Hyper-local Market Supply and Demand

When we typically talk about investing in, let's say, any kind of market, let's say like public equities or something. We go to the Wall Street Journal or our favorite news aggregator, and we see, oh, this is how the s and p is performing, or this is what interest rates look like. And people, uh, create these kind of, um, outlooks based on these kind of national broad aggregate statistics. Same thing can be done in real estate.

You can look at cap rates, you can look at, you know, other kind of how certain real estate classes are performing nationally. You can look at growth rates and things like that. But something you have talked about, uh, quite a few times before is. Some of that is helpful, but what we're really looking at when we think about self storage and and office industrial flex properties is what does it actually look like for that specific property within a few mile radius?

And you've got some statistics and data that you guys use when you're analyzing properties around that. So one thing that you said, for example, is. You need to look at the facility count and total square footage within one, three and five miles. You've talked about square feet of storage per capita with 10 square feet per capita, often being a saturation threshold.

You've got these other, the statistics that I find really fascinating because, um, it's, it's almost like surgical precision you have to have with where these. These properties are located and what's going on in that, that local market. And it's becoming increasingly important to do that when, uh, looking at or doing any kind of due diligence on these kind of deals because you, something you said before is you can no longer just open up a map and throw a dart and be successful in self storage.

Maybe that's, that's still the case a little bit, but with the increase of institutional demand and in higher interest rates, maybe some other things that are going on in the market. You have to be very, very precise in where these properties are located. So I wanna get into all of that. But first, what do you mean when you say hyperlocal and the supply and demand dynamics

If you get into a really rural market, people may not only be willing to, but have to drive 10 miles, 12 miles, 15 miles, uh, to get to a storage facility. Um, but typically in most markets, you're really generally not gonna get a customer outside of a five mile radius from your property. So we tend to think of, of that hyper-local market being out to five miles, uh, radius around. The location.

Um, different markets have different. Household utilization of storage. Um, households that tend to be volatile probably isn't the right uh word, but maybe more transitional. Young professionals, renters people like that tend to use storage more often. Um, in certain markets, think about the Florida market where you've got a high percentage of part-time residents, people who might live in New York, um, you know, during the summer months when it's 110 degrees in Florida.

But come Thanksgiving, they load up the U-Haul and they are headed to Florida 'cause they have a home down there and they want to get away from the cold weather in the Northeast for the winter. Um. Those kinds of dynamics can change the utilization. So we throw around the 10 square feet per capita number as sort of the point at which we start to get concerned about, uh, saturation.

And what I mean by that is there exist in a five mile circle, 10 square feet of self storage for every person that lives in that five mile circle. Um. However, in a market like Florida, uh, in certain markets in Texas, uh, we see that those markets can absorb up to 15 to 18 square feet per capita because the people who live in that area are two or three times more likely to use storage. So you kind of have to dig down a little bit beyond just the surface numbers, um, to make sure your data's.

Informing you in the right way. But, uh, but that is a, a key metric that we absolutely use is, is square feet per capita. You, you mentioned the macro. Uh, economic factors, they are absolutely, um, a factor at one level. For example, we've talked about the fact that moving is about 25% of the demand in self storage. One of the reasons why, um, storage has been resilient in slower economic times is that when the economy's tough and people may have lost their job, they're more apt to move.

To get another job, or they may use the fact they've been freed from a job as, as a time to move to an area they wanted to go to anyway. So when the economy slows down and unemployment's a little bit of an issue, um, actually moving kind of ticks up often, and that helps self storage, which is why we swim against the tide in those kinds of environments At the same time. Today with mortgage rates over 7%, it has slowed the purchase of new homes and new and moving.

And so it's actually had a negative effect on the supply side, or excuse me, the demand side of the equation in self storage. So those demographics matter. However, when you're talking about a hyperlocal market, there can be dynamics at the local market level that absolutely contradict whatever the higher level economic, um, metrics may be telling you. Um, right now in, in, in, uh, CILO Texas, which is outside San Antonio, we have a project that's coed in June of.

Of last year, 2024. It's been in operation nine months. Our projection showed that it would be about 41% occupied by the end of March. We sit here today on the 25th of March, and as of the 15th. It was almost 50% occupied, so nine percentage points ahead in spite of the rates, in spite of the environment, in spite of all the conversation about some markets being overbuilt. Um, it's performing actually above budget and you see that.

Because the local market dynamics have a lot more impact on the performance of a particular location than the, the macro dynamics or even dynamics at the state level. Um, you know, a regional level. Um, so at the end of the day, you kinda look at all those levels, but the, the, the, what's happening in that local community ultimately winds up being the biggest driver of success or failure.

I. Um, location and multifamily is gonna be important because it needs to be close to where people are employed. It needs to be close to where people, um, the, the entertainment, the restaurants, the things they want to do outside work hours. It needs to be in an environment that's safe, you know, with low crime. Um, location still important, but they don't really care about what's happening in terms of their, their ultimate tenant within a five mile radius.

'cause they're probably not gonna draw a ton of people from. Five miles. They certainly do, but it's not what drives their business model. Um, when you look at other types of commercial real estate, look at retail, um, absolutely. Location again is important, but it's important for a different reason. And that is you want rooftops around you. You want, people are gonna shop where it's convenient, they're gonna shop, whether it's on their path to and from work or the places they're going.

Um. The other thing, uh, would come to mind is in the commercial product, we were in a B2B environment. We build a office, industrial flex product. Um, again, location is important, but those tenants are probably not coming to us from. A location within five miles of that site, they're coming to us because our site is located within a reasonable different distance from where they do business.

So if you're a landscaper, you may live in, you may live two towns over, but if all your clients are within a five or eight mile radius of our project, you want to base your operation there because it's efficient to get to them. Um, and, and back at the end of the day. But in the storage industry, it's a B2C product. It's a, it's a consumer, uh, oriented service or product, and it's a product that people expect convenience and efficiency.

And they typically won't rent a storage facility or a storage space more than five. They don't have to. In today's market, they're oftentimes three other facilities between where they live and our facility. Um, but as long as it's within that five mile radius, we, we at least have it at bat. We at least have a chance to get them as a customer. Because they're gonna do a Google search and they're gonna weed out everything that's further than five miles away.

And part of the answer is, in this environment, probably the, the numbers say that new development's gonna be down about 25% this year from. 24. Um, and so, and a lot of projects are being canceled or delayed because they don't pencil or they can't get the debt they needed or, and so when you look at, so when I look at pipeline numbers, now you have to kind of haircut them for the reality that some of those reported projects have probably been canceled or delayed.

Um, we certainly don't get aggressive with that 'cause we don't wanna make a misstep, but generally speaking, we can get that data. It's, it's, it's, it's. It's accurate in a general sense, but I don't ever put all my trust into it. Um, 'cause the other thing that can happen is a, a a a, a location that's not in the pipeline. We build in phases. It takes us four years to get a property stabilized. Um, a property that's four years away is not showing on a pipeline report today.

Certainly help when supply goes up and competition becomes a little more fierce.

But for example, in North Carolina, uh, most communities have pretty strict zoning rules, and if it's not already zoned for a particular use, it can take you a year and a half to get the proper zoning. Um, and then, you know, that extends out when that that product might deliver into the market. So,

I'm assuming you mean like you want good neighbors, you know, if you're gonna be in that hyperlocal market, you want people to like that, you're in that in town. And so tell me a little bit more about that.

But we also, in all of our sites have live on site managers. They don't just, they're just not there from nine to five. They literally live on, we build an apartment and they live on the site. Here's why we do that. And it's really, there are a lot of reasons, but in a hyper-local market, community engagement. And building relationships is, is critical. So our local managers are doing things like sponsoring the local little league. Um, there, we have a referral program.

Our managers are out a part of every week. We have two people on site, so one can be gone, uh, that are out visiting with professionals in the community and we have a referral program and they leave them that information. People sign up for the referral program, but more than anything else, they're out.

As ambassadors for our site in that community meeting, every real estate agent, every closing attorney, every moving company, every U-Haul, rental location, um, they're building relationships, putting a face with that name, um, and building a referral network in that community to, to get us customers over time. Um, participated in local events. Um, we, I, I said this.

I think last week, but we're launching a program where we're gonna host local events on our site where, where we have sites that c can accommodate. It's an idea we stole from an operator, um, that I ran across out in Las Vegas at a convention a year ago. Um, but it's, it's fantastic. Do a first responders night where you have the policemen, the firemen, the EMTs out to your site with their trucks, invite a food truck and through their networks in the community, 'cause they're.

Uber connected in the community. Promote this event. Let the parents bring their kids out. Um, climb on the fire truck, see the fireman, wear the fire hat. Have a great experience. You know, eat a taco from the food truck or a hot dog or a hamburger. Have a little, uh, a little event. Um, and it builds goodwill. It builds relationships and it builds familiarity. People have now been on your site, so they may not need storage for another two years, but if they came to that event.

Chances are you are gonna be top of mind with them in two years when they get ready to move or remodel or need storage for some other reason. So, um. Customizing and personalizing the offer of what you offer people. Now that seems hard in self storage 'cause we rent, you know, 10 by 10 or 10 by 20 boxes with a concrete floor and you know, a metal roof. There's not a lot to it. But we have a location in fund one that's just starting construction in Lago Vista, Texas.

Longa Vista happens to be on the shores of, of Lake Travis, which is just outside the Austin Metro. When you're in a location

Because we're dealing in a five mile radius trading area, the chances are if somebody has a really good experience with you, they're gonna tell somebody else that lives in that five mile radius. Uh, unlike if, if, if your, you know, if your market is all of Austin. Um, I, I, I don't know that. Word of mouth ultimately can be powerful in that environment, but I don't know if it's that direct and that powerful in a, in a larger, in a larger market. So we focus a ton on customer service.

We want people to have a great experience. Um. Because if they do, uh, when their neighbor says something about needing storage or, you know, when, when their buddy that they play golf with says something about needing storage, they say, Hey, you know, I, I use AAA down the road. They were great. That's the kind of, um, things that you can do and have to do in a, in a hyperlocal market to be successful.

Is there anything else that that comes to mind like that?

Um, and, uh, and, and today actually emailed us and said, I'm in, I'm ready to go. But, which was great, but I, I think he overthought it a little bit. The, the, the, the first thing you do is pick a good sponsor that you have confidence knows what they're doing. At some level, it's just sort of a trust and verify, right? Trust them to do the really deep due diligence. You just look at it and make sure it makes sense.

But to your question, if you're looking at an an individual property or a fund like ours, I. I think it's worthwhile to do a little research on the communities that those sites are located in. Um, you're not gonna have, well, we provide access to our investors, but you can see the square foot per capita data. You can see all that. But what direction is that community headed in? How likely is it to swim against a negative tide? Um, you know, is, is that community growing?

What are, are, what's new construction look like in that community? One of the things that's driven the Green Valley project in, in SLO that I talked about a minute ago is I was just down there and you ride down the road and there are literally new housing developments going up on either side of the road for the two miles leading up to our facility.

And I, I can tell you that's what's driving the success we're having, um, is all of that new construction, all those families moving into the area, they're moving from somewhere else. Maybe they downsized, maybe they didn't, but everything they had in the old place doesn't fit in the new place and now they gotta have a place to put it. Um, and uh, so I think it, I mean, if something's in Austin proper, that's a little harder, um, to, to.

Get any meaningful sort of insight on Austin's a big city and different parts of the city have different dynamics, uh, but. In our case, we tend to build in city skirt markets. So we're in Georgetown, outside Austin. Um, we're in Lag Vista outside Austin. We're in Cilo outside San Antonio. Um, and those are smaller communities that you can, you can get a little bit better feel for in terms of where they're headed. And, um, is the, is the economy growing? Is the population growing?

Are their employers moving into the area that are gonna offer people the opportunity to find employment? Is it trended in the right direction? That would be one thing. And then. The rest of it is look at the data and, and ultimately, um, but I, I, I wouldn't encourage people to try to become a self storage expert. That's why you invest passively is basically to hire someone to do that for you.

And the sentiment or culture or whatever of that town did not like new development. And so for whatever reason, it was just, they just liked the way that the town was. And that would probably be something hard, harder to see in data. But if, if you're in a really hyper-local market, knowing as much as you can about the community might be really important, which is another point. Trust the sponsor because they're doing the hard work to,

And, and, and, and the way you can figure that out is if you go look at their zoning regulations or requirements and the hoops you have to jump through to do anything in that community, it clearly tells you that they're really not interested in a whole lot of new folks moving in. Um, and so that, that's sort of an indicator of communities like the one you're talking about in Georgia, that if you can get a glimpse of their, um.

Their zoning and permitting regulations, it'll give you an idea of how welcoming they are, how hungry they are to have newcomers in the area. So.

Self storage sites that are closest to you, um, you know, nine times outta 10. Um, and so it, that, that tool has become really important and companies like ours spend an awful lot of money on Google ads and keyword searches and, uh, the new maps tool, uh, in, uh, in, in Google where once you enter. Uh, a search, it'll, on the right hand side of the page, it'll pop up a map with all the locations in it and a list of them and the ability to click right through to their website.

So, um, that's become a really important aspect of marketing in self stores. That's driven by the fact that it's a hyper-local market. So,

'cause I, again, you've been doing this for decades, so it's, it's always nice to hear how you guys are refining your processes and what's become really important to you. 'cause you're experts at this, this is what you do.