America is the land of opportunity, and big cities like Chicago, Los Angeles, New York, Philadelphia, and San Francisco have always been considered good places to earn money and settle down. But in recent years, the Sun Belt has taken the lead in business and population growth. Growing metropolises like Austin and Dallas in Texas, Phoenix in Arizona and Tampa in Florida have become prime locations to seek opportunities.
In fact, a bumper crop of secondary markets is garnering national attention. According to an article by personal finance website gobankingrates.com, Apex, NC; Bentonville, Arkansas; Elk Grove, California; and Frisco, Texas are among the fastest growing US cities for small businesses. These types of booming areas are also becoming prime targets for self-storage investors. Let’s explore why and how to choose and area for your next acquisition or project.
Why secondary markets?
Since the pandemic, more and more people are migrating to secondary markets, which means greater opportunities for self-storage investors. For example, St. George, Utah is enjoying an influx of residents leaving California, primarily for economic reasons. Many of them have sold their homes at a substantial profit and are moving east and south to take advantage of lower property prices and a better quality of life. Overwhelmed with money, these consumers buy lots of “toys” that require storage, which they can now easily afford.
Likewise, a large number of New York residents have reassessed their priorities and moved upstate to take advantage of a slower pace, work remotely, or start a new career. They have shown that they are not afraid to put quality of life above their professional goals. But most of these transplants find a low inventory of homes for sale. Now they are renting apartments and waiting for interest rates to drop. As such, they are storing their property in self-storage until they can find an affordable home.
The pandemic has also fueled consumer expectations for contactless services, self-storage and many other industries. This push to adopt new technologies has opened up secondary markets for investors. It is now more affordable to manage multiple facilities as they can be operated remotely with less staff. My company operates over 50 sites in secondary markets using a hub-and-spoke model. All day-to-day operations are centralized in one main office, allowing us to share resources across multiple locations and create profitability. It also allows us to provide better customer service; a single facility could not support such a large team of experts.
Selection of a secondary market
I hope you see the secondary markets in a more positive light than a few minutes ago. But the idea of establishing self-storage facilities in smaller, growing cities could have raised an important question: how do you know if a given market is the right one to invest in? When considering a location, answer these five questions:
1. How many potential customers are there in the market? A good rule of thumb is to select a location with at least 10,000 people within a one-mile radius, 30,000 within a three-mile radius, and 50,000 within a five-mile radius. This gives a sufficiently broad base of potential self-storage tenants. That said, if the existing competition is very low, a smaller population might still make sense.
2. What are the market rents? The most important factors in determining the potential return on investments are the average rent per square foot and the growth in rents over time. A market with rents of $15 per square foot will yield a much higher land value than a market at $6. Many assets in secondary areas are rented below the actual market rent, creating a significant upside opportunity for purchase.
3. What is the level of supply? In addition to knowing the existing population, find out the amount of storage available per capita. Markets of 7 square feet or less will have significantly better economy than those with more. Go for markets with medium to low competition.
4. How does your offer compare to the competition? Are existing self-storage facilities in the area full? Are they well maintained? What is their unit mix? It is important to recognize unmet needs in the marketplace. If you can build a better facility with more amenities or upgrade an existing site, you will be better able to capture potential new business.
In summary, self-storage investors should look for secondary markets with a decent population size (over 10,000 per mile radius), high rents (over $10 per square foot per year), supply below average (less than 7 square feet per capita) and, ideally, competition outdated and nearly 100% occupied. If you can manage this, it will give you good control of supply and prices in the area.
The majority of the return on investment in self-storage is determined by the market you choose and the terms of purchase (if you are buying rather than building). If you buy in a big market at a good price, over time the asset will work. On the other hand, acquiring a lower cost facility in a highly competitive market with low rents usually does not result in much growth.
The path to success
The success of any business is never guaranteed, but investing in a self-service storage aftermarket can be a very smart strategy. When looking for places to build or acquire facilities, ask yourself if you can add value to the community. Properties with potential for expansion or in need of capital improvements can have a phenomenal advantage for revenue growth.
The real return in secondary markets comes from the ability to implement large remote management systems. Technology has opened up thousands of potential new markets for savvy self-storage investors, and these secondary areas are now ripe for the picking!
Jeremiah Boucher is founder and CEO of Patriot Holdings, which owns over 100 commercial real estate assets. Since 2001, he has aggregated a $300 million portfolio, with a focus on self-storage, manufactured homes and industrial assets. HHis vision is to grow the Patriot portfolio to over $1 billion within 10 years. To reach him, call 702.550.3808 or email [email protected].