Day 21: Self Storage Supply vs Demand: How to Spot an Oversaturated Market Before You Buy

Welcome back to day 21 of the Storage 100. I guess I should say welcome back to the Storage 100. This is day 21. Anyway, I'm Joe Downs with the Storage Mastermind. We're kicking off day 21 with a critical concept in self-storage, supply versus demand. Sort of covered it a little bit. We're going to take a little bit of a different approach to it today. This is where most investors fail before they even start. I think the reason is because people take the, if you build it or if you buy it, just because I bought it or build it, they will come, you know, the whole Field of Dreams approach. If you build it, they will come. While that was a great movie, it was a movie. You can't just build it and expect people to show up and pay your premium rates. Market doesn't care about your dream or your pro forma. It cares about the ratio of available units to the population that needs them. So if you under— if you ignore fundamental economics, you're going to end up with half-empty facilities and a mountain of debt. So going to cover today how to spot an oversaturated market. You need to know— well, sorry, you need to know when to walk away from a deal, no matter how good the deal looks on paper. And first place we're going to look to understand that is the true health of the market. To understand the health of the market, I should say, is the occupancy signal. So what do I mean by that? Physical occupancy of a facility is the single— is not the single, it's one of the most important signals that the market gives you. So forget the fancy marketing in the broker's pitch book and, you know, whatever the pitch the broker gives you. If you are there and you, at some point you will be, you gotta drive the facility or walk the facility. You gotta, Look at the locks on the doors. That's going to tell you what the occupancy is, right? Locks on every door, we're occupied. 2 locks on some doors, we're occupied, but we're not paying. So, and then no locks, we're not paying or we're not occupied. So do that math. If you see a market where the average occupancy in addition to that is below 85%, it's a potential danger zone. Operators are struggling to fill units in that market and you will be too. So you're probably going to want to stay away from that one. A stabilized market, Across the board is probably 90%, uh, or better. That's a healthy market. You can compete there, um, but you got to be better than the guy next door. That's all right, you know, that's what— that's where you get this to bring your competitive edge and what you're learning here to the table. Um, when you see 90% or higher, like I said, that's green light. That's a go for that market. It's not the only signal, but it's a good signal. It's a strong signal. Um, market's screaming for supply at that point, and that's a market you can raise rates in. Maybe immediately, maybe not. You know, there's a lot of other things you need to learn about the facility in the market, but it's a market I, you know, I feel like I can work with, right? So just remember that if you build it, they will come only works if the neighbors are already full. And by full, I mean like 100% with waiting lists. That high occupancy market and facilities, that's kind of considered like a permission slip too. to continue to investigate the rest of the market and make sure you're comfortable with it. But even with a market with great current occupancy, that can be a trap if you don't look ahead. So you have to understand the silent killers of deals, and that might be the pipeline. Pipeline problem is a silent killer that turns a great deal into a bankruptcy potentially within 6 months after you close. Wouldn't be that quick, but you get the point I'm trying to emphasize here. You can't just look at the current supply ratio. You, just because you see a market with a fantastic current occupancy and you think you found a gold mine and you buy the facility, but if you forget to check with the town planning board and you miss the fact that there's a massive 80,000 square foot facility that was just approved right down the street, you might have a problem. So that new facility's going to come on board and crash your supply ratio. The pro forma that you went into the deal with is completely toast. And once that new supply opens up, we know this from experience, it's a race to the bottom in rates because everyone, any new facility is trying to fill up their occupancy. That's the game they're playing. You're now battling retaining occupancy. You're going to lose some. You're not getting any new customers. And when you lose some, your occupancy is dipping, which means you have to start lowering rates. And it's just a downward rate spiral. You're, you're, you know, depending on who you're competing with, you might be stuck in a price war you can't win. So if you bought a facility based on old data, you might have a problem. The simple fix, though, always check with the town planning board minutes before— minutes, plans, sorry, town planning board minutes from the meetings for any approved project before you close. Non-negotiable in due diligence. So, all right, we've talked about When to avoid a market here. Let's flip the script a little bit. Talk about when oversupply can actually work in your favor. I was like, what? How does that work? Well, let's talk about it. Look, these are just some of the tips and tricks along the way. This is not what you lead with. But standard rules of saturation are not physics of law, right? So, or laws of physics. They are guidelines. They're smart money knows there's exceptions to those guidelines. So. You can come in and crush the competition if you exploit, let's say, here's a couple of weaknesses in the existing supply. So first, what's the unit mix in the market? If the market's flooded with small units but has zero space for boats, RVs, or large commercial storage, then the existing supply is irrelevant, right? There's a supply gap there in the type of product that's being offered. probably very quickly dominate your section of the market by filling that specific gap. How about climate control? What if you're in a market that has no climate control? Everyone's, you know, old stock drive-up garage. But you, by your estimation based on market dynamics, there's a demand for climate control for, you know, things like electronics and furniture, whatever, right? That supply is functionally obsolete. So There's an opportunity there. So the market could be oversaturated in one section of the market or vertical of the market, but maybe not all. And then finally, look for— it's probably more rare, more rural, but look for functional obsolescence. So like if your competitors are, you know, every facility is completely run down. I mean, the gravel drive aisles have become grass drive aisles. There's no cameras, there's no fence, or there's broken fences, or it's not secured. There's no gate. You know, anyone, anytime can drive in there. That's a facility that is going to lose tenants if there's a competing facility that has fresh gravel and fencing and a gate that works and lighting and cameras, right? So you're not just competing against the total square footage, you're also competing against the quality of that square footage sometimes. So, all right, now that you know where to look, let's talk about the exact steps you need to execute this strategy. So You need a concrete 3-step plan to execute this due diligence before you ever sign a letter of intent. First action step, simplest, most powerful, call 3 competitors and find out what sizes are sold out. All right. You can't just call and say, what are you sold out? You got to call with a story, but we'll cover that down the line. If they tell you they have everything available, you know, and you'll get on the phone with these calls like, what size do you want? I got 3 of these, 2 of those, 10 of these, 25 of those. That's a red flag, especially if you get that from every facility. That's a market that, that's totally oversaturated or underpopulated. Basically the same thing. A healthy market has some unit sizes that are sold out across one facility or multiple facilities. Next, check the pipeline. Call the city planning department, ask if there's a— for a list of any sort of self-storage permits that have been issued in the last 24 months. Don't trust the broker's word. Get the data straight from the source. And then lastly, adhere to the 85% rule. If the market occupancy is below 85% across the board, you can't fix that problem with better management, a fresh coat of paint, some gravel. You're in a market that's again oversaturated or underpopulated. At the end of the day, probably the same thing. So those are 3 steps that are, you know, As far as I'm concerned, non-negotiable from a homework standpoint before you dive into the next level of analysis. Um, all right. Tomorrow we are going to use, um, Google Maps to crush your competition analysis, which is gonna be awesome. All right. You got the knowledge. Now you need to put it into action and share the wealth. Hit the like button for me if you now understand that supply kills deals faster than interest rates ever will. Make sure you subscribe. Um, because you just learned how to count units before you start counting your profits. And also not to miss all the future drops and the lives that are coming up. And folks, every— by the way, what I just covered here, the difference between a seasoned storage investor and a beginner. Beginners are not getting this stuff. So kudos to you for watching this series. All right, lastly, share this with a friend who's building in a saturated market. They're making a huge mistake and they will thank you later.