COLLIERS MINNESOTA

Despite Big Box Availability, Industrial is Still the King of Self Storage

February 11, 2019

 

Industrial has been the healthiest product type in the commercial real estate market over the past several years and has dramatically affected both the single tenant and multi-tenant leasing and sales market in the Twin Cities, but what about the industrial product type that is often forgotten and rarely tracked? Self storage. Despite current self storage rental rates that are in many cases declining, self storage opportunity remains strong in Minnesota.

 

Developers and investors of self storage facilities are also seeking out existing industrial product and in some cases, land development opportunities, to build from the ground-up or convert. However, the lack of industrial product on the market has stirred up fierce competition not only from outside owner-users and investors, but from self storage groups who are also competing for limited product. The most lucrative arrangement is a facility that has all of the square footage on the main floor, so rents are not discounted exponentially per floor. Operators still prefer to have all of their square footage on one floor so they do not have to discount the space. Not only is new construction expensive, but most new facilities are going multi-story which leads to a lower ROI.

 

The industry sweet spot for these newer facilities seems to be 80,000-100,000 square feet of gross rentable space. Developers are taking advantage of Minnesota’s harsh winters and offering their customers the ability to drive their car through these new buildings all the way up to their locker, much like a traditional drive-up storage, but in the comfort of a climate-controlled facility.

 

The bigger players in the self storage industry will not even consider potential properties without a three-mile population of 40,000 or more, though less populated areas should not be discounted in all cases. Despite populated areas seeing mainly development of climate-controlled and multi-story facilities, traditional drive-up mini storage buildings are still being developed in tertiary markets, such as Waconia and Owatonna. Industrial building reconversions remain the best choice for self storage, while industrial zoned land remains the easiest to gain city approvals for new facilities.

Despite the recent surplus of vacant big box squares in the last few years, industrial remains the king of self storage conversions.

 

All of these factors, not to mention city zoning issues, are a major contributing factor to whether or not a self storage property will be viable for a self storage user. Many cities, such as Mendota Heights, have no provisions for self storage facilities in their entire zoning code. In cities like this, land owners often go through lengthy approval processes to get their properties approved for self storage and then selling their properties as a shovel-ready self storage property. The vast majority of self storage developers are not interested in properties where self storage is not a permitted or conditional use. Cities often view a self storage facility as an eyesore that does not contribute to the tax base as only one or two people are employed at a self storage site at any given time.

 

Many cities nationwide are being blindsided by self storage development, so much that they are placing emergency moratoriums on any new self storage businesses while they amend their zoning code to further restrict development of self storage businesses. For example, in the summer of 2018, Brooklyn Park was so overrun with proposed self storage developments that they placed an emergency moratorium on self storage facilities in the business park (BP) zoning district. They then passed a zoning amendment restricting facilities in the BP zoning district.

 

Some cities in the Twin Cities metro area are becoming too saturated to be considered economically viable for new self storage. In cities such as Eagan and Bloomington, where three to four new facilities are being constructed within mere miles of each other, it could take many years to reach market occupancy rates. The population levels in these cities cannot support additional self storage facilities without driving down rental rates. When successful facilities enter saturated markets, they find a better location than their competitors. Location is everything. There are pockets of the metro where there is insufficient supply that fits the above specifications, much like the industrial inventory in the Minneapolis and St. Paul urban cores.

 

The Minnesota market is so competitive that it is not uncommon to be up against four to five other self storage developers when making offers on a viable self storage property. Plus, owner-users and outside investors are also looking at the same properties, thus competition for qualifying product is extremely fierce. Some properties that are being developed for these facilities never even hit the open market, instead they are being privately pursued and purchased by self storage developers.

 

 

Max Holmes

Associate

Colliers International | Minneapolis - St. Paul

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