Self Storage Demand 101 - Know WHAT to Buy! (Full Guide)

Dec 15, 2023

Demand is undeniably the key factor in the success of a self-storage business. Being the best operator doesn't guarantee success in a market with low demand. This is Self-Storage Demand 101, and we are revolutionizing the traditional approach. Let's delve into my formula, a quick and effective method for evaluating demand.

To begin, we need to move beyond the simplistic notion of square feet per capita. 

Instead, we'll explore various factors and their interrelationships to gain a comprehensive understanding of market dynamics, encompassing both consumer behavior and the self-storage market itself.

Here's a list of all the things you are going to look at when considering demand:

  • Occupancy 
  • Rates
  • Fill-up
  • Growth Rates
  • Square Feet per capita
  • Products
  • Future Supply

Occupancy 

Firstly, we consider baseline occupancy. Low occupancy is a clear indicator of low demand, but high occupancy doesn't necessarily signify a robust market. The critical question lies in the pricing structure. For instance, a 90% occupancy rate at 50 cents per square foot may not reflect the same demand as 90% at a dollar or $2 per square foot. Assessing true demand becomes more challenging when facilities are consistently fully occupied. Merely having 90% occupancy doesn't reveal the complete picture.

Rates

Rates play a pivotal role in deciphering demand concerning occupancy. If a facility is 90% occupied at a lower rate and you contemplate raising it, the impact on occupancy levels becomes a crucial consideration. This underscores the importance of comprehending the intricate relationship between occupancy rates and pricing in accurately assessing demand.

Consider this scenario: 90% occupancy at 50 cents per square foot versus 90% at a dollar or $2 per square foot monthly. Determining high demand requires understanding the pricing dynamics. Is the demand robust at the lower rate, and if rates increase, will occupancy plummet? This highlights the crucial role of rates in deciphering demand alongside occupancy levels.

What we hope to observe is a scenario where occupancy is gradually increasing, depicted as an upward trend. Simultaneously, we want to see seasonal fluctuations in rates—oscillating up and down—while occupancy remains stable. 

This pattern indicates that pricing in the market and the demand for storage are highly inelastic; changes in price do not significantly impact the level of demand.

Conversely, what we hope to avoid is a scenario where an increase in rates leads to a decline in occupancy. This suggests that the high demand at 90% occupancy is contingent on lower pricing. 

Testing occupancy against rate history is vital in understanding the market dynamics and the sensitivity of demand to pricing changes.

Fill-up

To further gauge the demand, another crucial factor is the fill-up duration. It involves examining a recently constructed facility in the market and assessing whether it took 1, 2, 3 years, or more to reach full occupancy. This information provides valuable insights into the market's absorption capacity.

It's important to note that we recently experienced a unique period known as the Covid bubble. During this time, if a market opened up amidst the Covid situation and didn't fill up promptly, it could be a significant indicator. This is because, during the Covid bubble, demand was exceptionally high, and facilities were quickly reaching full capacity, leading to increased prices. However, it's essential to approach this information with caution, as the Covid environment was exceptional.

Therefore, if a facility claims to have opened during the Covid period and filled up in 2 years, it might not be entirely reflective of typical market conditions. It's crucial to consider this context and take the information with a grain of salt. Ultimately, examining the fill-up duration over the past 3 to 4 years can serve as a more reliable indicator. If a facility took three years to reach full occupancy during this timeframe, it could signal a potential warning sign for the current market dynamics.

Growth Rates

Moving on, the next factor to consider is the examination of two primary growth rates: population and income. The key questions are whether income is on the rise, potentially leading to higher rents, and if the overall population is expanding. These factors are instrumental in forecasting future demand.

The specific percentage of growth rates becomes less critical. Whether it's 3%, 1%, or even closer to zero is less relevant. What matters is the assurance that there is a consistent demand overall. The focus is on understanding if any weaknesses observed in the market are short-term or indicative of long-term trends. This analysis aids in anticipating what the future holds for the market.

Square Feet Per Capita and Future Supply

Now, let's delve into the influential metric of square feet per capita. Contrary to its perceived significance, the absolute quantity is not as crucial to me as its impact. What is impactful is understanding the correlation between future supply and the square footage per capita. The objective is to interlink these aspects, providing a more comprehensive understanding of market dynamics, demand elasticity, and future growth prospects.

Consider a scenario where there are 200,000 square feet on the market, equating to 10 square feet per capita. If someone is constructing an additional 100,000 square feet, this results in a 50% increase in supply. The key inquiry related to square feet per capita is understanding the impact of new square footage. The question is whether the 100,000 square feet will be absorbed by demand. If the answer is yes, generally speaking, anything exceeding a 20% increase raises concerns, prompting a closer examination

Additionally, it's essential to explore the historical aspect of square feet per capita. Analyzing how much square footage was introduced, when it entered the market, and its subsequent absorption allows us to establish correlations with other key factors. This comprehensive analysis aids in understanding the dynamics of supply and demand, guiding us to make informed assessments of market trends and potential challenges.

Products

To conclude, the most crucial aspect is breaking down the comprehensive analysis into individual products or units. These individualized units play a pivotal role in understanding the dynamics of supply and demand. Many overlook the importance of this breakdown, but it is essential because a facility might exhibit low overall occupancy, yet this doesn't necessarily reflect low occupancy across all unit types.

Consider one of my facilities currently at 74% occupancy, indicating a 20% vacancy. However, a closer look reveals that this vacancy is predominantly concentrated in our 10 by 10 units, constituting 80% of all the vacant spaces. Removing these 10 by 10 units would boost our overall occupancy to 90%. This illustrates that vacancy issues might stem from overbuilding a specific unit type.

I once acquired a facility with 60% overall occupancy, and upon inspection, I found that all the unoccupied units were 5x5 in size. After converting these units into different types, we swiftly reached 90% occupancy, and we were able to triple prices. Each unit has its own supply and demand dynamics, influencing the strength or weakness of those units in the market. Examining units individually allows us to grasp what the market demands.

The chart below vividly illustrates areas of both low and high demand in the market. Identifying these patterns is crucial as it guides pricing adjustments. Addressing these demand variations effectively can resolve issues, transforming the overall demand landscape within the facility.

By understanding the demand for each unit type, we can identify weaknesses and strengths. This insight into individual units not only helps in optimizing pricing but also addresses specific demand-related issues within the facility. Fixing these unit-specific challenges can bring about a significant change in the overall demand and performance of the facility.

Understanding Unique Demand Dynamics

Understanding the nuances of individual units within a facility is crucial. A facility might appear to have lower occupancy, like 80%, while others in the area boast 95%. However, assuming uniform demand across all facilities can be misleading. The facility with lower occupancy might have limited unit types that lack demand, making it challenging to fill up through conventional marketing efforts.

Avoid falling into the trap of assuming uniform demand. Comprehending your market and how various demand inputs interplay provides insights into overall demand. Breaking it down to individual products and understanding customer preferences unveils opportunities. Identifying unit sizes with high demand allows for strategic expansion, construction, or price adjustments.

Self-storage is dynamic and constantly evolving. New facilities may arise, but their offerings might not impact your existing operations. Each unit has its unique demand dynamics, and recognizing this is fundamental to Demand 101.

Conclusion

Scrutinizing market demand is not one-size-fits-all. Whether it's a small, big, or midsize market, understanding the local dynamics is key.

Now equipped with the knowledge of demand analysis, you'll approach acquisitions and builds with confidence. This understanding will empower you to be more assertive in underwriting, ensuring the best outcomes for your investments. I hope this information proves valuable in navigating the dynamic landscape of self-storage market.

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