Colorado Real Estate Journal - September 2, 2015
Looking back over the first half of 2015, self- storage owners are basking in their own glory and, in general, self-storage properties continue to improve while the Front Range market fundamentals remain as strong as ever. It is time to look into the crystal ball and examine the factors 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, and we have seen many of the most aggressive national buyers focusing on Denver for new acquisitions. This largely is due to Denver’s strong population 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 strengthening along the Front Range, and new supply is slow in coming. The cost of new development is rising at a staggering pace. This, paired with a long and cost-intensive approval process, is making new self-storage developments more challenging and valuable than ever. Prices have never been higher for self-storage properties, either in absolute 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 public awareness and low interest rates. It is worth noting, however, 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 investors today are focused on market-specific demand drivers, such as migration of population, population growth, barriers to entry, income growth levels and employment basis. It is fair to say that we have two distinct markets within 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 present. This is the case in markets such as Greeley, Fort Collins and Castle Rock. These markets enjoy strong rental velocity, rental rate growth, population growth, income growth and, most importantly, demand growth for self-storage. But before you get too excited about the Colorado self-storage 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 Federal 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 property types enjoy. The second issue is overbuilding; you guessed it, development is back! The great returns drew a crowd. We are in the beginning stages of the development cycle, but strong growth markets, such as Colorado, are seeing as much as 5 to 25 percent new supply in the development 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 stabilized market and new development won’t bring any new customers into that market – it will only take existing customers away from other operators, leading to an overbuilt situation. A new self-storage building in and of itself doesn’t create any new demand for the product 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 rentable 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 situation to develop. Self-storage owners and investors’ ability to properly evaluate the future demand and current market is the most important part in making the right investment 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 situation and take action during this unique time in the self-storage real estate cycle.