The Keys to Stabilizing A Self Storage Facility [Don't Miss These]

In the dynamic world of self-storage facility development, achieving stabilization is a critical milestone, signifying the point at which consistent occupancy rates are reached. This is a multifaceted journey, influenced by an array of factors, from market dynamics and micro-level demand analysis to product selection and market growth rates. The timeline to reach stabilization is far from uniform, with outcomes ranging from a few months to several years. 

In this article, we delve deep into the intricacies of property stabilization and the variables that impact it, shedding light on the ever-evolving self-storage industry. We'll explore the concept of "micro demand," the significance of product-market fit, the implications of market growth rates, and the unpredictable nature of predicting market absorption. By understanding these factors, we can better navigate the challenges and uncertainties associated with property stabilization in this rapidly changing industry.

Stabilization is a critical milestone in the establishment of a self-storage facility. Typically, it signifies the point at which you reach a consistent occupancy rate, commonly falling between 80% and 90%. It's important to note that this doesn't necessarily equate to breaking even; that point might be at a lower occupancy rate. Stabilization is about reaching a steady and sustainable occupancy level that aligns with your long-term objectives.

However, the timeline to attain stabilization can fluctuate significantly due to various market cycles and economic conditions. There are instances where facilities have taken up to five years to achieve full occupancy, while others have reached that point in as little as six months. This wide variation can either make or break a self-storage venture, and some facilities, despite years of operation, might never attain stabilization, leaving us to question if they ever will.

The Importance of Micro Demand

Now, let's explore the concept of "micro demand," which holds immense significance in the self-storage industry. This is where we will primarily focus our discussion. However, before delving deeper into this concept, it's essential to consider the broader demand factors.

Previously, we discussed the current stage of the self-storage industry. I strongly recommend watching that video if you haven't already, as it provides valuable context for this discussion. To summarize, we find ourselves in the later stages of a significant period of development in the self-storage industry. While I can't predict when this phase will conclude, it's evident that we are well into this expansive development stage.

Understanding Stabilization Timelines

We find ourselves in the later stages of an enormous development cycle within the self-storage industry, one of the largest cycles we've ever witnessed. Historically, self-storage facilities typically took around three years to fill up. However, in many current markets, they have been reaching full occupancy much faster, often within two years or even less. This trend has led some to believe that this rapid fill-up is the new norm. It's essential to acknowledge that this is a concerning development. I've come across feasibility studies that boldly predict a six-month fill-up, which I consider reckless. Planning for anything less than a three-year fill-up is not something I would recommend or support.

To clarify, I must mention that our specific niche and expertise in demand analysis, coupled with our strong marketing strategies, advanced technology, and product selection, have allowed us to achieve quicker fill-up times. However, even with these advantages, I remain conservative in my approach and would never plan for a fill-up duration of less than three years.

Now, let me explain why I believe that a three-year fill-up timeline is not just the standard but should be considered mandatory. When examining the life cycle from the opening of a storage facility to its full occupancy, it's important to consider that there's an additional year before reaching this point. This means that the entire life cycle from development to stabilization could span up to five years, and in some markets, it might take even longer. Therefore, it would be unreasonable to purchase a property and assume that you can predict what will happen in five years. 

The world changes rapidly, and over the last two decades, we've witnessed significant shifts in just a few years. Claiming to know what will happen in two years after a facility is up and running, with a six-month fill-up expectation, is impractical. The pace of change in our world is evident, and attempting to foresee events five years ahead is often based on luck rather than accurate prediction. 

The Ever-Changing Landscape of Self-Storage: Planning for Uncertainty and Success

The world is constantly evolving, and this has a significant impact on various aspects of our lives, including interest rates, unexpected events like black swan events and viruses, and much more. It's challenging to predict the future with certainty, and even though I possess strong capabilities, I can't guarantee how the market will perform when we start our business. Additionally, I can't guarantee that my capabilities can always overcome market downturns, such as new competition or rapidly rising interest rates, which could lead to a housing market slowdown and increased vacancies, causing price drops.

This situation may require me to adjust my underwriting prices and extend the timeline for achieving my business goals. For instance, if I initially planned for a one-year fill-up, I may have to lower rental rates and face a significant drop in revenue. The expected stabilization period in that market could extend from 90 days to three or more years. The problem here is that you may not be prepared for such a scenario, and you might have to seek additional funding from investors or risk losing the property. I've purchased properties from individuals who were unprepared and sold them by banks at a significant discount.

Feasibility studies that suggest a quick fill-up in six months are often unreliable, especially for banks that typically require a three-year fill-up plan. Therefore, it's essential to exercise extreme caution when planning for the future, as the current favorable conditions may not last.

The self-storage industry has thrived in the past few years, partly due to government interventions that have stimulated an abnormal market. Expecting this cycle to continue is risky, and we are currently experiencing the highest price point and the greatest influx of self-storage square footage in history.

While self-storage remains a promising industry, it's essential to acknowledge that it won't be as straightforward as it has been. The industry has evolved, and competition is fierce. To succeed, you must adapt to changing product preferences and market demands. Embracing change and planning for the worst are crucial for long-term success when analyzing property stabilization. It's important to take a micro-level approach and consider all factors that can affect your specific situation.

Going Micro: A Microscopic Approach to Property Stabilization

Change is a constant in the business world, and when it comes to evaluating property stabilization, it's vital to focus on the fine details. This micro-level analysis involves examining the market's supply per square foot, which can provide valuable insights. But, why is this square foot per capita metric important? Contrary to what some believe, it doesn't directly indicate demand. In fact, I've encountered markets with a mere six square feet per capita that thrived and others with 20 square feet per capita that struggled. The dynamics at play are diverse, influenced by factors like growth rates, housing trends, lifestyle variations, and how people utilize storage in different regions.

The absence of a one-size-fits-all standard complicates matters further. Demographics, growth rates, city planning, basement availability, house sizes, homeownership rates, income levels, and the prevalence of multi-family dwellings all contribute to the complex equation. Understanding these intricacies is essential, as it allows us to gauge the total square footage per capita in a given market and assess our potential impact. For example, consider a market with 200,000 square feet of storage. If we plan to introduce a 100,000 square-foot facility, we're increasing the market supply by 50 percent.

However, it's crucial to recognize that once market alterations surpass the 15 percent mark, predicting specific performance metrics becomes uncertain. The intricacies of these changes can lead to fuzzy forecasts, making it challenging to gauge the market's response accurately.

It's Impossible to Predict if a Market Can Accommodate a 50% Increase in Supply

No one, regardless of their expertise, possesses the ability to predict with absolute certainty whether a market can seamlessly absorb a 50% surge in supply. We're not omnipotent; we can't work miracles.

As you push beyond this threshold, the higher you go, the less reliable the estimation of the stabilization period becomes. Here's the primary factor I consider: If I'm enhancing a market by a mere 5%, and there isn't a single available unit, and everyone is hiking their prices, my impact on that market will be negligible. I'll build, but none of the existing storage facilities will even notice.

However, if I'm increasing supply by 15%, and there's already vacant storage space in the market, and perhaps rental rates have plateaued, as is occurring nationwide, I can reasonably anticipate a longer fill-up period. There's existing inventory that people aren't taking, so why would they suddenly embrace additional supply?

The Key to Faster Stabilization: Strategic Product Selection

It's crucial to recognize that stabilization periods are primarily influenced by product selection. Personally, I prefer to call these offerings "products" rather than "units" because, in my view, they're more than just real estate – they are products with unique market dynamics. To achieve the fastest and most efficient fill-up rates, it's imperative to focus on aligning these products with the market's specific needs and high-demand preferences.

This approach has consistently yielded excellent results across all our development projects. We maintain a discerning and selective attitude, always striving to match our product offerings with the highest-demand segments in the market. When executed with precision, this strategy can significantly reduce the overall time it takes for a property to stabilize.

Conversely, neglecting this aspect can be detrimental. To illustrate, I once acquired a facility with four buildings filled exclusively with five-by-five units. While these units constituted a substantial 30% of the facility's total space, the market had minimal demand for such offerings. Consequently, approximately 30% of the facility's space sat at an occupancy rate as low as 10%. In response, the facility lowered its prices across the board.

Upon our acquisition, we promptly recognized the issue and embarked on a comprehensive product-market fit strategy. We increased prices for units with high demand, and we transformed the unwanted five-by-five units into offerings that aligned with market preferences. The results were remarkable – a rapid fill-up, a substantial increase in revenue, and a quick doubling of performance within just a year and a half.

Why they initially go wrong? First and foremost, the initial missteps can be attributed to two critical factors. The concept of 'product-market fit' was overlooked, and all units were treated as equals. The misconception that a square foot is just a square foot doesn't hold up in practice. These are the primary elements we scrutinize when assessing stabilization periods.

Importance of Market Growth Rates

Moving forward, it's crucial to consider the market's growth rate when evaluating stabilization periods. Markets with high growth rates typically experience longer stabilization periods. Why? Because these markets are in a constant state of flux, with a significant portion of self-storage demand stemming from the churn created by people moving and transitioning. This high churn rate is instrumental in attracting customers, and it forms the foundation of the self-storage business. People come and go, and a portion of them remains, resulting in a consistent level of occupancy.

Understanding the importance of this churn is critical. In stagnant markets, where growth rates stall due to factors like rising interest rates and a sluggish housing market, the movement comes to a halt. This sudden cessation of movement leads to a rapid decline in fill-up rates. Not only do these rates plummet, but other storage facilities also experience a drop in occupancy. Units that you never even considered in your initial underwriting suddenly flood the market, altering your entire model and approach. In essence, everything changes.

This is precisely why it's prudent to allow for an extended fill-up period in your planning. While achieving a six-month fill-up is indeed commendable, relying on such an optimistic timeline is imprudent. Planning for unexpected shifts and uncertainties is a far more rational approach.

Conclusion
 

In summary, the road to stabilization in the self-storage industry is marked by uncertainty and change. To navigate this evolving landscape successfully, planning for the worst and taking a micro-level approach are essential. Understanding market growth rates and product-market fit are critical elements that can shorten stabilization timelines and increase the chances of long-term success. Adaptation and meticulous analysis are the keys to thriving in this dynamic and ever-evolving industry.