The Country’s Best Storage Market?
Denver has long been a hidden gem in the middle of the U.S., oftentimes playing second fiddle to gateway cities such as San Francisco, Chicago, Los Angeles, and New York. But the Mile High City is riding high with arguably the best storage market in the country. According the Self-Storage Almanac, Colorado ranks as the 14th largest self-storage market in the nation with 1,272 facilities. Thousands of new units have been proposed at municipal planning departments all along Colorado’s Front Range from Fort Collins to Pueblo. This is a 200 mile stretch that runs north and south along the foothills of the Rocky Mountains, with Denver being the main hub in the middle.
Public Storage, Extra Space, National Storage Affiliates (NSA), and Cube Smart are all reporting Denver occupancies in the low to mid-90 percent range and same-store revenue growth in the top five markets they are currently operating in. This puts Denver on the map as one of strongest storage markets in the country. Driving the Denver self-storage boom are number of factors including:
- Strong population growth, which includes a large number of millennials who tend to use more storage and are attracted to the outdoor quality of life that Denver offers.
- A job market with increased wage growth that outpaces the national average.
- A robust real estate sector, including escalating housing prices, increased home building, and high occupancies in apartments.
- A strong retirement market, with retirees who are downsizing but need storage.
With vacancy rates trending lower and strong population growth predicted for the next 12 to 36 months, Denver will to continue to outperform the rest of the country. As you will see in the vacancy rate chart below, Denver is forecasted to outperform the West and United States averages by more than 200 basis points over the next four years. This is largely fueled by the robust household income, population, and household growth trends; household income growing at more than four percent annually; population growth at greater than 1.5 percent annually; and household growth rates of more than 2.4 percent annually—all of which puts Denver well above the national averages.
No Shortage Of New Supply
Whenever you have high returns and high occupancies, it draws the attention of developers, and Denver has certainly seen a boom of new projects either proposed, under construction, or newly opened. We are currently tracking more than 50 new self-storage projects encompassing more than four million square feet and 33,000 new units along the Front Range, as illustrated on the map below. The green dots indicate a proposed project and red dots indicate that location of a new project that is either under construction or recently opened.
In our company’s 21-year history, it has been our experience that about 40 to 50 percent of the projects we track will actually get built in the current real estate cycle. If this holds true, we should anticipate about 1.7 to 2.1 million square feet to be delivered this real estate cycle—about a two to three percent increase in new supply. By my account, between 12 and 16 new self-storage projects will be opened by the end of 2015, delivering 900,000 to 1.3 million new square feet to the market. This leads me to believe that we will see roughly the same amount of new supply delivered in 2016, but I would anticipate a slowdown in new construction by mid-2017 due to paradigm shift in the real estate market and most likely a tighter lending market than today.
A Timely Process
All of this new development has largely been supercharged by the very robust lease up of new projects along the Front Range. The owners of Self-Storage at Centerra, Edgemark Self-Storage, and Public Storage opened facilities in 2015; all have enjoyed a lease-up time greater than profoma. Many of them are on pace or reaching stabilization within 12 to 24 months, which is 12 to 18 months faster than typically projected. Most developers in Denver today are in a race against time. It is taking developers between 18 and 36 months to develop a new self-storage project, and the process seems to be getting more difficult, costly, and time consuming, partially because many of the municipal planning departments are removing storage from the zoning code, forcing developers to work through a proposed use development (PUD) process. Because of this increased difficulty and the amount of time it is taking for new projects to get approved and developed, the value of approved and existing projects has gone up. This keeps many of the new and less sophisticated developers from gaining traction in the Denver market.
The increasingly high barriers to entry in Denver have not only protected the values of existing owners but increased the value of many properties around the metro area. With new development slow in coming, this has allowed existing projects to push rents and increase their NOIs in a meaningful way. If you are looking to enter the Denver market as a developer, it is important to understand that the entitlement process will take some time as many metro area planning departments are very busy. Moreover, the process is costly and time consuming. I also recommend avoiding the rezoning of a property unless your development horizon is several years down the road. It is clear that as a developer in Colorado you need not be looking at where the market is today, but where it will be two to three years.
Denver is no longer a hidden gem in the middle of the country. The secret is out, and all of major investors in the self-storage industry have placed Denver high on their list of target markets for new acquisitions and new development. It is clear that the market fundamentals are sound and the future is bright for the Mile High City.
Ben Vestal is the president of Denver-based Argus Self Storage Sales Network, a national network of real estate brokers specializing in self-storage. He can be reached at (800) 557-8673 or email@example.com.