leases in an area. In the example below, there is a population count for each radii. Those numbers are multiplied by 7.89 (the residential demand multiplier for Texas). So, the 1 mile radius yields 63,840 sqft demand (8000 people x 7.98). Subtract out the current rentable space provided by competitors in each radii and you arrive at the net demand. Keep in mind that the average facility is 50,000 sqft.
Congratulations, this investment would pass the first test in determining demand.
Factor 2: Learn to Love Traffic.
There are three ways people learn about your facility: referrals from current customers, marketing, and drive-by traffic. It is estimated that up to 75% of self-storage customers come from drive-by traffic. A decade ago, the only self-storage facilities around were on odd parcels of land next to railroad tracks. They occupied space that was not fit for any other commercial real estate. My how times have changed! The best operators build or buy facilities that are located in customer’s everyday commute to work, school, and home.
The absolute minimum you will look for is 10,000 cars a day. Since 75% of your customers come from drive by traffic and customers are necessary for high occupancy, it makes sense that your facility needs to be on a major thoroughfare. Drawing from my own project, the traffic count passing by my proposed facility was 39,000 cars per day.
Factor 3: Seeing / Seizing opportunity.
Self-storage is at the end of the day, commercial real estate. Just like apartment complexes, self- storage facilities are valued based on Net Operating Income (NOI). By increasing NOI, we thereby increase the value of the facility. Also like apartment complexes, our goal is to divest the property after NOI is maximized and the value is far greater than the purchase price. This is how you will earn return on your investment. So how is value added?
When we first drew our 1, 3, 5 mile radii to get a hold on how much storage space exists among competitors, we also visited those facilities as “secret shoppers”. Physically visiting the competition and asking targeted questions gives significant “intel” on the market – how much space is leased (occupancy rates in our market are also an indicator of the market strength), and the price range of each unit size. We are looking to compare the rent rates of the facility we are buying to average rent rates in the market. If there is opportunity to increase rent rates up to or just below the local market, we can increase our NOI.
Our storage partner, Reliant Self-Storage is best in class in property management. Moving from a mom and pop facility to a professional, highly trained management increases efficiencies that translate into savings and improved profitability.
Ancillary Profit Source
sOnce management is transitioned from ledgers and spreadsheets to specifically designed software and best management practices, there is bandwidth for ancillary income. Some of the common options for increasing ROI include: offering Insurance, incorporating a Uhaul business, selling packaging materials, locks, and shipping services.
Adding Rentable Square Footage
If occupancy rates of the competitors is high, our facility is stable, and the market can bear additional square footage then new construction on a currently existing site can add profit.
Factor 4: Play the End Game.
Radius study, check.
Traffic count, check.
Maximizing profitability, check.
Everything to this point has revolved around evaluating the facility and increasing the NOI, but to what end? To create a class A facility with class A management that generates strong revenue to be sold to a REIT. A REIT is a Real Estate Investment Trust that is a corporation that owns and operates a portfolio of properties. REIT’s typically prefer to purchase stable investments that produce modest profits. Exactly the kind of facility we have created by adding value.
Factor 5: The Holy Grail
The last factor that makes for an attractive deal is finding a facility for purchase in an area that has no geographical room for new self-storage construction.
No room for new construction means an area cannot be over-built (which maintains high occupancy and strong rental rates) and REIT’s (who like to dominate a market) will need to compete to buy your facility since there is no room to build a new one of their own.
The two common refrains I hear when self storage is discussed are, "I know a guy who made a killing in self storage" and "self storage has jumped the shark"! So which is it? Answer: it all depends. While by no means exhaustive, my hope is that by providing these 5 factors you are better able to review a self storage investment to know which is which.