Can anyone help me with determining self storage market saturation from a distance?
I am looking at facilities in several places around the country, all of them are out of state and I am trying to get a better handle on market saturation. I have found some information on the internet but I can not get a clear handle on when to pass and when to proceed further.
For example:
One of the facilities has a 10 cap with 75% occupancy. I called one of the "big boys"and aksed if they had any facilities in this town. The girl told me that they have 8 facilities in this town of 20,000 (population found on internet).
How do I determine, from a distance, if this town is overbuilt, (it is an older established area) or if there truly is some potential to fill the vacant units and increase occupancy?
Expense to income ratio shows that it is being operated at 35% so I don’t know if anything can be trimmed off management expenses to increase the CAP rate.
I am reading the Self Storage Course and any additional input would be appreciated.
Thanks!
Joanne,
The key here is to try and find out what the market occupancy is in this area. If all facilities are running about 75%, then it is a stable or overbuilt market. That’s not necessarily a bad thing as long as someone else doesn’t add more square footage in the area.
A 10 CAP price on a 75% occupied facility sounds like a decent deal as long as your financing is good. You want to make sure you have some profit right from the start, especially if you are trying to do this with a combination of financing with little money down. If you are using your own money, then you want to make sure you get a good return on your down payment. I would want at least a 15% return and shoot for 20 or higher.
If their asking price is a 10 CAP, you should offer lower and see how low they will go. You might pick this up for a 12 CAP or better.
Once you have it under contract, then you can visit the local area to assess whether the market is overbuilt.
Self storage is so locale specific, it’s difficult to get a true gauge of market conditions via the Internet and even the SS Almanac. The best way to do this is the old fashioned way of physically visiting the area and the competition.
But, I wouldn’t spend the time or effort flying to a long-distance location until I have it under contract.
Steve