Transcription
Today, Connor and I are focusing on the one thing, the only thing that matters in storage. Demand. Demand. You could be the smartest self-storage investor in the world. If there's no demand, you're going to fail. And you can be an idiot, an absolute fool, and if there's a lot of demand, you will succeed and be wealthy to some point. You cannot fight market forces.
This is something that I think real estate people, they they forget because they assume that real estate always goes up. It's always there, right? It it just always in the long run works. And so then they overlook a lot of key components. And this happens a lot in storage.
Yeah. What short memories we have, huh?
Yes. So short. Unreal. And another problem with storage is I think demand's a lot harder to understand in storage than any other asset class because you can kind of manipulate it, right? Like at a certain point, everybody will rent. So if you were doing a dollar a month for a storage unit, you would be 100% full, even if everybody in the marketplace was 50% empty.
Exactly.
Because people at that point will go, "I don't even need it. I'm just going to get it."
Mhm. Right. I'll go hang out in there.
Yeah. Yeah. I was even on a call with one of our community members the other day and we talked about, you know, they were excited because this facility had high occupancy. Yes. It's like, well, you get that aging report and make sure delinquency is not super high because that's another thing. You could have a lot of great occupancy but not paying tenants, and that's, and hence, is the problem. There's metrics that they look at, and we assume that means demand. It actually doesn't necessarily. And so what we really need to go over, and what we're going to talk about in today's podcast, is how to understand it. It's not just find it, because also in storage, it's not just there is demand or isn't. If you look at a market, roughly all your vacancy will be tied up in like two units. So, you have a property that has 12 different types of units. Some have 15 or more different types of units. You may have 20% vacancy, 80% occupancy, but that 20% vacancy isn't overall. It It's literally just in maybe one unit size. There's going to be a trend.
Yeah.
And so, all of a sudden, you take that one unit and you're like, "Oh, we're 95% occupancy." So then if you look at that market and you say 20% vacancy, there's not a lot of demand. But then you build a facility with just not having that one unit in it, you could be 100% full and raising rates. The issue of storage is that demand is, first of all, a moving target. It is price sensitive. It is subject to type, use, right? Everything else. And then also, it is hyper-local. And so this, when you look at a market, right, this can start to get confusing, and I think people miss this a lot. Um, and two, storage has such low barriers of entry that demand can change fast, and that gets can get people into trouble. Um, and overall market cycles can affect it really big, like we've seen. So then the question is, okay, well, then what do I do? How do I know? Because that is the one thing I can't fight. That is the one thing that changes value, revenue, everything else. It doesn't matter if you up your ad spend, if there's no more demand, there's no more customers, there's nobody to get, right?
Mhm.
So, where do we start?
Yeah. Where do we start? How do you verify demand? How do you identify demand? How do you identify the lack of demand?
Um, and and some of this is is more simple than than you would imagine. Um, you go out and you talk to storage owner and operators. You go out there, you secret shop, you go out there and talk to other investors or other owners in that that area that you're in or thinking about investing in.
And straight up ask them like, "Hey, I'm an investor. I'm looking at building this. I know that, you know, if I come in and I build all these kinds of units and I oversupply the market, it's going to be terrible." Like, "What are you seeing? You know, what what units are you struggling with? What's your occupancies looking like?" Go to those SSA meetings or whatever. You know, go to the state agencies and and meet other owners and operators. Um, secret shop, go around. I mean, I can't tell you how valuable that's been for us on the acquisition side, actually getting on the ground.
Oh, yeah.
And looking at these other facilities and walking in and, you know, having those face-to-face conversations with the employee or the owner and saying, "Hey, yeah, just looking for looking for storage." And they're like, "Oh man, take your pick." Like, we got, yeah, whatever units you need and all that kind of stuff. Or, um, man, yeah, we're super full. We maybe got a 10x20 coming up tomorrow. Somebody's moving out, something like that. Um, there it really helps give you the pulse on what demand is looking like in that market. Um, despite what the the asset looks like that you're, you know, looking at right now, and whatever the management summary reports say, or what whatever the occupancy or OM says, um, you can really get a good idea demand-wise what that looks like. But again, you need to start identifying unit-specific demand. You can't just say, well, you know, everybody's 90% occupied or this or that. You can verify overall demand, you know, if you find that a lot of these facilities are full, there's not a lot of vacancy, but you really want to start honing in on that unit-specific demand and identifying who has the the most occupancy or what type unit types have the most occupancy and what have the least.
Yeah, it's really important because it it is it is a relationship, not an outcome. So when you look at storage, there is a a a very very clear uh relationship between occupancy, between rents, between individual unit types, new supply. Um, it's uh based upon growth rates, right? There's all of these things and it's the relationship that builds out the picture. So, if we're looking at it, everybody starts at occupancy, right? And that's a good place to start because at the end of the day, if there's 30% vacancy with everybody, you're like, there's no demand. It's not there. Like, it's literally just not even there. So, that's a quick way to walk away to go, there's they're not full. Nobody, everybody has units. Like Connor said, you go and talk to that manager and they're just like, "Hey, I, whatever you want." And we've literally had people tell us that. They're like, we're like, "Hey, so we're looking to move in and I have a whole bunch of stuff. I may need two or three units. What sizes would you suggest? What do you have available?" And they're like, "I got anything you want. Like, we can do three of these. We can do four of these." And they're and it that attitude alone tells you they're just like, "Dude, I got empty units everywhere."
But well, that even touches on that square foot per capita thing that people get caught up on as well.
That has been the number one metric forever. And that metric holds no water. It holds no water and it is so easily misunderstood.
So you could have a market that has 20 square feet per capita and there could be outrageous demand, right?
And then you could have a market that has six square feet per capita and there is no demand, as we have seen in going out and going to the city to do research.
It is not the event. It's not that individual number, but the relationship of the number.
The well, another reason why this is important and, um, you know, we had who did we have on here? They were talking about the acquisition of the New York portfolio. It's slipped my mind here. He he brought up just a great point, and we I'll remember and keep it in so you guys can go refer to it. When he looked at Boise, um, he was like, "You have all this square footage." And then he's like, "Look at New York, there's this much square footage." You know, which has more supply? And I'm like, "Oh, Boise, because it had three times, four times the square footage." And he goes, "But now look at it another way. Doors per person had way more doors per person than we did."
Well, how in the world could that be? Because we have 10x30s, 20x40s.
Not.
And they have 5x5s and little drawers in New York. So they actually, with their six square feet per capita, have more units per person than we did with 20 square feet per capita. That's a really good point to to point out, like doors per person, because that's almost what square feet per capita is trying to achieve in relation, how much storage in relation to people is there. And I think that per door metric is probably a lot more accurate to look at for one. But then two, again, you're you're not looking at this square foot per capita and thinking that, um, you know, one is good and it the other is not, because again, it's just we've saw it all over the board where, as we're verifying demand, we can that, you know, 6 ft, four square ft per capita doesn't always mean that there's demand and it's going to be a great market. Um, where again, you know, talking this area, we've got assets here in uh, the Boise area, and demand's great. Yeah, storage market, sorry, you got to.
Yeah, no, but you're exactly right.
You would come in here with some amazing information.
I mean, absolutely. You guys need to go listen to it. They're the largest privately owned, um, storage company in the world, and fantastic. He was very kind to share, uh, his time with us. Um, but no, you're exactly right. And two, if you look at different areas, even the submarkets, though it changes. And so Boise is a perfect example. In some in the Boise area, there's pockets where there's really, really high demand, and then there's others that have 40 square feet per capita and they have literally hundreds of vacant units just sitting around. And that is within a 15-minute drive.
So, when you look at occupancy, it can be a very easy-telling story. Um, but also you have the problem that it doesn't tell the whole story. What do I mean? In areas that have high occupancy and have, um, even lots of storage, we almost always will see low price per square foot. So the more storage in an area you have, lower price per square foot. There's more of it, so you can't price it because it's price sensitive. So the assets that have in lots of square footage, there's just lots of storage. They're bigger units, usually, which the revenue per square foot on large units is less because if they were high, there's so much square footage that it would cost so much, nobody could pay for it, right? Um, and so what happens then is if you're pricing a big unit, and there's lots of those big units at $200 a month, let's say, let's say this is a a a 10x20, right? It's this big unit or even more, 15x20. You can park a whole bunch of stuff, high ceilings, $200. Well, then you can't price like a 5x5 at $100.
Mhm.
That's half the price of this ginormous garage, so to speak, right? Or a 30x20, whatnot. So then all of a sudden, all the prices, because it's all relative. You see what I'm saying? Like, you'll actually kill the pricing structure within the asset.
Because it's all relative. People will stop buying a whole section of units and they'll move to another. The market will incentivize customers.
And once those get upside down, they they move. They go, "This doesn't make sense. I'm getting more for what I'm buying." So the pricing structure on storage, especially when the buyer is buying, they're astronomically sensitive, and you can manipulate that very, very quickly. Okay. Well, this facility is 100% full and it has lots of demand. Yeah, but it is 60% below market rates.
Mhm.
So, would you rather have a facility that's 100% full with a market rate of $60, or one that's 80% full but a market rate of $150?
Mhm.
All day long. I'll take 20% vacancy because I'm getting, you know, three times the revenue. As a simple, obviously math not correct, but as an example, that's that's in the simplest form. You know what's going on. So often people trump occupancy. Everyone listening to this, this happens a lot too in small markets. Small markets, especially unsophisticated markets, opportunity is price. That's it.
I want more. I just drop price because they expect a marketplace to be perfect. As in, when you go to a marketplace, if I went to Connor's house today and I went and said, "I need to rent a storage unit from your house," right? There may be within a 10-5 minute drive, 15 facilities. Okay? But I I wouldn't know that. I may see four.
So then the question is to me as a customer, how many facilities are there? There's four. There's not 15.
Mhm.
So then the pricing only really matters amongst the four I can see. And this gets to what you were talking about earlier, and that was the I guess before we were on the podcast, but our true comp. We're in Mississippi right now, and we're turning this storage facility around. Now, lots of people are out trying to buy facilities, small ones that range everywhere from $300,000 to $45 million. Now, they're worried about getting the money or having the financing. This is why we team up with Live Oak Bank because they get this. They understand storage. In fact, we have them help us underwrite deals for our students and others because they are one of the best people in the industry when it comes to getting loans, especially small business loans. They can actually help the customers when they find the asset, understanding how much debt can I get? What's it going to look like? Not just because of the customer they're working with, but because of their knowledge base. That changes them from being a bank to being a real asset to the customer. We recommend Live Oak Bank to our students as well as others that are trying to get into the storage business. They have an in-depth knowledge of this asset class. So, it's more than a bank. It's more than simply getting money. They're actually an asset and a partner to them, helping them go through all the things that they don't know and understand.
Well, the other thing too, it kind of makes me think, uh, we were talking rates as well. Um, and you're diving into this a little bit, where I think it's really, really important as you're going through and looking at demand, not only looking at it, what what is this today? You know, you're looking at the rates historically. Are they going up or down? That's a really good indicator as well to make sure that you're looking and tracking those things and and putting that with new supply, you know, is that is new supply coming on? Is it not? All the different pieces there. Um, because do you want to touch on, excellent point, all the calls or the call that you had today and all the the things because there was this really great dynamic you were talking about where there was this really big increase of climate control and how that, um, that new supply of climate control coming onto the market was going to impact this facility that already had vacancy and in those different dynamics going on.
Well, what we're talking about here, first of all, everybody, what Connor said, the occupancy and the rates is snapshots are great, but it needs to be, um, you need to look at the trend. So, like Connor saying, how occupancy and rates work together. Meaning that if occupancy or if rates go up, does occupancy just go down and then rates have to go down? There's no demand, right? So, you hit a pricing demand above a certain price, people won't rent. But lots of times, you can't see that in a snapshot. That's why you look at the trends. Are rates consistently going up and is occupancy staying high?
Or do rates go up and occupancy goes down, and then rates have to go down? Or, you know, the ceiling? Are rates and occupancy going down, which is, it's an eroding demand scenario.
And so the one way you can that is actually a really good way what Connor was talking about to look at how those things correspond is on new supply. So if you have a new facility and you look back three years ago, like how fast did that fill up and what are the rates? So let's say a year and a half ago or two years, a facility came in on the other side of town or whatever it is. Is it where's it at? And if it came in two years ago, is it at market price and is it full? It filled up fast and it went straight to market. They're not competing on price. That's a good sign. But you have the other problem with supply is new supply. So I have some general rule of thumbs, but to keep this kind of organized, we talk about how occupancy doesn't mean demand. How rates show the level of demand that the occupancy has by pricing. It's either we're high occupancy, but we're getting lower pricing, or we have high occupancy and we're getting higher pricing. That means that occupancy level, right, that demand level in occupancy is stable and there's excess. Now, from there, we move on to supply. You have new supply that came on, but then you have new supply coming on the market. In our community, we were on a call. I I do deal analysis. So, people bring us their deals, pop on, and I in real time, I'll analyze it. We were going through the numbers, and there was a deal that one of our members had, and it had vacancy, a lot of it. It was like 60% um full, but it was a good sign because they were only open for move-ins like two days, and you had to call and set up an appointment.
So, it was like clearly because of that owner, right? So, that was a great sign. They were below market rates, low occupancy, but you couldn't even move in except for two days, and you had to call him to get in, like. So, it was exciting. It was Sounds like money, right?
Exactly.
As we're looking at it, we pop up on the screen. There is a new facility that looks like it's going to be built. I mean, that was like a mile down the road on the same way, right? Super close.
And it was like 75,000 net rentable ft. So that made it was a 30% increase in supply. And so when I look at it, I said, "That to me immediately was nope. Nope. Won't do it. Won't touch it." First of all, you buy that facility, and then you could for sure, you change the management style. He could absolutely get higher rents and higher occupancy. But if you're trying to do that, and new supply comes in, that can be really hard. With that much new supply, though, you all the rates in the market and occupancy may drop.
And they might drop down to where you are. Because when I look at a market, if I want to measure excess demand, meaning that how much more people are or how many more renters are there than square footage so I can build, I don't think anyone can know by putting 30% new supply into a market if there is actually demand for a 30% increase.
That's huge. That is huge. I I mean, think about it. Where a lot of these were, and even like this place is a city of let's call it 20,000 people, right?
There was square foot per capita was kind of high. We're going to use an easy number and say 10. It was actually, I think nine, but we'll use 10 just because that that's an easier way to go. So then you're talking, um, what 20,000 square feet, right?
Because it's 10% of that. So now that means that the person coming in to that market is going to be adding on what would be the equivalent of three new facilities. You're increasing the square footage. And this was in the 5-mile radius. This wasn't even in the mile radius.
Mhm.
So at 20,000 square ft, you're adding on 60,000 square ft plus.
Yeah.
Yeah. Something like that. So crazy. That's ginormous, right? Obviously, my numbers are probably wrong. I'm just spouting off my head, but you get the point where that means, let's take that for an example. That may mean 400 units, 500 units, 800 units, whatever the number is. So, let's call it 800 units.
Are there 800 more people right in that area?
Yeah.
That want storage? You also have the vacancy of the other facilities. So now you have to include the units that are being rented, everything else in a city that
They may not have 800 people even move to that city.
Yeah. The
They may not even have that many new people. Well, then that means everyone is fighting over a limited amount.
And prices drop because the occupancy isn't stable now. So, you have to lower that price to incentivize customers that were not renting because of cost, that now say, "Oh, it's cheap. I guess I'll rent." So, you you're having to entice new customers into a marketplace.
And those aren't
Purely on price.
Ideal customers.
Those are not ideal customers because they immediately leave when there's a problem or a price goes up.
Or create a lot of problems.
Or create a lot of problems themselves.
So, new supply can be very scary. And I look at it like this. If I'm in a marketplace, everyone, and I say, "All right, we have a million square feet. Um, out of this million square feet, somebody's coming in and putting a facility on on the market, and it's 50,000 square feet, right? That is the equivalent of 5%." Right? So 5% of occupancy. Well, in that market, you could have facilities that have, out of 10 unit sizes, they may have eight that has no vacancy at all. None.
So, all of a sudden, a 5% increase, they're like, "I, I don't even have any."
So, it won't even hurt the market because there's excess demand or excess people that want those units that can't even get it.
They don't exist.
They don't exist. So there could be 10 to 15% more demand, and you're only adding 5%. Now in that same market, if there was 20% vacancy, you might be going, "Well, it doesn't, we don't even have enough current demand to fill it." So that new supply is just going to exasperate those problems. But it's even worse when it's new supply because new supply doesn't have renters.
Mhm. Zero cents per square foot is worse than one cent per square foot. Meaning that if you have no customers whatsoever, it is better to fill up. If the rate's $100 a month, it's better to fill up at $10 a month than nothing.
Mhm.
So new supply just goes price down and fill up at all cost.
Yeah. It it has an adverse effect more so than a normal vacancy would.
Man, thank goodness for that call and in reviewing that deal, man, because that's a scary place to be in and stuff that I don't think a lot of people look at, you know, when they're looking at these deals. And I know there's a lot of stuff that kind of came to light. I was like, "Okay, wow. Yeah, maybe maybe we don't look at this deal." Um, and you made a good point, too, in the in the call where you're like, "Man, if you could scrape it and sell it for, like, turn around and sell it for more than what you bought it for, like, great, great, great." But I mean, to think that you're going to move forward or get going, and two lots of times in those places, that's actually why the person's selling.
So, one of I always ask the owners, "Do you know of any new facilities coming into town?"
Yeah.
And then we obviously go verify with the city. We don't trust them, right? But lots of times you find out, "Oh, there's one coming a half a mile down the road. That's actually why they're selling. They know they cannot take that new supply and they're trying to get out before the market goes down." There's no, there's no amount of anything that you can do to fix a market that has dynamics going on like that.
Nope.
Um, the other thing as you were talking about this, AJ, do you ever look at, what is it nowadays? Like the, I know it's crept up over the past several years, but the percentage on average of people in the US that utilize storage. I know it used to be 10, but I think 11, creeping up to 12, 11, right? 11 to 12. I So, do you ever look at that and say, "Okay, we're in a market of, you know, 10,000 people, 20,000 people, 50,000 people, whatever it is, and and compare that and say, from like a demand and new supply standpoint, and say, well, if we increase supply by X amount, we're going to be over this percentage?" Or do you ever use that metric at all?
So, I I will, and in regards to maybe the health of that individual market.
Yeah. Yeah.
Because we say 10 to 12, but some markets it's much less. And one of the reasons why is the west. One of the reasons why we have more storage square footage per capita is not just because we have bigger toys, things like that. The west is new, and so developments here, like I mean, Boise, Idaho, growth is new. It's all like after, yeah, after 1995, but really after 2000, 2008, that meant that all the people moving here and all the building, the vast majority of those are in HOAs.
Mhm.
HOAs do not let you do whatever you want with your yard. You can't just go build a shop. You have more usable space, less storage space. You can't use, you can't put RVs, you can't have cars out. There's way more restrictions. If you go to the Midwest, old neighborhoods that have a shed on the side or basement, and maybe more storage space, but just less regulations and rules. There's less people that need storage. So you can have lower. In the Midwest, you may take something and go, "On average, it's 10 to 12," but in the Midwest, it's 8. And in the west, in places like Idaho, it's just higher because we have more regulations. So I look at it to understand the the people in the market that are participating, do they need it? So there's a difference between "I want it" and "I actually need it." And yes, people do need storage.
If you look at multifamily that's being built, they don't offer storage anymore, and in in their apartments, maybe a teeny bit. The reason being is when people buy, they don't, the multifamily learned very quickly, if I converted storage space into livable space, it changes the perception of value. Somebody says, "I'm getting more for what I'm paying." So all of a sudden, people started to pay less for places with storage over the same square footage where it didn't have storage but had more livable space.
Interesting.
They got more bang for the buck. So multifamily, obviously, it is a much less revenue-generating part of real estate, and same with housing. Housing is the same thing. People viewed that as less, right? It's like, "No, I don't, I don't need a five-car garage. Give me a two-car garage and turn the rest of that into bedrooms or living space or whatever it is." Now the perceived value goes up, right? So because of that, which is dictated by what people want, that high rent and cost per square foot is too valuable for storage. And then there's regulations on how they can use it, as opposed to storage that we can rent to them at a much cheaper rate per square foot. Vastly cheaper. So it it makes logical sense that why pay for it in your apartment?
Mhm. I'll rent a storage unit because I'm actually paying less overall.
Yeah.
So, those dynamics drive up that organic demand with how people use their living conditions, everything else in a space. So, when I'm looking at the market, I am looking at that to understand how much is a need or a want. Because if it's a need, you are it's much easier to understand the dynamics of pricing because the pricing part of it is much more inelastic. Like people are like, "Okay, it went up by 15%. It's still half of what I have to pay for in an apartment or a house, so I don't care." Right? Whereas if you didn't need it, but it was convenient, that may be a dealbreaker, and you move out.
Y so you get more elasticity. So yeah, I I do look at it for that reason. And that comes down to like you were saying, trends, understanding demand, how people are utilizing it, how they live and use it, and then what does the future look like. So if you are in an area that's growing a lot, there's a huge increase in storage demand because movement makes storage. If you have a population that's already been living there compared to a population, you have 5,000 people that have been living there forever versus 5,000 people that are moving to that city. The 5,000 people that are moving to it, 80% of them will need storage. The other one, it may only be 6%. Right? So that growth is a massive boom to storage. It can dramatically lift up demand, but also then when that slows down, it has the opposite effect. Like moving is like leverage in demand for storage, big time, big time. You see this in second-tier markets. Price for units go way up, and then they come way back down. Then they go back way up. You have bigger swings.
And so you build for that and for that demand. But it could it can also catch you and it can slow down. But you do see more demand the more movement there are because that's why people use storage.
Mhm. No, all really good points and it makes me think we need to unpack a little bit and touch on and on a couple dynamics that go into all of those things because we're still talking demand. How to figure all this stuff out. And a part of that is identifying what your ideal customer is going to be. Who's you talked about unit utilization. Who's going to be using that unit? What are they using it for? Is it going to be businesses, recreational vehicles? Is it going to be the college students? Is it going to be the snowbirds that come, you know, that travel to Arizona for the winter? Like, what is it going to be? Who's utilizing it? And then also identifying, you know, what your facility, whether you're buying or building, what unit type mix you're going to have there, and doing a a comparison to the true or like competitors in that market, what that looks like. So, I want to hit on those because those are again some metrics that we've got to unpack a little bit.
Next level deep. And Connor hit on it. The true competition and your true customer.
At the end of the day, you have 300 units.
Mhm.
You don't, you can't have all the customers. You don't want all the customers. You can't increase your market share. You have 300 units unless you're building or putting on new supply. That's it.
So, not all of the storage facilities are your competition. And this is really important to understand. When we say there's 20 square feet per capita, okay, how much of that is your competition?
100%, man.
If you have a climate-controlled multi-story facility and you're comparing it to a gravel drive-up storage facility, those aren't the same customers.
They want totally different things. So once again, oversimplifying it doesn't work. We're kind of going down a list here, everybody, of the most important thing. We talk occupancy rates, new supply. We're talking about utilization. And now we're talking about, okay, now that we say there's at least demand here. We know that there's demand, right? Now, let's dive in deeper. That demand is spread out. Customers, there's basically three types of customers that I've written, talked about in both of my books, and I think it's still true today. You have customers that care about price. They're just price-driven. I'm not going to rent at places their costs. I go through and I'm trying to find the cheapest place, and if they have it, I'll go there. You have purely, um, convenience standpoint. Think about this in like the people, lots of times this is multifamily. I need it close to me because it's more part of my living space. It's on my way to go somewhere because it's like work. So I'm doing this because how I utilize it, what I need, or it's close to home. I'm not going to drive past two facilities to go to one because it's 10% cheaper. Right? Then the next one is quality. I need to secure my things. They can't be damaged. I don't want to be somewhere that's gross, dirty, smells, and I don't want to go to certain parts of the town. I want to feel safe. I need to use it. And that's really important to me. Those people are not price-sensitive. They're going for certain reasons. Quality will also I tie that into like specialty use, that could be climate-controlled. So I need this type of function. If you don't have it, it doesn't matter. I can't rent there, right? Electrical charges, right? Different things like that. When you look at that, those customers are very different. You don't want all the customers. So self-storage demand, once we say it's there, now we divide it up.
Who is your ideal customer? Or who you're trying to target. The next thing is, if that's true, then what are your competitors? If this is your customer, if my customer is a quality, I want to charge $2 a month a square foot in revenue, and I'm providing climate-controlled, right? Um, climate-controlled drive-up access.
Mhm.
Okay. Well, what other customers have that unit type and product and service? Where are they pricing it at? Because Bob down the road has a drive-up gravel 10x10 without security. Bob, you know, it's like his may be 100, and you go, "That's fine." My customers don't want that. They want something else.
This then drives down into where are you located, and where are those customers? But that could cut out a huge percentage of the competition.
Yep.
Like you're like, "That's not ours." I mean, you could almost find a almost like a blue ocean level situation. You're like, "Dude, there is zero."
We just bought one. We have that facility that we've bought in down, uh, the southeast with expansion room, and in a 10-plus mile radius, there is not one climate-controlled facility.
Amazing.
So, there's high occupancy, everything else. We have expansion room. We're expanding climate-controlled, which then our rent per square foot on average is going to be like 60% higher than all the competitors because we're offering, and we're we're putting on square footage, but if you go, we're adding 10% new inventory, let's just say to the market.
Well, in this case, it's not like it's not 10%, it's 100%.
Because there's no other product. We're not competing with anybody, right? It's a totally different product.
So, we don't need to worry. We're not looking at all. We're looking then is just is the total amount of demand because we're the only ones.
And so, you're right. If you get totally blue ocean where you go, "This product doesn't even exist."
Mhm.
And so, whatever demand is there, I'll get it all.
Yeah.
And that's a great way to go about it. So, tearing out then your facilities where you go, price-centric facilities that just compete on price, location-centric that are decent facilities, right? And then the high-tiered ones that are quality, they have all the special things. Which one are you competing with? How's that pricing in that market work?
And then look at demand based upon that.
Yeah. No, I think that's really important because I think a lot of times when we get talking about true competitors, like competitors, we think about the physical asset itself. You know, is it paved? Is it not? Is it? And those are all really important factors in finding your like competitor. But also like who's your like competitor based on the utilization of the facility and what, yeah, what customer base is using using that product. So really, really important there. And then as you go and build this stuff out and you identify and and gather all this information, that's where you're plugging all that stuff into your execution, your business plan.
Yes. Exactly. It's then you're doing pricing and and two, once again, we get in-depth location of the individual unit access to aisles, drives, we start doing all sorts of things and pricing structures on individual units, trickle charges where, you know, it's pricing is not flat, it's not fixed. Where are our customers at? How are we marketing towards them? Another thing that we're looking at to understand demand is demographics, right? When we go in the future, will there be more demand than today? Like, just plain and simple. And we look at trends. Then that's purely associated with new supply. Let's say there's no new supply coming. There's none planned or anything else. All right. In the next five years, is population growing? Are there new companies? Are they hiring? Right? And then we look at the risk to that demand. So we're talking future now. What is the risk? You have a snapshot. Is there demand today? So we got first. Is there demand today? Occupancy rates, right? We're looking at the relationship between them. Historical new supply, did it fill up? Then we're looking at what kind of demand is it? Type of facility, type of customer. Then third, we're looking at future. We're talking growth, demographics. I want to look at risk of demand, which means future risk would be new supply, but then also a demographic shift. Is there a concentration in that area of an employer? So is that area 50% of the workforce on one employer that may go under, right? Or is there new businesses and are there new hirings? Are people moving to the area? Talk to the city, city planning, are they getting new capital? All I want to know is will the people that live here earn more money? Will there be more people? Will there be more building? Will there be more jobs?
Growth, man.
Growth.
What What if there is a facility or or let's say you're looking at a facility, you're looking at that market, you're checking all the boxes for you, but the population's declining.
Yes. So, most small markets, we don't see any significant population growth, and some are declining. Now, when you're looking at that, what happens is it is like you, so we have two different markets. You have the absolute market, which is just the economy, the people, everything, and then you have the storage market. When you're looking at that, all you're doing is looking at the storage market. So if it's declining, if population is declining, first of all, that's usually just a bad thing because,
Yeah.
You know, at some point, if obviously that keeps going, there will be no more demand because it's just getting less and less. So if it is, the question is, how long, right, will that last?
Um, and how much supply is currently there? The one thing about these cities though, especially ones that aren't growing, what can happen a lot, I see this a lot, and this is why I like these markets, is you have what I call a rate runway. All that means is in a market when you don't have substantial growth, you don't have massive pressure on rates. And so what happens is you don't have developers and people coming in and bringing new supply because the cost of putting it, building it, is more than the rent that they can give. And so when you're buying facilities, you're buying it under replacement cost, right? Because it's just equal to that because everybody that built it, they built it 20 years ago. They paid $200,000. You're buying it for $400,000 today. To build it, it'd be $600,000, right? So even though there's not substantially growth, the storage market can't add new supply because it doesn't work.
So then I ask, where do rates have to go to get new supply? And if I'm looking at it and say, "All right, the rates $50," just using a basic example. And I I couldn't build unless I was getting at least $100. That means rates have to double in that market before I can get new supply, which will affect demand. That's a rate runway. Rates can go x amount before I really have to be concerned about new supply. That shows me a future of where pricing can go, just simply due to inflation and due to minimal growth, right? You don't need a lot. And that can give you kind of an outlook. But in those markets, you make your money on the buy. That's it. I do not buy expecting an exit. So for people that buy and like, "Oh, I'm going to sell it for a whole bunch more," as in its value is just going to go up, right? The market doesn't make you in those markets. You could be in a spot where we are today. A lot of people came in after 2008 and started buying up small facilities at, you know, and saying, "Oh, it's going to be worth all this money." And then all of a sudden they were paying six caps, and today they're nine. So even though their income went up, the assets actually worth less.
Yeah.
That happens in small markets regularly, right? I I even heard somebody once that told me, he's like, "The thing you old guys don't understand is that cap rates will never go up in small markets." This was 2021, I think, of course. And I was kind of looking at I'm like, "All right, they raised a lot of money, hundreds of millions." And I'm like, "You know, me and three other guys kind of looking at each other like, 'That's not how this works. You don't live, we don't live in a new world of economics.'"
Like, yeah, that's so funny.
But people think that at the end of bull markets that then you get in trouble because they're justifying their ability to buy and enter into those markets because a market force will save them or make it more.
Uh, that's a sure way to lose your shirt.
Oh, absolutely.
You buy based upon cash flow and cash-on-cash return in those markets. How long to pay it off? Depreciation, simply fundamentals. I don't think that I'm going to buy it at a seven cap and it's going to be worth a five cap and I'm going to make No, I can't do that in those markets.
But that's why you buy in those markets. Cash flow.
Mhm.
And so lots of times you can work with the owners, get seller financing, buy at a high cap rate, and you're getting great cash flow. Awesome. I'll build a portfolio of that all day. I did. That's how we started out. Small markets, cash flow-based. We were buying them, improving operations, trying to lower expenses, and then we had cash flow, right? So, when you're in bigger markets, especially growth markets, that can be next to impossible because markets don't even work like that. Like you, you even in hard times, you get cash flow, but it's not going to be dramatic because rates go up and occupancy goes up. So in our second-tier and even first-tier markets, 10 years ago, rates were 50% of what they are today, and even after three years of down, they didn't get close to where they were, right? And then they'll go back up. So it's still a cash flow game, but the buy is less, and then you get higher cash flow on rates, things like that, as it grows. Um, and that's more predicted on capital and how you can buy. So that's why that's really important to understand demand not only today but future demand. If you're going to pay for something and you're going to pay a decent amount.
You're you're paying for the fact that this is a market that is good. It's growing and it will get better. You don't have that in small markets. So you can't do that. So there's that that once again that snapshot today. Should I just buy or should I walk away? That's all about the relationship between occupancy, rates, supply, how much is on the market, how much has come on, when did it fill up, how sensitive it is to pricing.
Mhm.
And what is the utilization and how much excess demand there is. Then once again, we're looking at where's the demand. So, we have the facilities, we have the rates, the people, and then future demographics, new supply, or the lack thereof, and where that's going. Is it going to be less in the future because new supply is coming in, so vacancies will actually rise and rates will drop, or is there no new supply and there's still growth, right? That that's going to dictate completely. That's why when we talked about this, it even started out, it's just this is the one thing, guys.
Mhm.
The one thing if all you did was say, "I'm going to buy in markets that has high demand and I'm going to buy an underperforming facility, regardless of what the future does, you'll be fine."
Mhm.
You just will. Um, as long as you manage correctly, do the fundamentals.
Y
And if you buy on speculation
And other people are building and everything, you there can be a lot of short-term pain. A lot. And this we see this all the time. I mean, this year we bought three facilities from people that built and then the reality of the situation changed. There wasn't massive amount demand and their valuations, everything changed and so they're basically letting them go.
Mhm.
Um, and that was purely because demand change is like leverage. So all of a sudden when their underwriting told them they were going to be 95% full at $100 a rate and now it's 85% full at $80 a rate. That's the difference of $2 million.
Yeah.
So crazy. Then what do you do? And these are the market forces. Yeah. You exit or you just wait forever until the markets return. So then we can buy in those though at a discount.
Yeah. Exactly. It goes forward. So demand demand demand. That is why the last 3 years has been so difficult for storage because demand was hit not by anything you could measure.
So when we went and looked at markets, you could go, "Oh, there's huge excess demand. We have good growth rates. The fundamentals today are great." But at 6% interest rates, people stop building. They stop buying houses. They stop moving. So the demand across the board goes down. It's not even local. It doesn't matter about hiring. It doesn't matter if it's a good place to live. That will all come back.
Yeah.
But there's barriers for that demand in a structural way. This happens. This happens in market cycles, right?
Well, what was wild about that too is it was coming off of this just insanely artificial.
So the swing was like massive.
It was crazy.
Massive.
Yeah. No, it's something else to see that you know just having that that whole situation where you know valuations and rates and all the things for the longest time were just going through the roof and then you know just even this light return back to a normal was was literally this putting people under kind of scenario.
I mean, you know once again look at some of the deals that we even had did we we had a deal on a market where the 10x10 rate was $200. It had been it was everything was full. I I mean you literally it was just everything was full. You're looking around you're going okay this isn't like some spike. This isn't out of normal no it's this was just normal normal growth. It was normal stuff and then 6% interest that and uh new publicly traded company. Um, yeah I won't say the name. Uh, so they came in and they needed to fill up right as rates went up. Now you have excess inventory in the market lowering demand and that $200 rate went to $60.
Yeah.
In months. It was 4 month period of time. So you could see how the new supply plus other market forces and then a competitor that is trying to grab market share. that can be a recipe for disaster in a market that there was nothing that fundamentally changed right in that over market. So it's not like it's just it now of course it will return and everything go back but those swings happen and that's why too you need to be prepared
Yes
for these things to go up and down because you cannot control them.
Yep. you can't. And if you're buying for everything to go perfect, you you're just gambling. And then you're stuck. And so when things go bad, you don't have options.
You don't have money. You don't have options. You just have to let it go. You get in trouble. When things go bad, the ones that survive are the ones that can figure things out and can maneuver and have options.
Whether it was their fault, whether it doesn't matter.
They need to be able to move. And so today we're in a market cycle where luckily you're at the opposite end. The margin of error is much larger. So your margin of stupidity that I talk about today, it is so much larger than it was 5 years ago.
Mhm.
Like because the market was giving so much returns and today it's not. You're buying at a lower basis on the overall income. you're getting not as much new supply because people can't develop. So, the market is more forgiving because it's more organic to buy. Now, owning and operating that may be a different story if you bought years ago. But to go into the market, there's good deals out there that just have good healthy cash flow. You're buying at what would be in the last 20 years higher cap rates, so you're getting better deals and you can do seller financing. Now, you got to find those deals. Obviously, there's still deals in today's market that are trying to sell at rates that don't make sense. That's every market.
Yeah. No, it it really is. And and that's another thing that people get hung up on, too, is just the the pricing and and valuation and, you know, what they're trying to sell these things. It's all relative.
It is.
And just because someone lists something at a price, doesn't mean it's worth that.
No.
Just because a realtor says that's the price, that's not what it's worth. That doesn't mean that. And I I I've said this and I repeat it. I I just I haven't seen any deals that are trading at their listing price. It's always under.
Yeah.
It's just they're putting it up for sale and then the market is deciding what they'll pay for it.
Yeah.
And then they either come down to it or they take it off the market.
Exactly right, man. Exactly right. But man, incredible, incredible episode here, man. Talking about demand. The one thing that you guys need to get figured out as you're looking at these assets or whether you whether you're looking to build or acquire, it doesn't matter. really dive into that demand and make sure that you understand that that one thing is there because that is king.
King to everything. Yep.
All right. Thanks everybody.
Thanks guys.