09 Jan 2020
In mid-October of 2019, 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 moratorium bans nationwide, from cities as large as Birmingham, Alabama, to smaller towns like Milford, Connecticut, Nampa, Idaho, Margate, Florida, and Vancouver, Washington.
Last year, Denver banned self storage within a quarter-mile of any light-rail train station, and this year Sacramento is considering banning it in parts of the city.
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.
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."
