A Closer Look at Denver’s Self-Storage Market

By Evelyn Jozsa

Adam Schlosser, first vice president of investments, Marcus & Millichap

Five months after the New York City Council adopted the Self-Storage Text Amendment, which limits development in industrial business zones, the Denver City Council also imposed restrictions on the construction of self-storage facilities. Denver’s new zoning law targets main streets and areas that are within a quarter mile of any rail station. The regulations were implemented to promote more pedestrian-oriented developments. Adam Schlosser, first vice president of Investments at Marcus & Millichap’s National Self-Storage Group, weighs in on how the new law will alter Denver’s self-storage market.

How will the new zoning law affect the self-storage market in Denver?

Adam Schlosser: Impact will be minimal as it affects a very small portion of the city. Self-storage sites that would have been affected by this law got in before it was implemented.

How do you think these restrictions will impact investment in the self-storage sector?

Schlosser: There will be next to no effects, but the restrictions could help increase the value of existing facilities, as they create new barriers to entry in the downtown submarket.

What other challenges will investors and developers face beside finding an ideal storage location?

Schlosser: Rising steel and labor costs are driving up project cost and slowing delivery times. At the same time, rental rates and occupancies are softening in many areas. Municipalities have raised real estate taxes due to all the high price per foot sales in the market over the last several years. All this is making it harder for self-storage facilities to pencil. Interest rates continue to tick up but developers are getting squeezed more so on terms than the cost of debt. Lower loan-to-cost ratios and more recourse means more skin in the game and more risk than developers were facing a year ago.

What can you tell us about the Denver self-storage market in terms of supply and demand?

Schlosser: The Denver MSA has taken on a lot of new supply over the last four years, increasing new square footage close to 35 percent of existing stock. Prior to this build-up, the market was undersupplied and we saw unprecedented rent growth and occupancies hovering in the mid-90s. Strong fundamentals, optimistic economic forecast, availability of land and lots of capital wanting to get in on it spurred a flurry of new development activity. There are now areas around the metro that are oversupplied and seeing fundamentals erode. Self-storage is a localized business so fortunately it should be restricted to certain pockets.

One issue with self-storage facilities is that these properties are considered dead spots. Is it likely that the nature of storage buildings will change in the future?

Schlosser: I think this perception went away long ago and we continue to see the industry evolve and improve. What was once a land bank play by local real estate investors has turned into a viable investment engine for some of the world’s largest institutions, REITs and investment funds.

This “institutionalization” of the industry has changed everything from the way we manage these properties to how they’re constructed. They’re now designed with a more retail-centric focus in mind and resemble office buildings more than garages. Sophisticated revenue management processes price asking rates in real time resembling the hotel and airline industries. The industry has come a long way over the last 10 years.

Image courtesy of Marcus & Millichap