Storage is a local business. Oftentimes, you hear people talk about the 3-mile radius of a storage facility. What they are talking about is the local demand area for that storage business. Now the radius for the property could be 4-miles, 5-miles, or even 10-miles depending on where the property is located. Heck, in Manhattan it could be 1 block! The point is 3-miles is a general radius and I will use it here for simplicity.
If you’re a passive investor you might be asking, “why is supply and demand important to me?” Well, it’s of critical importance to the investment. If the investment is in an oversupplied local market, then your investment will suffer. Your sponsor’s stated returns might not pan out if they miss this critical metric when analyzing the self-storage investment opportunity. Questions to ask the sponsor of a self-storage syndication:
- What is the market radius per/capita maximum threshold?
- What is the market radius per/household demand threshold?
- What are the total square feet of unmet demand in the radius based on population?
- What are the total square feet of unmet demand in the radius based on households?
A good sponsor should be able to answer those questions for the given radius on the property. Also, the unmet demand should be positive numbers. If they are negative numbers, I would not invest. The sponsor should also have purchased a professional feasibility study prior to closing on the property.
There are two primary methods I use to determine supply and demand in a 3-mile radius. One is based on households and one is based on population.
I picked this one up by reading Mark Helm’s book, “Creating Wealth through Self-Storage”. I highly recommend the book. The household’s formula goes like this: Number of households multiplied by 10.2%, multiplied by 1.3, multiplied by 120, plus 20% (Households*10.2%*1.3*120+20%). Here it is in an example:
- Number of Households in the 3-Mile Radius: 15,968
o 10.2% of households use storage
- Households that use storage = 1629
o 1.3 users per household
- Number of Users of Self-Storage = 2118
o 120 average sq. ft. size of storage unit
- Total SQFT demand for households: 254,160
o Plus, commercial business use adds 20%
- Total SQFT demand in the 3-mile radius = 304,992
So, it mathematically it looks like this: (15,968*10.2%*1.3*120) +20%
Now you have to find the existing total rentable square feet in your 3-mile radius. You can do this with various tools (listed below). Once you get that number, in this case 158,058, you subtract that from your number above to get 146,934 square feet of unmet demand. This is a good number!
The second is based off population in your radius. It’s commonly referred to as the supply/person or sq.ft./Capita. You often hear that equilibrium for storage is 7 sq.ft./Capita and this isn’t true. That number is the national equilibrium. You have to remember storage is a local business. That’s why we use a 3-mile radius in most cases.
The first thing you have to do is find the equilibrium point of your given radius. We do this with the Self-Storage Alamance (link below) to find the US, four states including the state in which the property you buying and then 4 to 5 metro areas near your property’s metro area (or including) to get the average. For example, in the 2020 Self-Storage Almanac, if I am looking at a property in Grove City, Ohio:
- US sq.ft./person = 5.70
- Ohio = 4.99
- Indianan = 5.81
- Michigan = 4.66
- West Virginia = 3.32
- Columbus, OH Metro = 6.99
- Dayton, OH = 7.46
- Cleveland, OH Metro = 6.97
- Cincinnati, OH Metro = 6.83
- Akron, OH = 7.30
Now we can average all these to get: 6.00 sq.ft./capita for Grove City, Ohio. Now that we know that, we get the population for the radius to calculate the current demand for the area:
- Population: 30,520
- Saturation Ratio (SF/person): 6.00
- 2020 Demanded SF = 183,120 sq.ft.
- Add: Commercial 20%: 36,624
- Total sq.ft. Demanded in 2020 = 219,744 sq.ft.
So, if your current market has existing storage of say 184,502 then there is 35,242 of unmet demand in that 3-mile radius.
By the way, these two examples were of different areas. If you get different numbers for the same area that’s okay too. Just average the two or take the lower numbers to be on the safe side. Again, I encourage you to get a professional feasibility study done on every purchase. I’ve included references below.
I also want to mention that my Self-Storage Syndication Deal Analyzer has a calculator with these two methods built-in!
Smart Storage Group: www.smartstoragegroup.com
Self-Storage Almanac: 2021 Self-Storage Almanac – Mini Storage Messenger
Jason started learning and actively investing in real estate in 2014 and has a goal of being a passive investor by 2024. He is focused on self-storage as an investment and is currently an owner and operator of 15,500 sqft of storage. He also currently owns and operates his own social media site www.smartstoragegroup.com which offers free self-storage training and paid content like the Self-Storage Syndication Deal Analyzer and a Preliminary Self-Storage Feasibility/Market Study. He leveraged his 21 years of Information Technology, Lean & Six Sigma, and Project Management experience to rapidly improve the Net Operating Income of the properties he’s invested in by implementing cost saving technologies and operating practices. Jason attended Golden Gate University, graduating in 2007 with a BS in Computer Information System and then a Master’s in Business Administration in 2016. He has worked in the Information Technology (IT) field for the past 21+ years with Project Management, Data Analyst, Lean Six Sigma, Six Sigma, and Continues Improvement projects. He is a Dad of two wonderful kids and enjoys pro sports and hiking. Jason can be contacted at [email protected]
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