Making the Mark

SELF STORAGE ABSORPTION RATE

The absorption rate can only be determined by experience. It wasn’t until the first self storage property was developed and leased up to its stabilized occupancy that the industry had its first absorption rate. With each new self storage property being leased to stabilized occupancy, more absorption rates were discovered. But even then, the absorption rate varied greatly for the first 30 years due to the education of the consumer.    Between 1970 and to the present, several of the industry’s leading operators did market surveys around the country to identify the “everyday American’s” knowledge of self storage. You would be surprised to know that even recent survey’s in 1990’s indicated that in some parts of the US., only 70% to 74% of the potential consumers even knew the advantages of using self storage. It was only until recent years that self storage was fully recognized by this country’s consumers. Therefore, it wasn’t until recently that absorption rates stabilized to a point that a national absorption rate could be assumed as an average for the entire country.

Before the absorption rate is revealed, first please understand the assumptions and conditions for its disclosure:

1. The author’s absorption rate is based on only his 25 years of experience in developing and operating self storage properties in a variety of markets across the US.

2. The absorption rate is a “rule of thumb” national average and can vary from market to market.

3. This rate assumes the appropriate climate and non-climate control unit mix has been determined for each different market.

4. The rents used are market rents.

5. Use of the absorption rate is the sole responsibility of the user.

Assuming the above, the national conservative absorption rate is 2,250 sf. per month. This absorption rate will be used for determining lease up rates.

SELF STORAGE LEASE-UP RATES

As stated earlier, there is a host of variables that will affect how long it will take to lease-up a facility to stabilized occupancy. Therefore, with the use of the national absorption rate disclosed above, the following will define each variable’s affect on the lease-up rate.

The first major variable that affects lease-up rates is the actual size (net leasable sf,) of the facility to be developed. The following is an analysis of the affects of facility size:

As you can see in Figure 1, the project size is 45,000 net leaseable sf. and with an absorption rate of 2,250 sf. /month, will have a 5% lease-up rate and only requires 18 months before the facility reaches a stabilized occupancy rate of 90%.

Figure 2 represents a facility that is twice as large as the 45,000 sf. facility in Figure 1. With the same absorption rate, it has a lease-up rate of 2.5% and now requires 36 months before the facility reaches the same stabilized occupancy.

The obvious dilemma for developer using a 5% lease-up rate for a 90,000 sf. net leaseable facility is that he will be 18 months short in obtaining stabilized occupancy. This could lead to having a lease-up shortfall in funds that could result in several hundred thousand dollars out of his pocket. In addition, the additional timing to lease other than what he projected could easily jeopardize having his loan pulled by the financial institution for non performance. IMPORTANT! Always use the absorption rate (not lease-up rate) for determining how long it takes to reach stabilized occupancy.

The second major affect on lease-up rates is the historical existing lease-up rates for a market. Historical lease-up rates are the most difficult to determine since historical leasing data is required from the competitors in the market. In other words, you would have to have the leasing records for each facility for at least a year to determine the absorption rate by each competitor. THIS WILL NOT HAPPEN! Competitors will not share lease-up information! In addition, “industry experts” hired to do feasibility studies can’t get this information either so don’t depend on their “market projected lease-up rate” since it’s only a guess. If research indicates that the competition is at stabilized occupancy, that’s what it means and it doesn’t indicate a lease-rate. It is always recommended to research market lease-up rates but I wouldn’t use them as the sole guide in making a decision.

Another major affect on lease-up rates are competitors in the market still in their lease-up phase. When market research indicates one or two competitors are still in lease-up, this is a red flag about the market and it requires some serious further research. First, try to determine when the facility opened and its size. This can be done by researching tax records for size and researching the local jurisdiction’s record on when the property received its certificate of occupancy. Secondly, once you have the competitors start leasing date, its now time to seriously shop them. A personal visit can uncover a wealth of info on individual unit occupancy. Be prepared to hear statements like “I’m out of everything but 5x5’s and 5x10’s.” or “we have specials on 10x15’s.” The first says they are close to stabilized and the other statement says they have a host of one size. Further phone and personal shopping will reveal a picture of the existing occupancies. Finally, based on the picture you’ve obtained about each competitor, use the following format to determine lease-up rates:

From the example above, both competitors are experiencing a normal lease rate for the market. However, what if both were experiencing a 2% and 1% lease-up rate? That would indicate that both competitors were having trouble in their leasing efforts which could indicate their market is almost saturated. Or that the market is at equilibrium with both stores splitting the market’s absorption rate. Either case, these two scenarios are fine examples of when one should pass on the market until conditions improve.

Market rents are another factor which greatly affects lease-up rates. The following are the most common and best examples of the affects on rents on leasing:

1. Rents declining - are most often the results of a saturated or troubled market. Lower rents means greatly increased lease-up times until stabilization.

2. Rent concessions - represent the same as number 1 above.

3. Setting rents too high – usually represents an inexperienced operator with little knowledge of the market. The result is driving customers to his competitors and greatly increasing the time to lease-up the store.

4. Setting rents too low – usually represents an inexperienced operator with little knowledge of the market. The result is greatly decreasing the property’s economic occupancy which in turn means a greatly reduced property value.

Again, the indication of any of these situations mentioned above are “red flags” and one should tread lightly in that market or trade area.

Another major affect that greatly affects lease-up rates is the existing market’s economic conditions. Excellent economic conditions means above normal population growth, which means market mobility, meaning………above average lease-up rates! Of course trying economic conditions has actually the reverse affect. If you are new to the industry, stay away from markets that are suffering economically! It’s hard enough to find the right market and site in markets with all the best leading economic indicators!

In summary, Self Storage absorption and lease-up rates are extremely sensitive to the experience of the developer and existing market conditions. The inexperience of a developer can always be offset by his continual industry education and by having the ability to find the most knowledgeable experts. In addition, he must be able to do enough due diligence research to be able to read what each market is trying to tell him. There are two recommendations this author suggests. First, you can never do too much due diligence research for success. Secondly, a smart man is not one that knows all the answers. He is the one that knows where to get them. Good hunting!

By Mike Parham