02 Jul 2019
Within the United States there is now over 1.7 billion square feet of self storage space equating to supply of approximately 5.4 square feet per person. Not only is this the highest amount of supply in the history of U.S. self storage, but between 2015 and 2018 there was a dramatic increase in self storage construction spending. While this sector is still far short of the 14.1 billion square feet of retail space in the U.S., which has 43.1 square feet per person, it has seen an aggressive growth spurt over the past several years.
While 2019 self storage occupancies, on average, appear to be healthy across the U.S., we are approaching a period that could be challenging for operators and developers. Unlike other classes of commercial real estate - like office or retail space, which are rented under multi-year leases - self storage has to perform on a month-to-month basis. This means that the self storage user market is very dynamic with tenants moving in and out on a regular cycle. There is turnover risk and it is a speculative asset class, meaning it is not a build-to-suit, which is a project that is built specifically to suit a planned tenant or owner occupant. And the barriers to entry are not very high in most markets. This all means that any planned new self storage project can benefit from a Market Study. Here is why:
A Feasibility Analysis involves estimating the financial viability of a very specific plan that has an exact budget and full plans for development. With a Market Study, initial parameters on rental rates, absorption, market occupancy, unit mix, time to stabilized occupancy, and site analysis can be determined and this leads to the first test of feasibility. If rents are low in the submarket and land and construction costs are high, a project may not be feasible.
Usually clients have a location in mind for a project and a basic plan for buildings and number of units. The gathering of relevant submarket data and analysis can provide a better understanding of local market opportunities and pitfalls. For example, a submarket may have an oversupply of 5x10 units or a new national project may be struggling with initial lease-up. The data and analysis developed with a Market Study can provide a better understanding of the submarket and support for better development decisions.
A Market Study can be a part of a business plan for lenders and investors.
There is some mystery about what a Market Study can accomplish in the evaluation of a proposed self storage project. There is a “build it and they will come” mentality for many self storage developments. However, with assets evolving in sophistication and the amount of new building in the market, it may be a good time to do a better front-end analysis. Here are three key things that a Market Study can be used for in a proposed development situation:
Test Your Plan. From Main Street to Wall Street, most self storage participants have a plan when developing a new project. A Market Study can test assumptions on rental rates, unit mixes, ancillary services, absorption and location attributes.
Refine Your Plan. The research gathered from a Market Study can help in the refinement of a proposed self storage development plan. If there is substantial proposed supply within a submarket or lower occupancy, it may make sense to resize or phase the proposed project.
Finalize Your Plan. Once an evaluation of all market elements and the proposed project plan has taken place, it is time to make a final commitment on the site. This includes construction type and layout, unit mix, management plan, ancillary services, branding, technology, and vendors.
A Market Study provides intelligent guidance on the market at a set point in time and considers the likely near-term performance results for a proposed project. It is useful for testing a proposed plan or location and the results of the study can lead to project refinement. An analysis can be oriented toward the largest or smallest markets. In the end, having more knowledge about a submarket and making better decisions about development can lead to better success.
