he self-storage industry has traditionally focused on established, high-density markets. But a shift is underway. Smaller metropolitan areas, often referred to as tertiary markets, are experiencing a surge of interest from storage developers. These regions, once overshadowed by their larger counterparts, present a unique set of opportunities and challenges compared to well-trodden development grounds.

For storage developers accustomed to the familiar landscape of major cities, venturing into tertiary markets necessitates a fresh perspective. While the potential for untapped demand is undeniable, careful consideration is required to ensure a project’s success. Factors like population size, job growth, cap rate, and the presence of traditional economic drivers like strong GDP are important benchmarks. However, in tertiary markets, a nuanced approach is essential. Understanding the influence of non-traditional economic drivers, such as anchor institutions (universities, hospitals) or burgeoning industries, becomes equally important.

We spoke to industry leaders on the pros and cons of tertiary markets, the best way to navigate developing one successfully, and the precautions every developer should take before sinking their teeth into a tertiary market.

Tertiary markets are geographically defined by a lower population density than primary (major cities) and secondary markets (regional hubs). A more nuanced approach considers many factors when determining a tertiary market.

• Population Size: There’s no universally agreed-upon threshold, but tertiary markets typically fall below the 1 million mark. However, population size alone doesn’t tell the whole story. A smaller city with a vibrant university or a booming manufacturing sector might hold more potential than a larger one with a stagnant economy.
• Economic Base: Look beyond the traditional GDP metric. Consider the presence of anchor institutions like universities and hospitals or emerging industries that fuel growth. A thriving university town, for example, may see a surge in student storage needs, while a region with a burgeoning renewable energy sector might require specialized storage solutions. As Ted Culbreth from SBS Construction points out, “Generally, in a tertiary or a market that is newer, the rates are less, but the ease of development is less, the cost of development is less, the competition is less.” This balance between potentially lower rates and a more favorable development landscape is a key consideration for developers.
• Infrastructure: Tertiary markets may have less developed public transportation networks or limited access to amenities compared to larger cities. This doesn’t necessarily negate their potential; however, it’s crucial to factor in these limitations during the planning stages.

While the potential for lower storage rates in tertiary markets is a concern for some developers, it’s just one piece of the puzzle. Eric Blum of BMSGRP emphasizes a calculated approach when considering economic drivers. “First and foremost, you want to look at what the income in the market is. You want to make sure you have a good number there. You want to see what the home prices are. Again, it all comes back to the income in the area. Other economic drivers would be what businesses are there in terms of warehouses, retail, is it a university area, that type of thing.” Income and home prices are crucial factors in determining competitive storage rates that ultimately contribute to a healthy return on investment (ROI).

Having unpacked the unique characteristics of tertiary markets, one question remains: Are they a viable option for self-storage development? The answer, like the market itself, is multifaceted. Here we delve into the key factors developers should consider before taking the plunge.

The first step is conducting thorough market research to identify unmet needs within the community. This could range from a lack of storage options for a burgeoning e-commerce sector overflowing with inventory to a dearth of specialized cold storage solutions for local agriculture facing limited on-farm storage capacity. Understanding these gaps allows developers to tailor their projects to address specific demands, fostering a symbiotic relationship with the local economy.

Choosing the best site for your company is not easy, but it’s important to do your research and find which economic drivers matter most for your company. Culbreth emphasizes the importance of a continually growing population when choosing a site in a tertiary market. “So, if you were to ask all of our developers the top 10 reasons they like a site, those 10 reasons will probably all be the same, but they will all be in different orders. Living in Texas, we have an advantage that a lot of areas don’t; we have a continually growing population, which reflects a continually expanding self-storage market. So, the population grows, and once you get past that the amount of competition that is in the area, the population that’s in the area, the income that’s in the area, the scenario is no different than building in any market,” Culbreth explains.

Next, align your development project with those needs. Will it provide much-needed storage space for a specific industry or revitalize a vacant lot with a modern facility? Blum believes developers should pay close attention to the landscape, as well as production costs and potential earnings. “Is growth headed there? Are people moving to that area? Are high-income jobs coming there? Is there a retail market to go there, or some type of a chip factory being built that will bring higher-end businesses as well as people? And of course, what rate per square foot could be obtained—realistically,” Blum asks. Remember, the project should complement, not disrupt, the existing economic landscape.

Finally, don’t forget the financial side of things. While tertiary markets often boast lower land costs, they may also have a smaller pool of potential tenants. To mitigate risk, conduct a comprehensive financial analysis that factors in the cap rate (potential return on investment) and projected vacancy rates.

Overall, deciding whether tertiary markets are viable depends entirely on your individual needs, preferences, and goals.

If you decide to invest in a tertiary market, the best way to navigate it is simple: “Build wherever feasibility studies say there’s demand for storage,” says Culbreth. Make sure you also consider price per square foot, average income, retail, and business. Typically, developers see a strong ROI when developing tertiary markets if they prioritize research and conduct feasibility studies before developing a site.

Moreover, when navigating a tertiary market, success hinges on a long-term vision and building trust with the community. Engaging with local stakeholders allows you to understand their needs and tailor your project accordingly.

This might involve developing smaller, more targeted projects that address specific gaps rather than large-scale ventures. For example, tertiary markets may not necessitate large-scale storage facilities. Remember, tertiary markets often experience slower development and return on investment. Patience and a commitment to the community are key for a thriving project.

Navigating tertiary markets requires developers to take time to weigh the benefits and drawbacks before taking the plunge. According to the experts interviewed for this article, here are the advantages and disadvantages of developing a self-storage facility in a tertiary market.

Pros

• Reduced Competition and Growth Potential: A key advantage of tertiary markets lies in the potential for a “first-mover advantage.” As Blum highlights, “Pros would be low competition if the growth rate is high …” In markets with limited existing storage options and a healthy growth trajectory, developers can establish themselves as the go-to solution for a burgeoning demand. This can translate to higher occupancy rates and potentially strong returns on investment.
• Faster and Less Costly Development: Culbreth emphasizes the streamlined development process in tertiary markets. “The pros are usually less stringent development requirements, which oftentimes equate to less cost to develop …” Navigating fewer regulatory hurdles and lower land acquisition costs can significantly reduce development timelines and upfront expenditures.

Cons

• Market Size and Income Levels: The smaller population base in tertiary markets presents a double-edged sword. While it translates to less competition, it also means a smaller pool of potential tenants. Furthermore, as Blum points out, “the downside … might be a major one: lower rates. If the market is a lower income area, it might not afford the same opportunity than a higher income area being that it’s a rural market.” Developers need to carefully assess the income levels within the target market to ensure they can establish sustainable rental rates.
• Potential for Oversupply: Culbreth warns of a potential downside to the ease of development. “The cons you can align directly with that as well; if it’s easier to develop, there’s more likely to be competition …” With fewer barriers to entry, tertiary markets can attract multiple developers, leading to oversupply and potentially lower occupancy rates. Thorough market research and a well-defined niche become even more crucial in these scenarios.

If you’re considering developing in a tertiary market, expect to see an ROI in a couple of years, says Blum. “You can look anywhere on a return in a 4- to 6-year window if there’s minimal growth, and a traditional 2- to 4-year return if that growth is coming. And make sure you get a feasibility study.”

Culbreth doesn’t really use the term tertiary market “because today’s tertiary market is tomorrow’s urban sprawl,” he says. “To me, a market is a market.” Ultimately, the true potential of these regions lies not just in their current state but in their capacity for growth. For developers willing to invest the time and resources, tertiary markets offer a chance to be at the forefront of that transformation, establishing themselves as key players in a burgeoning market.