With the development cycle in its third year, the analysis required to evaluate a new or existing site is becoming more complex. Industry participants should be aware of not only new self-storage developments, but recently opened properties that are in some form of lease-up.
The analysis of a simple three- to five-mile radius alone may not be sufficient to properly assess a given location, as the performance of a store is impacted by facilities outside the traditional three- to five-mile ring, even if their customers don’t overlap. Lastly, the progress made to qualify the market has allowed us to better understand how much storage is out there, and what the actual national and regional square feet per capita numbers look like. We present the data below to highlight what the actual national and regional numbers are, differences from region to region, and why the number is very much a localized phenomenon that needs to be considered in the context of several factors.
Be Aware Of
What’s In “Lease-Up”
As the industry
is aware, the pace at which new self-storage facilities are being delivered has
increased dramatically over the last several years. In 2016, the total number
of facilities opening their doors was 364; in 2017 that number more than
doubled to 835. With 2018 on pace to be just as large, if not larger than 2017,
the self-storage landscape is increasingly complex and should be analyzed with
more care than before. Additionally, while lease-up periods vary from location
to location, it’s taking at least two to three years for these new stores to
approach some form of stabilization, which means they will have lasting impacts
in their local markets.
New stores in lease-up will have lasting impacts on rental rate and occupancy trends in the areas they are in, and importantly, as discussed below, impact more than just the stores that are competing for the same customers.
Is Three Miles Good Enough?
The proper size
radius to analyze when developing a new property or analyzing an existing
facility is a topic of frequent discussion. While the size of the competitive
area is naturally different from location to location (someone in New York City
is unlikely to travel five miles for a cheaper rate, while in Dallas they might
travel even farther), we question whether the competitive ring that a facility
pulls its customers from is as far as the analysis should go.
speak with indicate that they tend to think about their competitive area,
broadly speaking, in terms of a three- or five-mile radius from the target
location. More specifically, how many people live in the area? How many
competitors are there? And what is the resulting square foot per capita? These
are all important question to answer, but should it stop there? We don’t
believe it should.
To illustrate why we raise the question, consider the Venn diagram below of “Storage Town, USA”. Storage Town has three existing facilities (red dots), and new development that’s set to open for business in the coming weeks (blue dot). A traditional analysis of the three-mile radius surrounding AAA Storage would indicate that there is no new supply coming on line, but does that mean that AAA storage won’t be impacted by new supply?
There are two
distinct impacts to keep in mind when considering if AAA Storage is vulnerable
to new supply:
Competitor Overlap: The number of AAA Storage’s competitors that are competing against new supply that is outside the three-mile radius.
Customer Overlap: The percent of AAA Storage’s trade area is shared by new supply that are outside the three-mile radius.
As you can see
in the example below, both of AAA Storage’s competitors are about to face new
competition. Traditionally, when new stores open, they lower their rates below
the prevailing market rate to attract new tenants. This means that both of AAA
Storage’s competitors will also have to lower their rental rates to compete. As
AAA Storage’s competitors lower price to compete with the new developments, AAA
Storage will be forced to follow suit or they will see declines in occupancy as
more customers rent units from their cheaper competitors.
Let’s assume for
a moment, that AAA Storage doesn’t have any competitors, just as we have shown
below. However, outside of their three-mile radius, a new development is soon
to open its doors. While it’s certainly the case that AAA Storage doesn’t have
any new developments in its three-mile radius, AAA Storage does share a segment
of customers with a new development facility that is outside AAA’s three-mile
radius. If the new development lowers its rates, AAA Storage will be forced to
follow suit or lose customers to the new development.
In both examples
above, we can see that AAA Storage has to consider new development activity
outside of their trade area even though there are no new facilities in their
trade area. As this applies to the real world, we can see that there are direct
and indirect impacts from new supply. The number of facilities in lease-up
continues to rise, and it’s increasingly important for the industry to take
this into account as they do their due diligence.
Feet Per Capita
Once you have
calculated the supply in an area and compared it to the number of people living
there, you derive the square feet per capita. The number we hear most often is
that the U.S. has seven square feet per capita. What we’ve found is that the
self-storage industry has unanimously anointed seven as the accepted number for
self-storage supply per capita. Some may differ slightly from seven, but
something close is universally accepted as the correct amount of storage supply
for a given market. Anything over seven is generally considered over-supplied,
and anything less is considered under-supplied. For most, it has become the
metric for analyzing an acquisition, disposition, or development. Where this
“magic number” originally came from is uncertain, but it has just
spread as a type of self-storage folklore.
When we entered the self-storage industry in 2016, the most reputable source of information on square feet per capita came from the Self-Storage Almanac, which is where we can find evidence of seven. They have been the undisputed industry leader in education and market intelligence for decades and have certainly had some influence. The metric has fluctuated over the years as their methodology has evolved, but it has typically been in and around the seven range.
5.5 Is The Actual Number
With the understanding that a
dataset of every single self-storage facility did not yet exist, we set out a
year ago to create the industry’s first, bottoms-up database of the
self-storage installed base. Our process was painstakingly thorough as we found
every facility, confirmed the address, and mapped their individual square
footage. With accurate square footages of every facility, we now understand
that the nationwide number is 5.5 square foot per capita.
As you can see below, the Self-Storage Almanac did produce a
rather accurate estimate for both the number of facilities and average facility
size in the top 50 markets. As we move beyond the top 50 regions, however, we
found that the actual average facility size decreases significantly. The Self-Storage Almanac used the same
estimate for facility size in the non-top 50 markets as they did for the top 50
markets, which produces a total square footage number for the entire country
that overestimates the total square feet.
Using the actual numbers, we now
know that the actual square foot per capita for the Top 50 markets is 5.1, for
the rest of the country it is 6.0, and the average for the entire United States
is currently 5.5, not seven.
Regions Differ Significantly
The logical conclusion would be, “OK, let’s just change the number from seven to 5.5”, but there is more to the story. The analysis is a little more nuanced. If we look at the top 50 markets and rank them by square foot per capita, we see they range from as small as 2.52 all the way up to 12.44, with almost everything in between.
The two major takeaways are 1) the actual nationwide number is 5.5, not seven; and 2) seven was never the number in the top 50 markets.
Basements May Hold The Answer
Basements shed some light on many of
the large regional discrepancies. To our surprise, there are significant
differences across the country in the percent of homes with basements. They are
a clear alternative to self-storage and, as we can see in the chart to the
right, regions with a higher percent of basements have less square footage per
capita. While the correlation isn’t perfect, the chart does appear to lend
incremental insight to the discussion.
The data would suggest that there is
not a standard metric; therefore, we should not be so quick to generalize. The
metric for markets in Texas could well be 11, while markets to the North could
be four. There are many factors that go into analyzing a region, and we
shouldn’t rely solely on square footage per capita.
There has been a dramatic evolution
in the quantity and quality of data in the self-storage industry over the last
few years. This data comes at a crucial time, as the analysis need before
buying or building a self-storage facility is becoming increasingly complex. Whether
its monitoring facilities under lease-up, considering activity outside of your
immediate three- to five-mile area, or understanding the drivers behind square
footage per capita, if considered and applied appropriately, the industry will
be better off if adopted broadly.
Cory Sylvester is a principal at Union Realtime. Union Realtime provides both data and research to the investment industry as well as advanced location intelligence solutions for all members of self-storage industry including, owners, developers, lenders, managers, investors, and brokers. Prior to Union Realtime, Cory was a research analyst responsible for investing in technology and media companies at Columbus Circle Investors and J.P. Morgan Asset Management. He has a B.A. in Economics from Skidmore College.