WALNUT CREEK, CA—As retail rates in suburban downtowns become more expensive, valuable showcase space used as storage is being reconsidered. As a result, retailers are renting space in storage facilities. Also, some upscale cities are becoming open to having public storage units closer to downtowns, whereas in the past, this use was relocated to the outer city limits. In these situations, some of these buildings are upgrading the facades of buildings and even putting retail uses on the ground floor, GlobeSt.com learns in this exclusive with Transwestern and Rutan & Tucker experts.

“In those hot downtowns, $70 NNN high rentals don't allow space for back-end/just in time storage,” Edward Del Beccaro, senior managing director of Transwestern, tells GlobeSt.com. “With an increase of retail in suburban/urban nodes, it makes sense to increase storage there. Most cities don't want to waste valuable space but they are re-evaluating uses to create or free up sales tax-generating showroom space.”

This trend is taking hold in Walnut Creek, Palo Alto, Pleasanton and San Rafael, for example. Another creative storage concept is mixed use or thin retail with storage in the back.

“This is where the storage blends in with the environment,” Matthew Francois, Rutan & Tucker LLP, tells GlobeSt.com. “In higher rent areas, you maintain a street scene through intermixing, so you might have thin retail in the front, with an apartment on the top and storage in the back.”

Beyond the B2B concepts, the residential stats bear out the need for more storage as well. There will be more than 1.3 million US households added in 2016, an expansion of 1.1% from year-ago levels. Healthy household formation will intensify underlying demand for storage, particularly in urban employment hubs where growth is strongest. Overall, pent-up demand is yet to be satiated by elevated development, says a recent report by Marcus & Millichap.

The resilient national economy, healthy population growth and rising disposable incomes support improving self-storage property fundamentals. The US labor market continues to make strides with the unemployment rate teetering near a post-recession low and wage growth outpacing the rate of inﬂation. The strength of the job market is driving improvements in retail spending and household formation.

Additionally, the strength of the multifamily sector is having a positive impact on self storage as apartments and other rental housing, ranging from 600 square feet to 1,000 square feet for one- and two-bedroom units, typically don't have the room to accommodate all of a resident's belongings, says Del Beccaro. Empty nesters are also choosing multifamily housing after downsizing from larger homes, he says.

And, the housing crisis continues with not enough projects under construction. This has resulted in higher apartment construction costs and increased rents of $5 to $6 per square foot in San Francisco, $4 per square foot in Oakland and $3.5 to $3.90 per square foot in Walnut Creek, according to Transwestern research.

Despite the number of self-storage facilities nearly tripling in the last 20 years, fewer self-storage construction projects have started after the recession. These factors contributed to a decline in self-storage vacancy with the midyear rate sitting at a post-recession low, a 93.4% occupancy nationally, says Transwestern.

The West boasts the lowest vacancy among all the regions as healthy population growth and the robust tech sector lift demand for storage. The region-wide vacancy rate will fall 100 basis points year over year, reaching 9.2% by the end of 2016. Declining vacancy will put upward pressure on rents. The average asking rent for climate-controlled facilities will climb 3.3% this year to $1.60 per square foot. Meanwhile, average asking rent for non-climate-controlled units will jump 4.5% to $1.49 per square foot. The average sale price surged 8.9% in the past 12 months to roughly $88 per square foot in June, the highest price point since 2000. The average ﬁrst year return nudged up 25 basis points year over year, to the mid-6% range in the second quarter, according to Marcus & Millichap.

REITs and private investors are expected to heavily pursue self-storage assets seeking security and long-term proﬁtability amid weak returns from alternative investments. Although buyer demand is robust and underlying property fundamentals are sound, some caution is beginning to enter the market. The historic run-up in pricing in the past few years is starting to moderate and cap rates are ﬂattening, says Marcus & Millichap.

This trend is taking hold in Walnut Creek, Palo Alto, Pleasanton and San Rafael, for example. Another creative storage concept is mixed use or thin retail with storage in the back.

Instant Insights /

Pent-up Self Storage Demand and Development Still Far Apart

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