Most real estate buyers have an endless attraction to what are called “hot markets”. But this pursuit has some disastrous results for most self-storage buyers. In this Self-Storage University podcast we’re going to explore the truth about “hot markets” and how to approach them properly.
Episode 105: Understanding The Problem With "Hot Markets" Transcript
Most real estate buyers in America are drawn like moth to a flame, to what we call hot markets, but the problem is that hot market can often leave you burned. This is Frank Rolfe for The Self Storage University Podcast. We're gonna unlock what hot markets are all about and how you need to approach them. So let's first go over the definition of what is a hot market. Hot markets are the markets that always seem to come up in discussions, they always make the lists online, every broker touts the fact that, "Oh yeah, this storage facility is in a hot market." And so these are kind of the attributes that we have found relate to a hot market.
Number one, very strong growth in population. So I don't know of any market defined as hot in America where you don't have a lot of people moving there, whether it's Nashville, Tennessee or Dallas, Texas. So population movement, that would be part of being a hot market, and then typically in hot markets, you have lower cap rates because you have more competition, there's more people trying to buy properties in the "hot" markets. So that's another attribute, is things are more expensive. And then you do have typically stronger lender favorability, because the lenders are just like real estate buyers, they hear it's a hot market, they get all excited, "Oh, this storage property, this thing is located in Las Vegas, Nevada, so it's in a hot market, it must be safer than other deals," they would say.
And then typically you've got higher pricing because you've got rents typically that are higher because everyone sees the growing population and "Gosh, darn it. We're in a hot market, so let's raise those unit rents even higher." And there's typically little supply because it's what they call a seller's market, so people are holding off waiting for values to climb even higher, 'cause they know with the greater population, it's gonna make it even more valuable, so why sell today when I can sell tomorrow for even more money.
But the problem is that everything I just mentioned, every single one of those items are not good, if you're a buyer. Right? So if I'm a buyer, Why do I wanna go to a market that has lower cap rates and higher pricing and high rents and all these other things. And the answer is, you wouldn't. That's the problem. People are like lemmings, they all follow each other. The lemming is a little creature that will dive off a cliff to its death following all the other lemmings that dive off the cliff. You don't wanna be one of those people. You don't wanna follow the Joneses and just to your ultimate financial ruin.
So when I think of a hot market, when I hear the word a hot market from a broker, that's a market I find that I'm repelled from, don't have any interest to be in the "hot" market. Instead, the key to it all is to buy in the markets before they become hot. So think about that for a moment. If we're saying that a hot market is a seller's paradise, and a hot market displays highest rents at lowest vacancy and greatest demand at highest prices, then the whole key to playing the hot market game is to not buy in a hot market, but to buy in a market that's not hot, that you know will eventually attain hot status.
We were buying properties down in the Austin, Texas area back before Austin was considered a hot market, because we saw the promise of it. It's capital of Texas. Capital cities typically do really, really well. We could tell from the location on a major interstate I-35, and the fact that we've got a whole lot of commerce that goes on with Mexico, which goes right up 35, that Austin had a great future. But there was a period of time where Austin wasn't thought of very much, and it really wasn't a "hot" market.
So really the key is if you wanna play the hot market game, you gotta get to it first, and you have to be watching for markets that will become hot, which then begs the question, How do I know a market is going to get hot? Well, think about what we just said. Hot markets are where people are going, hot markets are where jobs are forming, so we can kind of map that out. You can look at right now, the stats on where people are going. People track such issues as U-Haul, where those U-Haul trailers start from and end to give them a very clear indication of where Americans are moving from and to.
And you can go to any city in America, and you can get from the state and county and city, list of all of the roads being built, all the way from interstate highways down to regular old state highways, all the way down into major secondary streets. And you can lay all of that out and you can start to get a pretty decent idea of where things are happening. You can watch some of the people who typically are precursors to population growth like Walmart and where those are going in. And you lay all that out in a map and you can kind of see what's happening.
We know from a macro level, for example, that a lot of people in the north are moving to the south. We all also know on a macro level, a lot of people in urban centers of America are moving out into suburbs and exurbs. So you can watch that population movement and get a really good initial handle of what we think will ultimately be hot, but also you have to do some forecasting. You have to say to yourself, "Okay, where do I think people are going? Where do I see the new opportunities in the American economy?"
So you have become educated yourself, read a lot of things on these various issues and concepts. And if you read a lot, eventually you will start to visualize where you think the future of hotness may be. And when you figure out where you think the future hot markets are, that, when you wanna buy before they're hot. When you buy things after they're hot, what happens to you? Well, we can simply look around. It's self-storage owners who have bought in those hot markets, and you can see they're not doing well right now. You've got decreasing occupancy, you've got decreasing rents, you've got decreasing values. Many of those folks who bought self-storage units in those hot markets today are under water.
If you look at their mortgage, now that it's been reassessed with higher interest rates and higher cap rates, you may find that where they thought they had equity in their properties, in fact have none. And you had the greater problem when you're in a hot market that a hot market has only one direction to go and that's down to become cold. So that's the other problem to buy into the hot market is you've got everything working against you and nothing going on in your favor. The bottom line to it is, there's nothing wrong with hot markets, but only if you got there first and early on before they became hot.
This is Frank Rolfe of the The Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.