Colorado Real Estate Journal - September 2, 2015
It’s hard to believe a niche real estate sector that started 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 eyebrows, 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 everyone 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 Denver economy, it looks like we’ll be seeing a lot more of both. The market for self-storage is flush with cash and there isn’t enough product to feed the appetite. The availability of cheap debt and high demand has driven values to a place never before seen in the industry. 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. Developers are scrambling to get as much product out of the ground as quickly as they can. Projects 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 tracking more than 50 projects in various phases of planning and development along the Front Range, and the number continues to grow. Many caution that we’ve seen this before – seasoned self-storage developers haven’t forgotten about the 1990s, when the Denver market was flooded with new development leading up to the savings-and-loan crisis, 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 seasoned 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 factors, it’s hard to envision a market imbalance anytime soon. Despite the current pipeline, there was little product delivered over the past five years to keep up with demand, and investors who are savvy enough to navigate the development process are taking full advantage and reaping the rewards. Today’s self-storage developers are building a different kind of product than in years past. The sprawling traditional one-story metal buildings are giving way to more modern multistory designs that resemble an office building more than a storage facility. The population migration back to the urban core is challenging developers to build more sf on less land. Not only are these projects having to go vertical, but also government regulation and consumer demand is dictating these new facilities be aesthetically pleasing, more energy efficient and environmentally friendly as well. Finding infill land for development at a number that makes financial sense is challenging. In many cases an existing building must be torn down or converted from its current use, if the structure allows. Building a more expensive product leaves less room for error, and developers must be more patient and thorough during the site selection process. Self-storage is a retail business first and foremost, so high visibility, population density and average household income all weigh heavily into picking a good site. Finding existing light-industrial zoning districts that already allow self-storage and fit the retail parameters needed for a successful project are few and far between. It’s not uncommon to see older self-storage facilities clustered into small corridors, which can lead to an oversaturation of an area. Many of the projects built today are staying away from these corridors and going through a much longer and more complex rezoning and entitlement process to get into higher-profile areas. These projects are changing the face of the industry and filling a much-needed void in their communities. So don’t be surprised if you’re walking out of your local Super-Target one day and a brand-new Class A storage facility is staring you in the face. After all, you do need a nice place to store all the great stuff you just bought, right?