Page 6AA —
COLORADO REAL ESTATE JOURNAL
— September 2-September 15, 2015
Self-Storage
L
ooking back over the
first half of 2015, self-
storage owners are
basking in their own glory and,
in general, self-storage proper-
ties continue to improve while
the Front Range market fun-
damentals remain as strong as
ever. It is time to look into the
crystal ball and examine the fac-
tors that will influence the self-
storage market in 2016.
There has been a 100 to 250
basis point compression in
cap rates over the last 12 to 36
months, andwe have seenmany
of the most aggressive national
buyers focusing on Denver for
new acquisitions. This largely is
due to Denver’s strong popula-
tion and job growth over the
last few years. This aggressive
pricing, along with the overall
lack of self-storage properties
for sale, is driving self-storage
values to record highs. This may
be as good as it gets!
Please forgive our optimism,
but we think that self-storage
fundamentals are strengthen-
ing along the Front Range, and
new supply is slow in coming.
The cost of new development
is rising at a
s t a g g e r i n g
pace. This,
paired with
a long and
cost-intensive
a p p r o v a l
process,
is
making new
self-storage
d e v e l o p -
ments more
challenging
and valuable
than ever.
Prices have
never been higher for self-stor-
age properties, either in abso-
lute dollars or in relation to the
income the properties produce.
This is driven by the lack of
quality product on the market
for sale (simple supply and
demand), newly found pub-
lic awareness and low interest
rates. It is worth noting, howev-
er, that not every market across
the nation is experiencing the
same uptick in value or lack
of sales velocity. This largely is
due to the increased intelligence
of the self-storage investment
community. Self-storage inves-
tors today are
focused on
market-spe-
cific demand
drivers, such
as migration
of popula-
tion, popula-
tion growth,
barriers
to
entry, income
growth levels
and employ-
ment basis.
It is fair to
say that we
have two distinct markets with-
in the self-storage investment
world, and we are not talking
about the top 50 metropolitan
statistical areas and rest of the
markets. We learned that small
and midsize markets could
be productive investments if
the demand drivers are pres-
ent. This is the case in markets
such as Greeley, Fort Collins
and Castle Rock. These mar-
kets enjoy strong rental veloc-
ity, rental rate growth, popu-
lation growth, income growth
and, most importantly, demand
growth for self-storage.
But before you get too excited
about the Colorado self-stor-
age market and our continued
prosperity, there are a few dark
clouds on the horizon. The first
is that interest rates may go up
in a meaningful way. The Fed-
eral Reserve has been trying to
justify raising rates for close to
a year, and self-storage doesn’t
have a government-subsidized
debt program that other prop-
erty types enjoy.
The second issue is overbuild-
ing; you guessed it, develop-
ment is back! The great returns
drew a crowd. We are in the
beginning stages of the develop-
ment cycle, but strong growth
markets, such as Colorado, are
seeing as much as 5 to 25 per-
cent new supply in the devel-
opment pipeline and readying
to come on line. Because self-
storage is a localized business,
new development and potential
overbuilding can have a drastic
effect on the market. There is
a finite number of self-storage
customers that exist in any sta-
bilized market and new devel-
opment won’t bring any new
customers into that market – it
will only take existing custom-
ers away from other operators,
leading to an overbuilt situa-
tion. A new self-storage build-
ing in and of itself doesn’t create
any new demand for the prod-
uct within a specific 3- to 5-mile
market.
Lastly, industry experts Self
Storage Data Services report
that the Denver-Aurora MSA
is at equilibrium with 6.57 rent-
able square feet per person.
The national average is 6.5 sf
per person. Current population
growth should offset additional
supply in the near term, but
there are concerns about the
potential for an overbuilt situa-
tion to develop.
Self-storage owners and inves-
tors’ ability to properly evaluate
the future demand and current
market is the most important
part in making the right invest-
ment decision. These absolutely
are the best times in self-storage
for careful buyers and sellers.
The prize will go to those who
analyze their competitive situa-
tion and take action during this
unique time in the self-storage
real estate cycle.
s
Joan Lucas
President, Joan Lucas
Real Estate Services,
Denver
Ben Vestal
President, Argus
Self Storage Sales
Network, Denver
W
hile it may not
seem like a compat-
ible land use with-
in a large shopping center or
mixed-use residential and retail
development, adding self-stor-
age to the mix can help maxi-
mize site coverage and rentable
square footage for an overall
development.
While you wouldn’t want a
large storage property to be the
anchor tenant, less desirable
sections of the mixed-use plan,
as long as they still provide
some visibility, can be trans-
formed into valuable rentable
sf by incorporating self-storage
into the plan.
The primary driver for this
is the lower parking spaces
requirement of self-storage rel-
ative to other land uses. Using
the town of Parker as an exam-
ple, the retail parking require-
ment is 1:300, while the storage
parking requirement is 1:10,000.
Thus, a four-story, self-storage
building with a 25,000-sf foot-
print would
require
10
p a r k i n g
spaces and
about
an
acre of land.
A 25,000-sf
retail build-
ing would
require
83
parking spac-
es and the
a d d i t i o n a l
land
area
to
accom-
modate the
parking. In
other words,
10 parking spaces could sup-
port 3,000 sf of retail or 100,000
gross sf of self-storage.
Today’s self-storage has
evolved into a retail establish-
ment. New facilities can offer a
combination of traditional stor-
age, postal services, and sales
of moving and storage sup-
plies (i.e., locks, boxes and bub-
ble wrap) with contemporary
full-service
work stations
and confer-
ence rooms
catered
to
l o c a l - a r e a
b u s i n e s s e s
and
sales
reps. Gone
are the days
of
orange
doors
and
razor wire.
These older,
outdated self-
storage facili-
ties are being
r e p l a c e d
by modern, architecturally
advanced vertical structures.
In addition, many munici-
palities recognize the need for
the product to complement
high-density urban residential
developments. The new devel-
opment of a self-storage facility
often is viewed as an amenity
within communities that have
a significant amount of existing
residential units and commer-
cial businesses.
Today’s modern facilities
come with fully air-conditioned
buildings, carpeted hallways,
extensive video surveillance,
high-speed Internet access, and
the use of a free truck and
driver to help with the move-
in. Finally, the consumer has
come to recognize the benefits
of indoor, climate-controlled
space vis-à-vis the more tradi-
tional drive-up units. The dif-
ferences between the twowould
be similar to storing items in
a bedroom closet versus your
garage, the former being clean-
er and a better option for more
valuable goods.
s
Jon Suddarth
Real estate
development, project
manager, The William
Warren Group Inc.,
Denver
Tim Hobin
Executive vice
president, real estate,
The William Warren
Group Inc., Costa
Mesa, California
A rendering of a WilliamWarren Group development under construction
in Denver illustrates the architectural advancements in the self-storage
industry.
I
t’s hard to believe a niche
real estate sector that start-
ed out as nothing more
than a way to make a few bucks
on a land bank turned into one
of commercial real estate’s most
sought-after investments. But
that’s exactly what’s happened.
The self-storage industry is on
fire and everyone wants a piece.
An executive from one of the
nation’s largest self-storage real
estate investment trusts once
said that one day self-storage
cap rates would trade lower
than apartments. At the time
the statement raised some eye-
brows, but if that time isn’t
already here, it’s certainly close.
The Great Recession proved
the resiliency of the self-storage
sector as the “big four” publicly
traded REITs outperformed its
counterparts
in all the other
major
real
estate sectors.
You
won’t
find a better
risk-adjusted
return over
a five- to
10-year hold,
and every-
one
from
Wall Street to
investors here
in Denver has
taken notice.
As long as
people buy
stuff, there
always will be a need to store it
and, with the growth of the Den-
ver economy, it looks like we’ll be
seeing a lot more of both.
The market
for self-stor-
age is flush
with cash and
there
isn’t
enough prod-
uct to feed
the appetite.
The availabil-
ity of cheap
debt
and
high demand
has driven
values to a
place never
before seen
in the indus-
try. Fundamentals in Denver are
some of the best in the country,
posting 15 percent rental growth
over the trailing 12 months and
physical occupancies pushing
99 percent in many of the first-
and second-ring suburbs. Prices
per square foot have reached
a point where it makes more
sense to build than buy. Devel-
opers are scrambling to get as
much product out of the ground
as quickly as they can. Proj-
ects delivered across the Front
Range blew away traditional
lease-up projections. What used
to take 36 months to stabilize is
now taking under a year and,
in some cases, as little as eight
months. We’re currently track-
ing more than 50 projects in
various phases of planning and
development along the Front
Range, and the number contin-
ues to grow.
Many caution that we’ve seen
this before – seasoned self-stor-
age developers haven’t forgot-
ten about the 1990s, when the
Denver market was flooded
with new development leading
up to the savings-and-loan cri-
sis, or the mid-2000s to a lesser
degree. While you can draw
some comparisons between
these past two cycles and the
current one, there also are some
notable differences.
Financing for new self-storage
projects is cheap and available
but primarily is limited to sea-
soned operators, which makes
it challenging for new investors
to secure loans and enter the
market. In addition, officials at
the county and local levels are
making it difficult to obtain the
zoning and entitlements needed
for new self-storage projects.
Taking into account these fac-
Adam Schlosser
Vice president
investments, director,
National Self Storage
Group, Marcus &
Millichap, Denver
Charles “Chico”
LeClaire
Senior vice president
investments, senior
director, National
Self Storage Group,
Marcus & Millichap,
Denver
