The Most Overused and Unreliable Self Storage Underwriting Metric

You sell air conditioners, and your boss points out the following statistics:

Florida has four air conditioners for every house in the state.

Minnesota has one.

He suggests that you spend all of your time in Minnesota selling air conditioners because Minnesota is under-saturated relative to Florida.

This strategy obviously doesn’t make sense, but this is how most storage developers think.

The demand for air conditioning in Florida is a function of the warm climate (a unique regional local characteristic) that drives demand and something that Minnesota doesn’t share with Florida to the same degree.

The same concept applies to thinking about storage demand in terms of storage square feet per capita (how much storage space there is in a given area relative to the number of people in that area).

Square feet per capita is the prevailing metric the self storage industry focuses on when evaluating development opportunities, and just as with the air conditioner example, the same flawed logic exists.

For example:

NYC metro area has a storage square feet per capita of 3.4.

Houston is 8.6.

The national average is 6.

Many self storage developers look at these metrics and assume that NYC is undersupplied, Houston is over-supplied, and if they can find an area that’s under six storage square feet per capita, it's a great site.

False.

There are local dynamics that drive demand in different ways.

In the NYC metro area, most of the homes have basements - whereas the homes in Houston are generally built without them.

THIS is the driver behind the difference.

The NYC Metro area may be in equilibrium at three, and Houston may be in equilibrium at eleven - each metro is its own unique market.

This isn’t just an opinion. When we run an analysis at a macro level, there is a lack of correlation between higher storage prices and lower square feet per capita.

This is one of the reasons we started DXD.

Most (not all) developers think about their site selection with the square foot per capita framework.

How do we do it?

We care about rental rates; current and projected rental rate trajectories give us real-time insight into self-storage demand.

Another analogy to illustrate the point:

If you book an airline ticket from Denver to NYC and the coach fare is $900 one way, you know that the flight is almost full and you are buying one of the last tickets.

It's the same concept in storage.

High rates are typically a good indication that the facilities are full, and without digging further, I can tell you that occupancies are also high (we always do investigate further down the due diligence funnel).

Going one step further.

If prices are high AND the square feet per capita is high, then that is REALLY good. There may already be a lot of storage, but the facilities are at or near capacity!

We love these markets because a new 800-unit facility adds a smaller percentage of new supply to the local market.  If there isn’t a lot of storage in the market, the same number of new units would represent a greater portion of the total supply.

In March of this year, we opened a facility in a market with 10 square feet per capita and high rates, six months later the facility is already 60% occupied.

Point is, this isn’t theory; this is what we’ve found in practice after selecting development sites using our underwriting methodology. Other storage developers, placing too much emphasis on a single underwriting metric, would have immediately passed on this deal, but because we take a harder look at more sites than others, we’re better able to capitalize on these opportunities.