Why I like the Texas markets

Once you know what your overall investment strategy is [1] and have decided on an asset class [2], the next major decision point you need to make as a real estate investor is what market to invest in. Unlike a stock, which is identically priced anywhere in the country, the price of real estate varies dramatically based on where it is located. More importantly, the value of the investment (i.e. the return to investors) can change dramatically across markets.

You can never manage your way out of a bad neighborhood. – Ken McElroy, 2018 [3]

There are a lot of things to consider when selecting a market or set of markets for an investment decision. Since many of them depend on the specific asset class you are looking at, I am going to share the factors I have been considering and why, as a result, I like Texas (TX) for self storage facilities.

First, a caveat. Texas isn’t a single market. While much of the data I will be sharing is at the state level, when looking at a specific facility or deal, I am looking at the city or neighborhood level data more than the state level, to see if the metrics I use still hold (you can replace “state” below with “city” or “zip code” when considering a specific deal). But I used the state data to see if the broader economy is favorable as decisions at the state level have significant impact across all of the cities and counties within it.

I look at the following information:

Demographic data. I look to see if the state population is growing or shrinking and how the average income varies over time. Self storage is primarily useful in places where people are moving, and in areas where the household income grows over time. One of the major drivers for short term storage is when people are moving – from the time they declutter to stage their house for sale to the time they have closed on their new home, they need a place to put their extra stuff. As you can imagine, if the population is shrinking, there are fewer people who will need storage in the future. And if the incomes are declining, they may not be able to afford it. Looking at the US Census data, you can see that TX had a population increase of 15.9% from 2010 to 2020 (an increase of 4M people from 25M to 29M) [4], the third largest percentage increase in the US (behind WA and UT) and the largest nominal increase. While the state income growth has not kept up with the national average over the period from 2011 to 2021, the gap has been closing since 2017, indicating higher than average income growth in for the past 5 years [5]. I also look at population density. However, given the size of TX, the statewide number is not highly informative – there is huge variation between the cities, nearby markets, and the ranchland of west Texas – so this metric is only meaningful at the city or census track level.
How business friendly is the state. I look for states that are business friendly for two reasons. First, as the number of jobs increase, there are benefits for self storage: more people are likely to move for a new job, increasing the need for storage; as companies compete for people, increasing income makes the cost of storage more affordable; and as income increases, the likelihood of having more stuff also increases. Second, the lower levels of regulation make it easier to do business in the state. The cost of creating and maintaining companies, including syndication partnerships, can vary dramatically across states. Having lower regulatory costs provides more money back to investors, all things being equal. I use job growth as a proxy for how business friendly the state is since companies will tend to move to areas where they are treated the best. In May 2023, TX had the highest percentage (and nominal) year over year job growth in the country [6]. There are broader surveys / studies that look more broadly, factoring in additional dimensions such as quality of life and infrastructure. On these surveys, TX has historically been a top ranked state, although in 2023 it fell to 6th place [7] in part because of ongoing issues with the power grid and its political climate.
How diverse is the industry base. People tend to think of the TX economy as being driven completely by oil. Oil is definitely a big part of the economy of the state. However, there are a lot of other industries that contribute as well. Depending on the exact city, you have the largest port in the US (Houston), a major tech hub (Austin and Dallas), state government (Austin), major airports (Houston and Dallas), and sports teams (Houston and Dallas). In addition, there is agriculture, retail, finance, tourism, and the other industries found in major metropolitan areas. I like to look at the BLS statistics for a market (e.g. for Dallas [8]) to get an understanding of what is driving the local economy and make sure that there is not a single point of failure.
Overall property prices. Because there are economies of scale in storage facilities, a larger facility will generally provide higher returns than a smaller one given equivalent rents. This holds true whether you are using on-site management, contractors, or even fully automated sites. As a result, unless you are managing the facility yourself, I like to see at least 10k net retable square feet of space and ideally closer to 20k. In TX, these facilities can be found for around $1M, making them relatively affordable compared to many other markets.
Proximity of secondary and tertiary markets. In self storage, as in much of commercial real estate, the large players tend to focus on and dominate the primary markets – building large facilities and saturating the market, counting on their extensive expertise and economies of scale to out-market and out-perform the smaller operators. In TX, this would include the major cities of Houston, DFW, San Antonio, and Austin. But, like many states, there are a number of secondary and tertiary markets that reside just outside the primary markets, for example the Woodlands, College Station, or Sherman. If you are driving down the interstate, you might not even be aware that you have entered a different town. Due to traffic patterns and the physical size of the primary marketplaces (there is a lot of land in TX, and thus a lot of sprawl), some of these smaller towns can be closer to major businesses than the other side of town. In these smaller markets, individual operators can flourish by providing local services while benefiting from the job growth in the nearby primary marketplaces. This is particularly true for self storage, where consumers typically live within 3-5 miles of the facility.
Impact of a location on LP investors. Investors in a syndication may need to file taxes in the states in which they invest. This isn’t commonly discussed when an opportunity is presented, and it isn’t usually a big deal (at least until the sale of the property when you realize a huge gain in a single year). However, it can add complexity to the LPs and in some cases would negatively impact the actual returns the investor gets (as opposed to what is reported on the deal). TX has no state income taxes, so individual investors do not need to worry about filing locally and there is no negative impact to the investor returns.
Availability of community level data. Data at the neighborhood level is important for vetting a specific deal. While some of the data provided by the federal government (for example the census data) is available nationwide at the same level of granularity, not all states make it easy to access certain information. TX has a wide variety of information easily available over the internet, including crime data (for the major cities, by neighborhood) and traffic counts (state wide, for all major roads). Because of the population density in many of the cities, the census tracks and zip codes, which are used to report much of the federal data, are also geographically denser, making the data more useful. This makes it easy to quickly determine if a facility falls within my basic investment criteria, and is worth exploring further, or not.

Picking the right market is critical to successful real estate investing. No matter how great an operator you are, if you pick a failing market, your investment is not going to be successful.

That said, different people are looking for different things in a marketplace. For example, someone looking for an appreciation play would care more about price growth and volatility than I do as a long-term, cash flow investor.

I have looked at a number of self storage markets and have found submarkets within Texas as where I see opportunities for successful self storage opportunities. Over time, I expect my target markets to expand to other states as TX is not the only one with solid fundamentals, but for the moment, I am captivated by the potential in this market.

If you have any questions or comment about this post, please email them to me at blog@mbc-rei.com, I will reply to the questions that are straightforward and will turn the questions requiring more detailed answers into future blog posts.

For further reading:

This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.