'We Welcome The Restrictions': Self-Storage Worried More About Overbuilding Than Development Bans
On Oct. 15, the Minneapolis suburb of Coon Rapids, Minnesota, became the latest municipality to ban the development of new self-storage facilities. The move came toward the end of a six-month moratorium on self-storage development enacted earlier this year.
In recent years, there has been a small but persistent number of such bans or moratoriums nationwide, from cities as large as Birmingham, Alabama, to smaller towns like Milford, Connecticut, Nampa, Idaho, Margate, Florida, and Vancouver, Washington.
For the self-storage industry, which has been one of the stronger niche sectors in commercial real estate in recent years, do such restrictions represent a minor annoyance? A positive good in the short term? Or the possibility of a larger obstacle to growth in the longer run, as more places decide against new development?
"While creating further impediments to an already difficult development process is not something we would normally welcome, given some of the irrational developments by newcomers to the industry, we actually welcome the restrictions," Hampshire Cos. Senior Acquisitions Manager Michael Legacki said.
Hampshire has developed or repositioned more than 30 self-storage facilities since 2012, mostly on the East Coast. Currently, the company has 13 self-storage projects underway.
Legacki said oversupply is what the industry needs to worry about in the immediate future.
"The recent influx of new self-storage developers have been delivering stores that are too large, in markets that are too saturated," he said. "Rent growth has slowed significantly and discounts have increased ... That will be more effective than municipal regulation in slowing down new supply."
Though not always known for their caution, developers need to be careful not to create more supply than demand, Extra Space Storage Corporate Communications Manager McKall Morris said. Extra Space owns or operates more than 1,400 self-storage properties totaling about 750,000 units in 35 states, Washington, D.C., and Puerto Rico.
As cities realize they have too much self-storage, that by itself might foster anti-development sentiment, which would be bad for the industry in the longer run, Morris pointed out.
"Some cities may not be as open to developments as they previously were," Morris said. "So it's important that as an industry, we’re not adding self-storage to submarkets that don’t need additional inventory.”
Concern about overbuilding in the self-storage sector has been brewing since at least last year, with more recent numbers indicating that oversupply is beginning to impact rents.
According to Yardi, street rates for standard 10×10 non-climate-controlled units dropped 2.5% year-over-year in July 2019, with the average rate for climate-controlled units down 4.3% over the same period. Rents declined in 89% of the top U.S. metros tracked by Yardi Matrix.
Regardless of the interplay between supply and demand, self-storage sales broker Thomas Parsons isn't sanguine about the potential impact of municipal bans and moratoriums. Parsons, an investment associate with the LeClaire Group of Marcus & Millichap Self Storage, is based in Denver.
“Municipal resistance absolutely has the ability to affect new supply, and we’re seeing it happen," Parsons said. "I’m not a fan of self-storage moratoriums, since the result is a government-imposed restriction of new competition. Such restriction will cause consumers to pay artificially more for their storage needs."
In proposing or passing restrictive legislation on self-storage, municipalities are generally following similar lines of thinking.
"Given that the city is already served by a substantial number of self-storage facilities, their rapidly increasing occupation of properties with potential for other uses, uses that advance our goal to achieve a more walkable and vibrant environment, was a serious cause for concern," Birmingham City Councilor Darrell O’Quinn said.
In July, Birmingham enacted a six-month moratorium on self-storage development in the entire city, with an option to extend it for another 90 days.
O'Quinn cited one location being considered for self-storage was a large, historic building in Downtown Birmingham near the city's National Civil Rights Monument sites. Another proposal is on the corner of two major thoroughfares immediately adjacent to a prominent entertainment venue.
"The temporary moratorium is giving us some breathing room to carefully evaluate this issue and the potential amendment of our zoning code to exclude self-storage as an allowed use in areas where they’d be in conflict with our interests," O'Quinn said.
Nampa Mayor Debbie Kling said a number of factors went into that Idaho town's decision to enact a six-month moratorium on self-storage in June.
"One reason is the recent growth in the number of units," she said. "We have 35 properties in Nampa, which is a lot. It's an oversaturation."
The town's limited land would be put to better use with other kinds of development, Kling said — a highest-and-best-use argument. According to studies the city has done, she said, self-storage comes in last when it comes to development that spurs economic activity.
"The long-term economic impact [of more self-storage] would not be positive for our taxpayers," Kling said.
Naturally, self-storage developers disagree with that assessment and point to the demonstrable need the industry fills to counter such arguments.
"The owners of storage facilities pay a high amount of property taxes and provide a lot of construction jobs," Parsons said.
SmartStop Self Storage REIT President and Chief Investment Officer Wayne Johnson said that some municipalities see the value in allowing retail and self-storage as part of mixed-use design applications.
"That provides a more aesthetically pleasing street view and still allows developers to provide storage uses to its customers," Johnson said.
“As an industry, it’s important that we work with cities," Morris said. "Self-storage is a service people use and need, so with some education we typically can make the case why modern, well-placed, storage facilities benefit a community."