Over the last decade and across the nation, we have had more demand for self storage than supply to service it. Double-digit revenue growth was the norm and many new developments were stabilizing in 12 to 18 months instead of the traditional 36 months. The self storage industry thrives on the mobility of its tenant base and their belongings. It has been an amazing run as we enter our ninth consecutive year of expansion, but the seemingly never-ending tailwind is starting to show some signs of slowing.
Investors who got in early after the last downturn have been rewarded handsomely and others have taken notice. This is no more apparent than in Denver, Colorado. New development has always been public enemy No. 1 for any self storage owner. This development cycle is shaping up to deliver record amounts of new supply to many of the country’s major metropolitan statistical areas and Denver is no exception. The “institutionalization” of the self storage industry has attracted record amounts of new capital into the space, changing everything from how self storage facilities are constructed to how they are managed. Cities like Denver, Dallas, Nashville, Portland and Charlotte that have a strong economic outlook, robust net migration and, most importantly, availability of land are being hit the hardest.
If you have driven by a new facility lately, you have probably noticed they resemble office buildings more than the traditional single-story track metal buildings lined up in rows consuming acres of land. The ability to go vertical has allowed developers to build in areas once reserved exclusively for high density uses in the urban core as well as retail corridors in the suburbs. From 2010 to 2019, the Denver MSA will deliver just over 7.2 million square feet, that is the highest amount of square footage ever built by a wide margin with the last high-water mark at 4.5 million from 1992 to 2001. Prior to the recent build up, the Denver market was undersupplied at six square feet per person but will be pushing eight square feet per person by the end of 2019, if estimates are correct. The national average is just over seven square feet with many markets such as Salt Lake City, UT already at the level that Denver is heading toward.
What has many industry veterans worried is not the amount of square footage but the amount delivered over a short time frame and the fact that many of these projects are clustered into pockets around the city. Areas like Broomfield and Parker are seeing supply in their markets double while cities like Westminster have not seen any new construction. Self storage is a localized business with tenants traditionally not going more than three to five miles to rent a unit. It is yet to be seen the impact all this new construction will have on the broader market but, in the short term, we can expect a softening in rates with more concessions, which does not sound all that bad for the average consumer out there.
Adam Schlosser is a partner in the Denver-based LeClaire Group and Senior Director of the National Self-Storage Group within Marcus & Millichap. He can be reached at 303.328.2044 or Adam.Schlosser@MarcusMillichap.com