market demand v1.1

What’s up guys? Today we are going over self-storage demand. We’re talking about market demand. Is this gonna be a good deal? Is there risk? This is the most important thing that you can learn when investing in self-storage. If there’s good enough market demand, I can make a lot of mistakes and the market can make me. But if there’s poor demand, no matter how good I am, I just can’t win against the market. You wanna get all the odds in your favor. You wanna make sure that no matter what, that market will have high consistent demand so your self-storage project will be successful. So how do you do that? Before we dive into that, please like and subscribe. That is the currency of YouTube and yes, it appeases the YouTube gods. Help me out. Now let’s dive into understanding market demand and self-storage. Let’s go. There’s a lot of things that go into this. I’m going to try to keep this simple and give you a framework in which you can use to look at lots of different markets. The reason being is this is dynamic. It changes. Not all markets are the same. I’ve been in markets that only have six square feet per capita of self-storage offered to the market, which is generally a very reasonable amount. In fact, a lot of people would consider six square feet to be low. And I have seen in that market there be no demand whatsoever. Be vacancies. Now I’ve seen other markets where they have 20 square feet per capita or more, three times what was in that market and demand is crazy. That’s frustrating, especially when trying to understand if this market will make sure that your project is successful. Will make sure that that acquisition will continue to be successful. All right, I have four things I want to talk about. Let’s start out at the first. Square foot per capita. This is something that we talk a lot about in self-storage. What we’re meaning is how much storage in a given marketplace is there for the population that lives there. Now this range is wild. We see three square feet per capita. We see six, 10, 12, 30. I live in Idaho. We have the highest square foot per capita of self-storage in the world, right here in the state. We love storage here. Now you would wonder, okay, if there’s so much storage, there must be vacancy. That’s not necessarily true. And there’s a lot of factors that go into this. But when I’m looking at square feet per capita, I want to know how much is there. The reason being is it gives me a baseline to understand all the points below. It gives me a place in which I can measure and value off of. So it’s really important to understand those numbers. We move on to the second part. Now the second part is really all about utilization. Understanding how much square feet is in the market. You then need to understand how that square footage that is currently existing in that market is utilized. We do this through this occupancies. What are the general occupancies in the area? Is there vacancy? How long has there been vacancy? At what level is the occupancy and what type of units? What units are high demand? Where are the locations of it? What are the quality of the facilities that have high occupancy or low occupancy? Generally speaking, if I go into a market and I’m gonna buy into a market, I do not want to see vacancy. Vacancy is bad. It means prices drop. It means prices are going lower. Now we’re in the middle of the COVID bump, as I like to call it. Basically bumped up occupancies across the nation. There is just no vacancy and self-storage in virtually every single market. That in itself to me is worrisome because I also know this is not historically normal. That’s why I call it the COVID bump. This is a strange phenomenon. In fact, occupancy was dropping across the nation until COVID hit. There’s a lot of reasons that we’ve seen COVID affect occupancy in this way. And it comes down to everything from new projects maybe didn’t come onto the market, but really it came down to the drop in interest rates and the housing market boom, mobility, people not working anymore from their main office, people decluttering their homes, changing up living space. Remember in self-storage, movement is good. And during COVID, it changed the patterns in which everybody moved. They worked where they went. They were all at home. Let’s get a storage unit. Let’s make more room. Let’s do home repairs. Home repairs started to skyrocket. All of that benefited storage and it benefited a lot. How do I know then if the occupancy in a given market is just the COVID bump, or if this is a real demand, sustainable demand in that market? We move to the third point. The third point is rate history. With occupancy, I don’t look at the occupancy in a given market as a snapshot. It needs to be looked across time. If you have high occupancy and year after year after year after year of rent increases, that tells you there’s demand and you need to look back. Take this in the perspective of years. Are rates moving up? Is there so much demand and I can’t get people in, so I’m raising rates to kick people out to get new people in? Or have I dropped rates and got people in so my occupancy’s up, but my revenue’s down 15%? Pretty important distinction. And number four, this is very important. What is that change in supply? So I talked about the first point. Remember square feet per capita in a given market? Future supply of the market. Are there new facilities coming on? Why was it important to understand square foot per capita in a market if the only thing that you think, well, if occupancy and rates tell me that there’s demand, why do I need to know square footage? Whether there’s 30 or two. It’s a valid question. Why does it matter? This is why it matters. If I know that someone’s building a storage facility down the road, which is public information, you can talk to the city or look at sites like Radius Plus, and that facility that they’re putting in is 100,000 square feet. And then I go back to my notes and I see that there’s 300,000 square feet in this marketplace. That’s a 30% increase in that market of supply. Can that market really withstand such a massive increase of supply on the market? I see people that are building 90,000 square feet in markets that only have 200,000 square feet of storage in that market. Now, you may say there’s high demand, but there’s no way that you know that there’s 50% more demand than is currently being utilized. At that point, you’re kind of guessing, I think, because there’s just no way you could really know. Now, if I’m in a market that’s the opposite, there’s 2 million square feet, and someone down the road is building 50,000 square feet, that’s like, what, 2.5% increase? It just doesn’t matter. It’s irrelevant, right? Once you get down below 15%, as long as there’s historical high demands and rising rates, it’s less concerning for me. But once you start getting into a lot of supply being put on a market that’s all gonna come out at the same time that that market needs to absorb, things can get pretty bad. And we’ve seen this, we’ve known this. A lot of people in the self-storage world did not go through the Great Recession owning storage. We did. Although occupancies remained high in lots of scenarios, some of those facilities, revenue dropped by 50%. They were discounting, giving everything away for free to get people in. And although their occupancy may have only dropped 10%, revenues had cratered. We picked up a lot of storage facilities that had been built prior, and now they couldn’t fill anybody up in them. It was a great time to buy. We got some home runs. But you don’t wanna be the person that we’re going out and acquiring because your asset is failing. You have to understand the impact of future supply on the market. And we look at that at the square feet per capita. Now we can dive in even deeper. We have what we call a heat map. We look and identify demand per unit. We don’t review demand overall because we believe that a unit is a product and the market has different demands for different products. A large RV unit is not the same as a five by five climate controlled. They’re very, very different. So my heat map takes all of the different units and we’re trying to find our product market fit. Who is renting that? Who’s currently renting it? What are the revenues associated with it? Are those revenues high? Are they low? Let me give you an example. We bought a storage facility in which someone built and a large portion of the building, they built five by fives. Why did they build five by fives? Because they looked in the market and found that they could get a much higher revenue per square foot. In fact, it was almost double. And they thought this is amazing. So what they did is they built 200 five by fives. They didn’t understand that in that three mile radius, there was nowhere near demand for 300 five by fives. So they filled up 20% of it and discounted to get that. And the rest of the building sat empty. And we converted the five by fives into 10 by 10s, 10 by 15s, all sorts of different products after we did a heat map and understood the product market fit. So remember, you have lots of products in a storage facility. And just because the square footage overall is saying something, you really need to drive down deep to understand demand on a per unit basis. This is extraordinarily important. If you have a facility that’s 100,000 square feet and 40,000 square feet of it is a unit that nobody wants, your performance aren’t gonna play out well. And this is even bigger the smaller you get. If I have 100 units and 20 of those units are not wanted in that market, that is really going to affect me. Why? Because those smaller units expenses have a much greater impact on that facility. So your expense per unit doesn’t change. So if you take out 20%, yet you still incur that expenses, your margin just shrinks. Understanding a self-storage market, whether it has demand, whether this is a good buy in which rates will continue to rise and occupancies will stay high. Remember, first, we wanna understand the total square feet per capita of storage within that market. Second, occupancy, where it’s at, utilization, is it high and how high has it been for how long? The next one, rate history. Where are rates at today and where have they gone? And fourth, we have our future supply and what kind of impact it will have on that market. Now you may say it only has a 10% impact on the market, but if it’s all RVs and you have an RV storage, how much of an impact is that single unit having on that market? That may be a very large impact. Understand the differences and understand how that future square footage on the market is gonna hit what products and what product types in that location. Very important. All right, now we’re gonna move on to overall market and market demand. That was the important stuff. All right, now we’re gonna move on to overall market and market demand. A lot of people ask, how fast does a market need to be growing? What are the demographics? I have seen study after study. I heard people that swear that certain demographics make certain square footage higher. I just haven’t seen very good correlations. The correlations that we see is generally out West. They have more toys. They do lots more outdoor activities. Lots of times they don’t have basements. There’s higher utilization there, but also out West, generally those markets are growing really fast. The one for sure correlation is the faster that market is growing, the higher utilization and occupancies tend to be. Why? Because it’s creating its own demand. Now, stagnant markets, you have to be careful because if you have a market that’s not growing at all and you oversupply that market, there’s no one to ever fill it up if the demand’s not there. Units sit empty. The only thing that’s left to do is rates to go down and your revenue to crash. Got to avoid that. Shrinking markets are markets I avoid. Your demand is literally getting less and less every year. So we avoid those kinds of markets. Whether there is high amounts of multifamily, suburbs, whether they’re McMansions, all of that, we see it successful in high-end suburbs, downtown areas where there’s lots of multifamily. We generally see the old rule that multifamily drives sales storage is not true. In fact, the suburbs just use it differently. They tend to use bigger size units. Why multifamily? They tend to use smaller size units. I like to see a mix. I like to see high-end houses. We like to see suburbia. I like to see multifamily because that allows me to give more proc selection to that market because the product market fit is diverse. That allows me to do all sorts of things with revenue management and on and on and on. So when you’re looking at demographics, when you’re looking at who are renters, who are homeowners, what the average incomes are, generally speaking, there’s not a huge amount of correlation. I like to have a mix of all of it as long as the market’s growing. All right, we’ve covered a lot and I love this topic. I could literally talk about this all day. I will make more videos on this. I’ll show you charts, how we analyze it on the computer. But if this was helpful, please like and subscribe to this channel. Comment below what you’re seeing out in the market. I like to see that too. It helps. Thanks, guys. If you wanna learn more about self-storage, you can check out the number one self-storage podcast, Self-Storage Income. We go over everything. We go over numbers, management, markets, and invite the best in the industry as guests. Links in the description. Check it out.