Transcription
All right, so one of the questions we get asked most often, which is actually one of the better questions to be asking, is what makes a good market, or what markets should I build or buy in, and how do I identify these markets? And this is really the question that matters, although it's broken up into two parts.
And I think a lot of people don't focus on the whole picture. They identify certain categories that it seems like they read out of a book, but don't make a lot of sense in practice. And let me give you an example of one of these. So when people are looking at markets, and I've actually heard funds that have hundreds of millions of dollars say this, that we do not invest in something that has over a certain amount of square feet per capita. So they say, "May, they may say, outside, anything we're looking for markets that have under 8 square feet of storage per capita." The reason being is they don't want to be in over-saturated markets.
The reason why I don't like these types of ways of going about it, although we use metrics and we do use rules, which we'll go over, but before we got to really set the stage for this, we got to, we got to kind of frame this and how you need to think about this. All markets are different, especially in self-storage. I have assets and markets that have 16 square feet per person. They are our highest rents, are most filled, and they rise in rents every single year.
So why is this important? Because certain markets, depending on everything from the city, who lives there, the different economics of the place, will derive different amounts of storage. A simple case is in some cities, excess storage, you know, house is hard or nearly impossible to do. But there's still live-in areas where they have lots of toys, and the city's cracking down through laws and regulations that you can't have RVs out, and people have a lot of rental. So what happens is the demand for storage rises. As well as opposed to maybe a location that people don't have as stringent laws, and they can store things in larger houses, or there's just not a need because the recreational activities don't exist that drive the need or want or desire to house and hold lots of things.
So we see this across the country in like inner cities where there may be storage needs. Small units are very, very desirable. Now, if you move out west, and you are in even large cities, when you move into Texas, and Rocky Mountains, and even the Midwest, where there's lots of outdoor activities that are being done, people have four-wheelers, all kind of things that they need to house that they can't house at their house. There's a large demand for larger units, right? They're not the same. The way people consume in those markets, and the way that between the government and at the price of housing and the income works, creates different demands in self-storage.
So with that said, and it's important to frame it this way because there isn't direct rules. Now, I'm not saying there's not guidelines, and you absolutely need to look. But it actually misses the half of the picture that's by far the most important, and that's what we're gonna talk about today. So identifying the perfect market for yourself storage facility, whether you're building, buying, whatever it is, but you want to be in that healthy market, the one that's gonna grow, the one that will allow you to increase your prices, your profit margins will get better, and your cash flow will increase. Finding that market and creating a framework in which you look at the markets to make that decision could not be a more important, and is that the crux of everything we talk about in self-storage and income.
And the reason being is because self-storage is a business disguised as a real estate asset. And if you don't understand that, you can get in trouble really quick. Because this defines what makes good markets and bad markets. And I'll explain it. But when you look for most people, when they look at markets, they're looking purely at demographics. They're saying, "What are the demographics that I need? Right? What is the right amount of self-storage?" Okay, this is a concept that is derived by other real estate asset classes that makes no sense in self-storage. Let me give you an example. If I went into a market and the occupancy in the market across the board was really low, and there was no, not a whole lot of growth in it, outside, it looked to be a terrible market. I could still theoretically build a facility that would perform outstanding.
Now, I'm not talking because I beat them in competition or anything. I'm talking because the product type that I may deliver to that market may not exist. So if I'm going into a market that has only outdoor storage, but has a huge demand for indoor storage and no one's built it, I'm not competing with those storage facilities. So they don't matter. I'm the only one that's gonna bring that product type in there. As long as the demand is there, and there's a large enough base to supply that demand, then I'll be good. And this is what we need to work out.
So the first, we will go over demographics. But as we talked about before, this is an, this is really is a science plus an art. When I'm looking at demographics, we're looking at a few things. First of all, we need a stabilized population, okay? And we need a growing population. And when I say stabilized plus growing, this is what I mean. I mean a population that has been around for a long time. There is enough economic activity and diversified employment that allows it to be stable. This can get iffy in third-tier markets, right? You may have one employer that just dictates the entire employment situation of that market. And if they run into bad times, it's gonna get ugly, and it may not turn around. And we see this. This happens. There are towns that are dying in America. You need to avoid that. Okay?
So you want a growing population. You want a stabilized population. Diversified employment, okay? You want long predictable trends, and you want growing wages. Now, to what extent matters a lot less to me. What I'm looking for is that in 10 years, that market will be bigger than it was in the previous 10 years. Wages will be more. Their families are moving there. There's a reason for that market to exist. And it can't just be one. Okay? Now, these markets are all over the part of the United States. I do have a rule that I don't really like markets that are under 20,000. But that's my own personal preference. I used to invest in storage facilities that were strictly in markets under 20,000. That was a perfect place for me to start, and I was able to capitalize on a lot of things.
Which is going to bring us into the next picture. This is way more, right here, more important than the demographics. Way more. Competition. Your competition will make you or break you. What the other storage facilities are doing, right? They are the ones that will determine whether you get customers, how much it costs to get customers, and at what price you can charge them. Competition is what makes the market supply and demand work. I've often said this, that the biggest threat to self-storage is self-storage. We just overbuilt, right?
So when I look at competition, I first, I'm looking at occupancies. I want occupancies to be high. And - I don't mean that by just stabilized assets, which we're gonna get into. Price per square foot. I want to know what is the price per square foot? Is this a good, healthy price per square foot based upon the cost to build? Okay? So you're looking at these two things.
The competitive advantage. This was very important to me starting out because when we started our self-storage business, it was under our, our philosophy and our whole outlook on this market was that it's a business. So what is our competitive advantage? And I learned on, really, really quickly when we started. We were not in a place to compete with the REITs. So we didn't, we made sure we picked markets in areas that we didn't compete with them.
Under construction and the five-year fill-up rate. All right. This is huge. This, this is where most people drop the ball. This is where most people get in trouble. You see people building storage facilities, and they have this attitude, "If you build it, they will come." Well, them and five other facilities are all building up, and none of them are gonna get to 90% occupied. The understanding and working with the city to figure out what purse, what square foot per capita is coming onto the market is important. This can be easy math that you can do. Like, you don't want to make this complicated. And I've been in markets where people were building, and when I walk through the math with them, they've never done it.
So I took a market like a market that I'm in that's overbuilt. And we said, "Listen, this is a growing market." And that gets everybody excited. But they were building enough storage that every man, woman, and child moving into that market would basically have a unit. That doesn't make sense. You have to remember, 10%, 10% of people use storage in markets that like a lot of storage. Use a lot. Make it 12. And ones that don't make it, like 8. But right in there, you got your 10%. Okay? This is just something that's kind of a rule. It hasn't changed a lot. And to, for a large amount of that 10%, it's temporary. They're not using it for a long time.
So when you have competition that's coming into the market, if the 10% is already filled, if that demand is already filled, and let's say you have, you know, whatever it may be, you have 10,000 people that move into that market a year, and you have 500,000 square feet of storage facilities that are being built, and that equals to be 5,000 units. That means that you are building five times more than needs to be met. This is happening a lot right now. A lot, a lot.
So you have, and how do you know this? So when you take your 10% in a market, I look at the stabilization, which I'm taking occupancy. Okay? And then I'm taking the five-year fill-up rate. So we have assets and our markets that are not filling up after the first two years. They're already being led out to three years. So this fill-up rate is extending while square footage planned is going up, and under square foot, under construction is both going up. So as your fill-up rates get longer, construction rises, and square foot planned rises, your occupancies drop, and your square footage drops. Okay?
This is important because it may not be self-evident, right? So this happened, and it's caught a lot of people by the shorts. Because what happened after the Great Recession, nobody built. Then three, four years ago, everybody started to build. Not only did they start to build, they started to build up in a big, big way. The first two years, there was an excess demand of this 10% that wasn't being met. Let's call it 2%. Right? The first two years, all the inventory that came out of the market sucked that 2% up, filled it up. You're good. Then from there, people were saying, "Look at these fill-up rates. This guy I know, Bob down the street, he filled up in a year, and he doesn't have to do anything because it's storage." We heard this a lot.
So all of a sudden, the square feet planned and under construction spikes. Everybody's trying to get into it, right? This classic boom-bust. So you need to be aware where you're at in the cycle. As people move in, those fill-up rates extend. Now, in some of our markets, guys are three years out, and they're like, "We're at 60%, and I don't think we're gonna get above that in the year four." But because it was already planned, they're building this stuff. This inventory has to go to market. So you spike, which is where we're at in some of our markets right here, at the top of a market, right? We get oversupplied.
So you get oversupplied here, and then the building shuts down. Now, it takes time to fill this excess inventory on the market. That causes square foot planned to drop. That causes the square foot under construction to drop. Five-year fill-up rates start to drop, and then eventually occupancy turns back up, prices per square feet turn back up, and you start the cycle over again. Okay? This is how you understand the cycle. This is where you, you're looking at what's going on, what's happening with your competition. Okay?
So demographics. I see people that are like, "I'm gonna go build in this market." Do you want to know why? "Because 50,000 people a year are moving into this market. They're like, it's crazy, right? So I'm gonna go build because it'll fill up." What they don't know is that five million square feet is under construction in those markets or has been already deployed. So it needs to be way more than 50,000. That's why demographics alone don't matter. And to competition, that's where you're gonna learn. That's where you're gonna learn where the opportunity is.
So what you need to do is you need to focus on two things. Being a good market. Okay? You need to be in a good market that's growing, it's not gonna reduce, that's safe, stable. Okay? You need to be in a market where you can compete. So what makes a good market? Well, that depends on you. Two, you need to be able to compete, right? So if you can compete, you're in a place where occupancies are high, square foot's rising, the planned square feet of being built and under construction isn't out of control, and you can tell that there's still demand in the market. Well, now you know you have upside. But don't get up here because then when you buy, your occupancies go down. And what does it happen, right? Your revenue starts dropping, but you bought up at the top.
So this is what's going to tell the story. Okay? Look at it like a business. What are your competitors doing? Who are you competing with? How are you going to compete them? What is supply and demand? Attack your market right for demographics, good market, okay? And then find out if you can be successful. That's what makes a good market. And socially. [Music]