After a stretch of overbuilding the past decade, metro Denver had too many self-storage units which triggered pricing wars and falling rents. But as with so many things, the pandemic has reworked the equation.
The outbreak created a surge in remote workers who needed to free up more space for home offices. It also disrupted supply chains, causing small businesses to build up inventories and hunt for space. Construction became more costly and difficult, reducing the number of new units hitting the market.
Restrained supply combined with increased demand has brought more balance into the market.
“Storage has had a lot of ups and downs — building cycles and economic cycles,” said David Cramer, chief operating officer for National Storage Affiliates, a real estate investment trust based in Greenwood Village. “With COVID, our sector has seen a very large increase in the number of people wanting to use our product.”
Between 2012 and 2021, the Denver market added 8.7 million square feet of self-storage space, according to a report from StorageCafe. But the pace of construction slowed sharply once developers realized the market was overbuilt.
In 2018 alone, the 10-county Denver metro area, not including Boulder, saw 37 self-storage projects open, bringing the total to 339, according to data and analytics firm STR. The following year, the number of units in the pipeline was about 13% of the existing inventory in metro Denver, according to the Matrix Self-Storage Report.
This year, new and planned units are running around 3.5% of metro Denver’s existing inventory, one of the smallest shares of any major metro area and below the national growth rate of 8.9%, according to Matrix.
Rental rate increases in Denver are now moving closer to the national averages. Rent on a typical 10-foot-by-10-foot unit are up 6% in Denver year-over-year for units that are climate controlled as well as those that are not. That still ranks in the bottom half of metro areas, but not too far off the 7% gain for climate-controlled units and 8% for those without any heating or cooling, according to Matrix.
A separate survey from brokerage CBRE found that rents are rising closer to 8% to 10% for stabilized developments or those that aren’t in the lease-up stage in metro Denver, said Walter Brauer, a first vice president with CBRE who specializes in self-storage investment sales. Occupancy rates at those established locations are running above 90%.
“Denver will exceed the national average for rent growth by the end of the year,” Brauer predicts, citing the continued in-migration into the area and strong demand.
That has generated renewed investor interest in metro Denver. In mid-April, global investment firm KKR, through one of its equity real estate funds, purchased two self-storage facilities, one in Arvada and one in Glendale, from Edgemark Development, a Denver real estate investment firm.
“We received offers for both of these properties on a weekly basis,” said Richard Sapkin, managing principal of Edgemark Development, in a release. “KKR made us an offer that was compelling in every way: timing, price and the quality of their brand. These properties were not on the market for sale, but KKR recognized the outstanding nature of these locations.”
What contributed to the turnaround? Like with so many things, the pandemic did, Cramer said. When workers were sent home, they needed to free up room for remote offices. Spending more time at home also resulted in a desire to clear out the clutter. Incomes also increased during the pandemic, in part due to large amounts of federal stimulus. Unable to spend as freely on services and with travel limited, some people spent more on goods, which take up space.
Lower interest rates, a monetary response to the economic downturn triggered by the outbreak, created a surge in demand for homes and sent prices soaring to record highs. Metro Denver home prices are up 23.7% the past year in March, according to the S&P CoreLogic Case-Shiller Indices.
“You can’t buy as big a house as you thought, so you are buying or renting smaller,” said Cramer, adding that paying $120 a month for a 10-by-10-square-foot unit offers a way to cope with those lowered expectations.
Supply disruptions and a shift to more online buying because of the pandemic have created another source of demand. With supply chains unreliable, more businesses are building up inventory and that requires storage space. And while bigger businesses might turn to industrial warehouses, smaller businesses are finding self-storage units a more affordable and flexible option.
Related Articles
-
“Storage Castle” on Colfax Avenue sells for second time in a century
-
Love them, hate them, regulate them: Denver remains a strong market for self-storage, analysts say
-
Denver’s self-storage disruptor Closetbox raises $7.3 million, adds 88th new market in three years
-
Denver businessman filling self-storage demand
Much of the warehouse space being built in Denver and elsewhere is larger in size and tailored more for big online retailers than small businesses, Brauer said.
David Billera owns a Highlands Ranch business called JSG Enterprises that buys up pallets of returned and overstock items, like clothing, and then resells those items through online stores. As demand rose, he needed more space to store bulk inventory. But he wanted to grow prudently and not run up overhead costs for his home-based business.
“It is hard to get warehouse space. It is snatched up so quickly when it does open up,” Billera said. In the Highlands Ranch area, warehouse space runs about $3 a square foot. He estimates he is paying about $1.40 a square foot at SecurCare Self Storage near his home.
Billera said he started with four or five smaller units and would grab bigger units as they became available and as his inventory grew. He has handled deliveries of up to 20 pallets at a time and now leases three larger units.
“It makes more sense in reality if you use the space properly,” he said, adding that he is noticing more people in the construction trades at SecurCare.
Rising theft rates have the construction industry hard, and paying for a storage unit to store tools and equipment securely has increasingly become a cost of doing business.
Brauer said he personally experienced the pressure on small-business owners to secure more inventory when he helped a friend in the sporting goods business purchase four containers of baseballs from China to get ahead of larger purchasers and to have enough supply.
“It got him through the spring season,” he said.
