TOPMARKETS_V2

What’s up, guys? All right. Today, we’re talking about self-storage markets and my top self-storage markets for 2022. Now, I love these reports, and I love when people talk about this stuff because it’s such good information and it causes you to think. At the end of the day, we’re going to talk about the top self-storage markets or maybe even the bottom ones, what we’re seeing in reports. But none of that matters if you don’t know what makes a good market, how to find it and how to analyze it. So in this video, I’m going to go through my three types of markets and what makes those markets good and makes those markets maybe bad, because right now we see a snapshot and we’re generally defining on what makes a market good by raising rents, obviously rising revenues so that the storage operators are seeing their revenue increase over what their purchase price. So we’re assuming that if you bought one today, a good market to be in will mean that it will continue to have high demand in the future. Now, self-storage is super localized. That’s why it’s really important to know, because within every one of those markets, there are pockets that are either good or really bad, and you need to be able to identify those. But before we get those, please hit that like and subscribe button. It appeases the YouTube gods. It helps that out algorithm and it makes this all work. OK, before we get started, 2022, it has been a crazy 2021. And for self-storage, it has been a blowout year. So is this going to continue? Is it going to slow down? Well, the answer is yes, both. And it really depends on where you’re at. In fact, a lot of people don’t understand that when we say things like self-storage did incredible in 2021, that is not universal. Not all markets did incredible. In fact, some storage operators did really, really bad. And so it’s important to understand that you’re taking an average over the whole country and you want to understand what makes some markets perform good and others perform bad. So a good market, generally speaking, is a market that is increasing in demand, allowing us to charge more for rents. What drives demand and what drives the ability to increase rents is a combination of things. Generally, it’s lower supply than we have need for, but not so obvious. A lot of people get tricked by this. They view that as, oh, it’s a fast growing market. Well, yes, we do see higher returns, but also in coordination with fast growing markets, you also have high rates of development. So lots of times growth rates can be offset by new supply, coming to the market. This can also be a trap that when things slow down and those growth rates in those markets pause, like we saw in 2008 or in other times, that the new supply is not filled up and it drives all the prices down. So it’s something that we have to be very careful of. And we don’t ever take anything as a set item or a set hurdle that we’re looking to jump over. Meaning I don’t take a set number as in a growth rate, or I don’t take a set number of square foot per capita. You’ve got to understand, self-storage demand is definitely three-dimensional. It is not one-dimensional. And that has been one of the areas that me and my firm have been able to really do a good job at. We analyze those markets and sub markets and find really, really good demand. And lots of times it’s not where people think it is. All right, so let’s talk year over year rent changes. Nationally. So first of all, most of the top ones we know, Tampa, Miami, Atlanta, Phoenix, and Austin. Those are the top five. Now the rent changes on these were an average of somewhere between 12 to 18 to 20%. That is really high. And of course, as associated, those markets are incredibly fast growing markets. We have lots of people moving in, lots of home being built. And if you remember from our other video, we talk about the drivers and the rotors of value within self-storage. Movement is a driver and a big driver of it. Now it can also prop things up. You know, we talk about COVID and I talk about the COVID bubble, meaning that self-storage has risen and we’ve seen the reason in the amount of people that need to use storage. Well, that directly coincides with the amount of people that are moving within the United States. Low mortgage rates has caused really high demand for housing, lots of movement. And COVID, we have the great resignation and the great movement. All of that is incredibly good for self-storage. And in markets that are hot and growing, it’s propped up. But these markets are also the markets that tend to contract. And we saw this in 2008. Those fast growing markets that had super, super high demand also reversed very, very quickly. Because when times are good, we see that bloated demand. And then when times not even end, but just slow down, it contracts in a big way. And that’s something we’re always looking out for. I call this transitory occupancy. Now, we, of course, we all know, which I was telling you for a long time, that transitory inflation was BS. We actually had inflation. Weird, it’s like when you pent trillions and trillions of dollars that its value drops. Supply and demand, right? We knew that was going to happen. Transitory occupancy is like transitory inflation, meaning it comes, but it’s also going to go. And I generally look at the market and try to figure out what percentage of their occupancy is just transitory. It’s just so much is happening right there. And it’s not core occupancy and core demand. So if the housing market slowed down or something happened, all of a sudden, you’d see a huge increase. A huge drop because some of these fast growing markets have very high demand of transitory occupancy, meaning they’re all full, but it’s only full because we are in a period of unusually high growth. That is not an area you want to be buying in to see a slowdown. So we have to understand in those markets where core demand is very, very high. This is usually associated with an abnormally low amount of square footage. So even if people aren’t just moving in, right, even if it’s not just mass movement, there’s still so much demand in a three, four mile radius that even if it cools off, it doesn’t matter. We still can’t get enough supply to the market. Now, this may be hundreds of thousands of square feet. So we look at demand in those markets that may have additional room for hundreds of thousands of square feet at that time and still be OK. So it can withstand those movements in the marketplace. When we look at the year over year rent change in markets, we still see markets that are high growth markets. We see markets that are expensive markets that are very highly concentrated markets, areas that people traditionally would believe there would be super high demand. Those are markets like Seattle, San Francisco, Twin Cities, and at the lowest, it’s Portland. But that makes sense because who wants to live in Portland? So when those markets, we’re not even seeing a 4% year over year increase. Now, Seattle and San Francisco, a lot of this has to do with the lockdowns. And this is one of the hardest things when we look at this. These were generally areas where people were leaving. They weren’t coming into and they were devastated by the COVID restrictions and lockdowns. People couldn’t go out. They couldn’t do anything. Those were also the areas that people avoided. Inversely, when you look at the top growth markets, you’re talking about Florida and Texas that were very open. People could move into it and people were migrating there to have more freedom in a COVID world. So when we look at these markets, we wonder, is that going to continue? Now, it’s not that simple because we also have to take into account areas like Twin Cities, Seattle, New York, Washington, DC, Portland. They also were coming off an area of high, high supply. People were building in those markets. And then when the COVID lockdowns and everything came, it shut down. Plus, new supply was on the market. We also have other markets like sub markets that we see in areas like Boise, Idaho. We have Reno. We have these smaller areas around the country that are expanding and growing, just like we see in Texas. In some of these markets, like the Boise market, we have well over 20 square feet per capita. We were looking today in a core radius around the Boise area with 20 plus square feet per capita. And there is hundreds of thousands of square feet being developed. We are very concerned about areas like this because those second tier markets are really dependent on the migration. Reno, Boise, Albuquerque, you have some of these markets that are very dependent on the great migration out of California. And if you saw a rise in interest rates, which would maybe slow down or contract housing, that could really affect those markets. And with so much new supply and already supply on the market, you may not only not be able to get really high rental rate increases, but you may get drops in occupancies. So what to look for? We’re going to go over right now and we’re going to talk about my three market types. OK, we have high growth, we have stagnating and declining. Funny enough, I’ve actually seen in markets that are more stagnant, a lot of opportunity. And we see this in different market cycles. The reason being is those markets, they did not have a massive development cycle over the last four or five years. That meant as they slowly kind of grew and they were treading water, that occupancy was completely full. And as demand went, there was no new inventory and the prices were low. Now, because occupancies are full, prices were low. We can buy those assets and you can get that on the upward cycle. We’re trying to figure out trajectories of markets. Now, when we’re dealing with stagnant markets, there’s obviously stagnant market that is zero. Me being from a very high growth market, I think 1% is fairly stagnant. I understand that’s not true at all. But when we look at markets, I want to see in a stagnant market some kind of growth. Right. And I want to make sure that growth is sustained because the one market we have is a declining market that I just don’t invest in. The reason being is that can obviously speed up or go away. I can’t control it. And over the long term, demand is leaving. So it’s like catching a falling knife and you’re going to get cut. So I always avoid those stagnant market markets. I’m looking at mild growth and sustained growth. When you’re dealing with a stagnant market, I care way more about does that market go through phases and periods where it shrinks? Or is it a very core market that really never shrinks, but it never really booms? That makes it a lot easier to understand demand. And if that market hasn’t been oversaturated with new supply from a heavy development cycle, it’s safe to say there’s a lot of untapped demand there that may be overlooked for a high growth market. Once again, though, you have to be careful in stagnant markets, because if you do have new supply, it can be very hard for that new supply to be absorbed. And you generally speaking, aren’t going to see massive rate increases. You look at milder rate increases. So for stagnant markets, you want to look for consistency. Now, that does not mean there’s not opportunity there. In fact, there can be tons of opportunity in those type of markets. These markets we see in the Midwest. We’ve invested in the Midwest. We’ve invested in the Northwest and we’ve invested in the South and continue to develop in certain areas. That leads to high growth market. When you’re talking about the interior Pacific Northwest, when you’re talking about Texas, Florida, the Southeast, you’re looking at rapid, fast growing markets. The key to fast growing markets is also consistency. We may be growing really fast, but is that a sustained growth that has been going on for a long time? Will that continue? And in fast growing markets, the biggest concern is new supply coming on the market. How much new supply is coming on? And if this trend changes, am I going to be caught holding the bag? That’s what you want to avoid. Remember, self-storage is hyperlocal. So I can find stagnant markets and high growth markets, pockets that are underserved that I feel safe in. But just because something is high growth does not mean it’s a good investment at all. All right. So when you’re looking at a market, remember when you’re analyzing, we have total square footage. Now, square footage and usage of square footage can vary a lot across the country. So we look at how much square footage is on the market, how much is coming on the market. Regulations associated with it. And then I look at a history of rental growth. I want to see a history of consistent rental growth out of those assets. I want to make sure that if I’m buying it, that is not just propped up today. I do this by looking at utilization. We talk rental rate increases, historical occupancy fill up. I want to see an asset that was put in three years ago. And how quick did it fill up? Because that tells me a lot about the overall demand. And if new assets are coming board, what the expectation should. We should look at growth numbers as far as population growth. If I know that 10% of the population is utilizing storage and a new storage facility is coming, how much new supply can that market handle? That’s really important. And if that growth, 2% population growth doesn’t keep up, what does that mean for demand? Current and future. So it’s not just understanding how much square footage is on the market. It’s also understanding how that square footage is being utilized, which is very different. Is it climate controlled? Is it drive up? What products are being used? Sorry, I say products because to me, storage facilities, we have a product and a customer. A unit is a product and we’re selling it to the customer. So product market fit is essential when understanding demand. All right, all these things come together. We see opportunity in all but declining markets. But how we go into it changes. Meaning with stagnant or more mild and slow growth markets, those are not areas that I want to develop in. Why? Because the rate of fill up, I can get in big trouble. Meaning growth isn’t going fast enough to fill up that new supply of that storage facility that I developed. And it could take years to fill it up unless there is unmet demand in that market in a large extent. Also, low priced markets per square foot. If I’m in a market and I’m getting 50 cents a month in rental rate, those are markets that I’m not going to develop in because development costs have skyrocketed. Now, high growth markets are generally where we go because per square foot revenue is much higher and it’s not meeting current demand and the fill up time within that market, if things stay the same, will be high. Stagnant markets and high growth markets, we acquire both of them. The same thing you have to look at and you have to understand that utilization. This is so important. So when we move into 2022, the most important things that you need to understand is we are on the back of a heavy development cycle. We are in the hottest real estate market and we have a lot of unknowns for the United States coming up, including rising interest rates, which we do not know exactly how it will affect these things. We’re building in a lot bigger margin. Well, I call it my margin of stupidity, but our ability to withstand market contractions in 2020 than we have ever before. With that said, we plan on buying more facilities than we ever have. So be careful, but get out there and get it done. All right. Thanks, everybody, for checking this out. Once again, Self Storage Income, the podcast, we talk a lot about market analysis. Go check it out. Follow me on Instagram. I put a lot of information out there and including analytics that we’re looking at when we’re checking out markets or investing in a given market. Thanks, everybody.