How to Evaluate a Market for Self Storage

all right so one of the questions we get asked most often which is actually one of the better questions to be asking is what makes a good market or what markets should I build or buy in and how do I identify these markets and this is really the question that matters although it's broken up into two parts and I think a lot of people don't focus on the whole picture they identify certain categories that it seems like they read out of a book but don't make a lot of sense in practice and let me give you an example of one of these so when people are looking at markets and I've actually heard funds that have hundreds of millions of dollars say this that we do not invest in something that has over a certain amount of square feet per capita so they say May they may say outside anything we're looking for markets that have under 8 square feet of storage per capita the reason being is they don't want to be in over saturated markets the reason why I don't like these types of way of going about it although we use metrics and we do use rules which we'll go over but before we got a really set the stage for this we got to we got to kind of frame this and how you need to think about this all markets are different especially in self storage I have assets and markets that have 16 square feet per person they are our highest rents are most filled and they rise in rents every single year so why is this important because certain markets depending on everything from the city who lives there the different economics of the place will derive different amounts of storage a simple case is in some cities excess storage you know house is hard or nearly impossible to do but there's still live in areas where they have lots of toys and the city's cracking down through laws and regulations that you can't have RVs out and people have a lot of rental so what happens is the demand for storage rises as a well as opposed to maybe a location that people don't have as stringent laws and they can store things in larger houses or there's just not a need because the recreational activities don't exist that drive the need or want or desire to house and hold lots of things so we see this across the country in like inner cities where there may be storage needs small units are very very desirable now if you move out west and you are in even large cities when you move into Texas and Rocky Mountains and even the Midwest where there's lots of outdoor activities that are being done people have four-wheelers all kind of things that they need to house that they can't house at their house there's a large demand for larger units right they're not the same the way people consume in those markets and the way that between the government and at the price of housing and the income works creates different demands in self storage so with that said and it's important to frame it this way because there isn't direct rules now I'm not saying there's not guidelines and you absolutely need to look but it actually misses the half of the picture that's by far the most important and that's what we're gonna talk about today so identifying the perfect market for yourself storage facility whether you're building buying whatever it is but you want to be in that healthy market the one that's gonna grow the one that will allow you to increase your prices your profit margins will get better in your cash flow will increase finding that market and creating a framework in which you look at the markets to make that decision could not be a more important and is that the crux of everything we talked about it self storage an income and the reason being is because self storage is a business disguised as a real estate asset and if you don't understand that you can get in trouble really quick because this defines what makes good markets and bad markets and I'll explain it but when you look for most people when they look at markets they're looking purely at demographics they're saying what are the demographics that I need right what is the right amount of self-storage okay this is a concept that is derived by other real estate asset classes that makes no sense in self storage let me give you an example if I went into a market and the occupancy in the market across the board was really low and there was no not a whole lot of growth in it outside it looked to be a terrible market I could still theoretically build a facility that would perform outstanding now I'm not talking because I beat them in competition or anything I'm talking because the product type that I may deliver to that market may not exist so if I'm going into a market that has only outdoor storage but has a huge demand for indoor storage and no one's built it I'm not competing with those storage facilities so they don't matter I'm the only one that's gonna bring that product type in there as long as the demand is there and there's a large enough base to supply that demand then I'll be good and this is what we need to work out so the first we will go over demographics but as we talked about before this is an this is really is a science plus an art when I'm looking at demographics we're looking at a few things first of all we need a stabilized population okay and we need a growing population and when I say stabilized plus growing this is what I mean I mean a population that has been around for a long time there is enough economic activity and diversified employment that allows it to be stable this can get iffy in third-tier markets right you may have one employer that just dictates the entire employment situation of that market and if they run into bad times it's gonna get ugly and it may not turn around and we see this this happens there are towns that are dying in America you need to avoid that okay so you want a growing population you want a stabilized population diversified employment okay you want long predictable trends and you want growing wages now to what extent matters a lot less to me what I'm looking for is that in 10 years that market will be bigger than it was in the previous 10 years wages will be more their families are moving there that there's a reason for that market to exist and it can't just be one okay now these markets are all over the part of the United States I do have a rule that I don't really like markets that are under 20,000 but that's my own personal preference I used to invest in storage facilities that were strictly in markets under 20,000 that was a perfect place for me to start and I was able to capitalize on a lot of things which is going to bring us into the next picture this is way more right here more important than the demographics way more competition your competition will make you or break you what the other storage facilities are doing right they are the ones that will determine whether you get customers how much it costs to get customers and at what price you can charge them competition is what makes the market supply and demand work I've often said this that the biggest threat to self storage is self storage we just over built right so when I look at competition I first I'm looking at occupancies I want occupancies to be high and - I don't mean that by just stabilized assets which we're gonna get into price per square foot I want to know what is the price per square foot is this a good healthy price per square foot based upon the cost to build okay so you're looking at these two things the competitive advantage this was very important to me starting out because when we started our Self Storage business it was under our our philosophy and our whole outlook on this market was that it's a business so what is our competitive advantage and I learned on really really quickly when we started we were not in a place to compete with the REITs so we didn't we made sure we picked markets in areas that we didn't compete with them under construction and the five-year fill-up rate all right this is huge this this is where most people drop the ball this is where most people get in trouble you see people building storage facilities and they have this attitude if you build it they will come well them and five other facilities are all building up and none of them are gonna get to 90 percent occupied the understanding and working with the city to figure out what purse what square foot per capita is coming onto the market is important this can be easy math that you can do like you don't want to make this complicated and I've been in markets where people were building and when I walk through the math with them they've never done it so I took a market like a market that I'm in that's over built and we said listen this is a growing market and that gets everybody excited but they were building enough storage that every man woman and child moving into that market would basically have a unit that doesn't make sense you have to remember 10% 10% of people use storage in markets that like a lot of storage and use a lot make it 12 and ones that don't make it like 8 but right in there you got your 10% okay this is just something that's kind of a rule it hasn't changed a lot and to for a large amount of that 10% its temporary they're not using it for a long time so when you have competition that's coming into the market if the 10% is already filled if that demand is already filled and let's say you have you know whatever it may be you have 10,000 people that move into that market a year and you have 500,000 square feet of storage facilities that are being built and that equals to be 5,000 units that means that you are building five times more than needs to be met this is happening a lot right now a lot a lot so you have and how do you know this so when you take your 10% in a market I look at the stabilization which I'm taking occupancy okay and then I'm taking the five-year fill-up rate so we have assets and our markets that are not filling up after the first two years they're already being led out to three years so this Phillip rate is extending while square-footage planned is going up and under square foot under construction is both going up so as your Phillip rates get longer construction Rises and square foot planned Rises your occupancies drop and your square footage drops okay this is important because it may not be self-evident right so this happened and it's caught a lot of people by the shorts because what happened after the Great Recession nobody built then three four years ago everybody started to build not only did they start to build they started to build up in a big big way the first two years there was an excess demand of this ten percent that wasn't being met let's call it two percent right the first two years all the inventory that came out of the market sucked that two percent up filled it up you're good then from there people were saying look at these fill-up rates this guy I know Bob down the street he filled up in a year and he doesn't have to do anything because it's storage we heard this a lot so all of a sudden the squared feet planned and under construction spikes everybody's trying to get into it right this classic boom bust so you need to be aware where you're at the cycle as people move in those fill up rates extend now in some of our markets guys are three years out and they're like we're at 60% and I don't think we're gonna get above that in the year four but because it was already planned they're building this stuff this inventory has to go to market so you spike which is where we're at in some of our markets right here at the top of a market right we get oversupplied so you get oversupplied here and then the building shuts down now it takes time to fill this excess inventory on the market that causes square-foot planned to drop that causes the square foot under construction to drop five-year fill-up rates start to drop and then eventually occupancy turns back up prices per square feet turn back up and you start the cycle over again okay this is how you understand the cycle this is where you you're looking at what's going on what's happening with your competition okay so demographics I see people that are like I'm gonna go build in this market do you want to know why cuz 50,000 people a year are moving into this market they're like it's crazy right so I'm gonna go build because it'll fill up what they don't know is that five million square feet is under construction in those markets or has been already deployed so it needs to be way more than fifty thousand so that's why demographics along don't matter and to competition that's where you're gonna learn that's gonna where you're gonna learn where the opportunity is so what you need to do is you need to focus on two things being a good market okay you need to be in a good market that's growing it's not gonna reduce that safe stable okay you need to be in a market where you can compete so what makes a good market well that depends on you two you need to be able to compete right so if you can compete you're in a place where occupancies are high square foots rising the plan square feet of being build and under construction isn't out of control and you can tell that there's still demand in the market well now you know you have upside but don't get up here because then when you buy your occupancies go down and what does it happens right your revenue start dropping but you bought up at the top so this is what's going to tell the story okay look at it like a business what are your competitors doing who are you competing with how are you going to compete them what is supply and demand attack get your market right for demographics good market k and then find out if you can be successful that's what makes a good market and socially [Music] you

Channel: Self Storage Income

Views: 6,910

Rating: 4.9774013 out of 5

Keywords: Self Storage, Self Storage Income, Self Storage Investing, investing in self storage, AJ Osborne, real estate investing, cashflow, cashflow2freedom, cashflow 2 freedom, wealth, get rich, build wealth, passive income, millionaire, how to become a millionaire, how to invest in real estate, investing in real estate, investing in storage facilities, storage facility investing, storage market, paul moore, travis morrow, self storage

Id: uVDT5DBj-JI

Length: 15min 57sec (957 seconds)

Published: Thu Dec 12 2019