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08 Mar 2019

The 4 Essential Underwriting Steps... One Will Surprise You!


James de Gorter

Union Realtime

James de Gorter, March 8th, 2019

Our clients love The Compass Report which provides them with an on-demand feasibility study; however, one of the biggest reactions we get is "Thanks for all this detailed information but what does it mean? Should I build this self storage facility?" While every project is extremely nuanced we have identified four primary metrics you must analyze before moving forward with your development. If just one of these metrics is extremely good or bad it can override all the other analysis.

Square footage per capita

This is everyone's favorite, and it is typically the easiest to analyze; however, it is probably the least important of the four metrics. There are plenty of markets with very high square foot per capita that have strong fundamentals and vice versa. As you can see below there is great variance in the metric across the country. As we have discussed before, basements explain a portion of the variance. That being said, we should still use the metric and compare to the macro to give context for our analysis.

New supply

This is by far the most important metric to analyze. New facilities are popping up everywhere and both recent deliveries and future deliveries will be impacting your market for years to come. If your trade area is seeing significant supply growth and you are still considering a new development you better have a compelling reason. At a minimum, run some downside scenarios on your lease up time and rental rate assumptions. If we look at the top 25 regions on the scatter plot below we see a very distinct correlation between increased supply and declining asking rents. The magnitude is not trivial either, especially if you analyze over a multi-year period. Always stress test your asking rents if you plan to develop in a high supply growth market.

Structural changes in demand

This one is the most obvious and typically analyzed before opening the spreadsheet; however, that doesn't mean we can forget it. Structural changes in demand typically include a major company exiting / entering a market or a local industry going through a boom / bust cycle. For example, if there is a tech boom going on in Silicon Valley then you can reasonably be assured that market health will be robust for many years regardless of some new supply or market softness. Similarly, if Tesla is building Gigafactory 4 down the road then you can bet the fundamentals will improve. Phoenix is an example where recent pro business policies that attracted big finance and tech firms like JP Morgan and Intel have led to strong employment growth and consequently improved self storage fundamentals.

Asking rate trajectory

This analysis is by far the most overlooked, primarily because the data hasn't been readily available. Now that we can analyze year over year changes in asking rates we can get an immediate read on the health of the market. If rates are going down year over year it is a clear indication of over supply; conversely, if rates are going up year over year it indicates supply shortage and healthy fundamentals. Regardless of square footage per capita, new supply expectations or demand expectations you can always identify the current health of a market. Analyzing this metric is always the best place to start.

Original article by James de Gorter, March 8th, 2019

James de Gorter

James co-founded Radius+ alongside partners Adam and Cory, in 2016. James previously spent eight years on Wall Street investing in tech companies for firms including Royal Bank of Canada. With Radius, the task is similar: discover and communicate actionable insights for clients. When he's away from the numbers James enjoys family time, golf, and his status as reigning NKF Ping Pong Champion.

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