Is Self-storage Overbuilt in Your Area?

The times in the self-storage business have been good, even great, in most parts of the country for two or three years. In fact, some would say we are getting a little fat and happy. What happens now? Is all this good news going to result in overbuilding? Or is it really time to build more? Only a detailed analysis of your market will tell you for sure.

First, a word or two about overbuilding. What does the term actually mean? Simply stated, it means there are too many prudent investors with good building ideas in a given area. People build self-storage (and other real estate) when they think they can make money, which means the existing real estate is probably already making money. This occurs when rents are high and rising, interest rates are low and falling, lenders are interested in new loans, and investors are taking profits and looking for better investment opportunities.

If this sounds familiar, it’s an alarm bell that is ringing loud and clear. However, overbuilding is not a disease sweeping the nation that will kill off the self-storage industry. Overbuilding happens one little market at a time. You only hear about it when it happens to a lot of little markets or to your market. It is always better to have some advanced warning of the situation in your market, and develop a strategy to deal with the potential problem.

The following checklist will help you determine if you should begin to lose sleep or celebrate. If you go through the list carefully, you will gain valuable insight on how to answer these questions.

1. Check with your city and/or county planning and zoning departments. They know about all proposed projects in your area.

2. Check with the building department to see if there are any projects permitted. A permit usually means that the developer is very serious about beginning construction.

3. Check the Yellow Pages for new self-storage listings. Sometimes projects are listed before being built because of the publishing dates of the Yellow Pages.

4. Drive the area. See what sites are for sale and call the brokers to find out what’s cooking. If there are a lot of sites available, and they are zoned for self-storage, it’s not good news.

5. Plot all your competitors’ facilities by rental rates and unit sizes. If your projected rents are more than the prevailing rents, you may be sending an invitation to a future competitor to move in.

6. Divide your projected net operating income (before debt service and depreciation) by the square footage of your facility. If this number is an average of $3.50 per square foot or more in most areas, the chances are good that other developers are looking around your town.

7. Check the demographics in your market for growth. Some appraisal firms can give you this information.

Michael McCune is president of Argus Self Storage Sales Network, a Denver-based real-estate firm with brokers nationwide, specializing exclusively in self-storage properties. This article also appeared in Inside Self Storage Magazine. For more information about Argus’ services, or a current list of available properties, call (800) 55-STORE.

Did You Know?

According to information obtained through the Argus Self Storage Sales Network, since 1988 self-storage rental rates for the average 10-by-10 unit have increased by $10.95, the equivalent of 24.3 percent.

On the subject of self-storage occupancy, the sales network reports that the national occupancy is up 5 percent since 1992, and has increased 12 percent since 1987.

Argus Self Storage Sales Network also reports that, despite the increase in self-storage rental prices, median household income grew only $500 (from 1984 through 1994), creeping up from $30,268 to $30,786…a 1.5 percent increase.