There are millions of acres of undeveloped land throughout the country, but that does not mean that every piece is suitable for self storage! Most areas lack the population, the right level of income, or some are simply overbuilt with competition.
The most cost-effective step that you can take in the development process is to find out if you are developing in the right market with sufficient demand. Many builders have been led astray by the old adage, “If you build it, they will come”. The objective of this article is to equip you with the knowledge of how to find the right site, define the market, determine the net demand, and analyze your competitors to lessen the chance of developing in an oversaturated market.
The Right Site
Anyone can build a self storage facility! The key is to develop a facility that will lease. There are several factors to look for when selecting a site or deciding if you own a parcel that is suitable for self storage development. The first two are visibility and high traffic areas. Consumers choose storage facilities very similarly to how they choose their dry cleaners or Starbucks. They don’t go to a specific Starbucks because it serves better coffee than a neighboring facility; they go because it is on their way to work, down the street from their grocery store, or on the convenient side of the highway. This may explain why you see one Starbucks located on the northeast corner of a popular intersection, and then one located on the southeast. They are targeting two completely different markets, and it is rare for one to cannibalize the other’s sales. Storage is much the same way. Consumers will choose your facility because it is convenient to their way of life. Statistics show that somewhere around 85% of all self storage customers at a given facility are because of drive-by traffic. If your facility cannot be seen from the highway, or is not located on a street that grosses at least 15,000 ADT (average daily traffic), it is safe to assume that you will have trouble getting to stabilized occupancy.
The next factor will ensure that your facility is protected from future development by competitors. For continuous survival, it is important to develop in an area with not only great visibility and high traffic, but also high growth. If you find, after you have done your demand study (discussed later in the article), that there is enough demand in your market for only one more facility, it is of the utmost importance that you are developing in an area with the potential for growth. The growing number of oversaturated markets within the United States is a prime example of developers building on top of each other. It is key to the success of your development to be aware of the potential for others to enter the market. If your site is located in an area with the potential for growth, you can rest assured, with the right location, your facility will continue to grow with the market.
Defining the Market
The first step in defining the market for your site is to plot the location on a map. The most user-friendly tool for this process is Google Earth Pro. This software will run you a few dollars but is absolutely invaluable throughout the development process. There is also a free version of this software called Google Earth, but it will not enable you to draw radiuses, measure buildings, or create presentations.
After you have marked the site, draw a 3 mile radius around it to see what it will encompass. What type of market are you dealing with? A primary market will have roughly 100,000+ people within 3 miles. Due to the density of the area and an abundance of commercial retail, consumers will rarely drive further than 3 miles access their storage facility. You will find that your average consumer does a good portion of their day-to-day activities within this 3 mile bubble. If this doesn’t sound like your market, you might want to expand your search out to 5 miles. If your site has around 75,000 people within 5 miles, then you are dealing with a secondary market. These areas are located outside of the city and tend to be largely suburban. Most of the consumers within this market will have a 20 to 40 minute drive into the city to go to work and will therefore shop (and more importantly, store) a little further from home than those in a primary market. If this still does not sound like your site then you are probably developing in a rural area and should take your search as far out as 7 miles. A rural market will have around 30,000 people in 7 to 10 miles. These consumers are very accustomed to driving long distances for everything they need, and will travel much further for their storage needs.
The biggest issue in determining the type of market is gathering information on the demographics within the specified radiuses. What statistics should you use to accurately identify this information? The most precise way to find out a population within a given area is to find a news/program that utilizes postal counts. Most demographic newss will base their reports on the census. They will use a growth formula that measures the amount of growth from 1990 – 1998 to give you the current population for 2008. These statistics can be as much as 100% off! While we are coming close to a time when this information will once again be reliable, it is best in the long run to rely on postal counts. These are collected from the United States Postal news (USPS) residential or business drop counts, which measure how many people receive mail at one address. These statistics are updated quarterly. If you are paying someone to do the demand study for you, this is a very important question to ask! Make sure they are not basing your demand off the census or growth formulas!
Now that you have defined your market (primary, secondary, or rural), you need to determine the net demand. It is best to separate each market into 3 radiuses (i.e. – in a primary market find competitors within a 1, 2, & 3 mile radius; in a secondary market 1, 3 & 5; in a rural market 3, 5 & 7) to gain a greater understanding of where the demand is spread. In the same way that you plotted your site on the map, you now need to plot your competitors’ locations. This can be done from the comfort of your own computer desk by using websites like MapQuest, Yellow Pages, or Google Maps. Google Earth Pro also contains a search feature. No matter which of these newss you use, it is always best to cross reference with another news to guarantee that you are not missing any competitors.
The next step in assessing the demand is to find out the gross square footage of all your competitors. This information can be obtained several ways: the county property appraiser’s website, measurement tools on Google Earth Pro, or physically going to the competitor and counting doors.
After collecting this information, you can now finalize the demand study. The example (a) below will serve as a guide when performing your own calculations. Start by adding up all the square footage of your competition within each radius on an Excel spreadsheet. This will give you the total existing supply. Next, take the population of each radius and multiply it by the “Forecast Demand” for the surrounding city, as calculated by the Mini-Storage Messenger Self-Storage Almanac. It is important to give yourself a safety margin to be absolutely sure that there is sufficient demand in your market. A good rule of thumb is to subtract out 10% of the “Forecast Demand” to use as your multiplier. For example, if doing a demand study in Orlando, Florida (listed as 6.23 sq. ft. per person in the 2007 Mini-Storage Messenger Self-Storage Almanac) you would use 5.6 as your demand multiplier. This equation will produce the demand based on the population for the area, but you should also adjust your calculations to include commercial sales. The percentage will vary from primary markets to rural markets, but in most primary markets, you can count on 15% of your tenants to be commercial. Adjust your gross demand by multiplying it by 1.15. You can now subtract the total existing supply from your total combined demand to find the net demand for your market. This is an excellent indicator as to how saturated your market is currently.
Now that you have done the research to identify that your site is suitable for self storage with a positive demand in your market, you should narrow down who your actual competitors are. There are generally three classes of self storage facilities (A, B & C) which are determined by the state of your market. The amount of rental income that you can expect will determine the type of facility that you are able to develop. If you are planning on developing a “Class A” facility for your market, you will be competing with other “Class A” facilities. These are the competitors you should study when setting your rents and planning what types of amenities you will include.
The first step in competitor analysis is to find out what your competitors are charging for rent. This information can be obtained several ways. The first and easiest method is to check if the facility has a website. Big name competitors will sometimes have their rents listed on their websites, but if this is not the case, you will have to call the facility and try to gain information about the site from the manager. Some managers will be more than happy to answer all of your questions, but others may be aware that they are being “shopped” and limit their information. It is best to ask for only a few key sizes to get an idea of what their facility is charging. If you can find out what they are charging for non-climate & climate control in 5×10, 10×10, and 10×15, you will be well on your way to establishing your own facility’s rents. Any information that you obtain in addition to this should be considered a bonus. It is important that you do as much homework on your competitors as possible before you go out and drive your market. You may find that their rents are not high enough to sustain the type of facility that you would like to develop. Time is money, so be sure not to waste any in the discovery phase.
The most organized way to collect rents is to put them all in a spreadsheet, as seen in example (b) below. This will help you to compare all the facilities in your market and find out the average price per square foot.
After collecting as much information as you can from the comfort of your own home/office, it is time to go out and drive the market. This is the time to take pictures of all your competitors, walk the facilities, collect any information that the manager would not reveal to you over the phone, and figure out their occupancy level. Go into the facility with the eyes of a consumer. Would you store your belongings there? What amenities would you consider a benefit? What amenities are lacking?
In order to determine the occupancy of the facility you will have to keep your eyes and ears open. Let the manager take you around the facility. During this time it is good to ask questions about the site; you might even be able to ask a question like, “So how full are you?” If they say something along the lines of “Well, I don’t have any 10x10s left, but I have plenty of the smaller units,” it is safe to assume that they are around 80% – 85% occupied. The time spent touring the facility is also a good time to make a mental note of how many doors do not have locks on them.
After driving your market and shopping your competitors, it is time for the big decision. To buy or not to buy? To develop or not to develop? If your research has yielded a positive demand, high rents, and a potential for growth, then by all means proceed forward. You should continue to monitor any fluctuations in your competitors’ rents and pay a trip to your local planning and zoning department to keep an eye out for competitors entering the market while you are in the development stage.
You now have all the tools needed to perform a preliminary demand study and competitor analysis. This article should also serve as a guide of what to expect when paying a professional to do this step for you. While it may seem time consuming and somewhat tedious, this process will greatly lessen your chances of developing in an oversupplied market. Instead of operating under the “If you build it, they will come”, mentality, you now have the statistics to prove that the market is awaiting your arrival.