Investor-driven demand prompts Vancouver to restrict further self-storage development

Open this photo in gallery:

Only seven years ago, when Patrick Wood started specializing in B.C.’s self-storage real estate market, “no major bank would touch self-storage,” he says.

Back then, self-storage was still considered a mere “land cover” before the “real development” occurred, “so buyers had to resort to secondary lenders,” to get loans, says Mr. Wood.

“But now, all the major banks like self-storage,” says Mr. Wood, a broker with Vancouver-based William Wright Commercial Real Estate Services.

After proving “recession resistant” during 2008, when some Canadians forced to downsize put their belongings in storage, the asset has delivered strong performances during COVID-19, as people have cleared out space for home offices, classrooms or gyms, says Mr. Wood.

Inflation has also proven no foil for the sector. Unlike residential rent, self-storage rental rates are unregulated, so owners can raise rates to keep pace with demand from residents pushed into smaller homes by soaring borrowing costs.

“Rental rents are at record highs,” Mr. Wood says.

In Vancouver, a unit inside the four-storey NationWide Self Storage is priced at $3.30 a square foot.

That’s higher than a typical apartment in the same East Vancouver neighbourhood: A 700-square-foot apartment priced at that square footage would cost $2,310 a month.

As CBRE’s Clive Bradley puts it, self-storage has become “a hot commodity” during the past three years.

Mr. Bradley, head of CBRE’s self-storage practice group for Canada, says he is seeing “growing interest” from both individual investors and large public and private real estate investment trusts in Canada.

Capital demand has led to such an all-time surge of new facilities in Metro Vancouver – where six multistorey bunkers have opened in the past 18 months and eight are in development – that a ban has been imposed on new buildings in the city.

In April, Vancouver’s city council voted to prohibit self-storage development near public transit. In addition, on the rare remaining urban land, any new project must incorporate “mixed-use” on the ground floor to create space and opportunity for other types of business.

A City of Vancouver report, Regulating Self-Storage Uses in Industrial Districts, states that developers from other industries were no longer able to compete against self-storage businesses financially for land and that the new measures aim to accommodate more labour-intensive ventures.

“I understand the decision,” Mr. Wood says. Hemmed in by ocean and mountains, “Vancouver has a very real lack of land for buildings where people can work, and the city thinks self-storage only employs a few people.”

However, especially given the rise in e-commerce, “they don’t see all the locals running businesses out of them,” using units to store product before shipping.

“Self-storage allows small business owners to stay in Vancouver, when they otherwise couldn’t afford to, or there’s no space for them.”

In a city with “astronomical retail rents” and “incredibly low” warehouse vacancy (currently at just 0.4 per cent, according to Colliers), Mr. Wood says even major retailers are storing inventory in self-storage or using it as last-mile distribution centres.

“I don’t think you could find a 400-square-foot industrial warehouse unit in downtown Vancouver to rent, but you can find a 400-square-foot storage unit to rent,” he says.

Now, at least one-third to “in some cases, half” of all B.C. self-storage units are rented by commercial clients – a 50-per-cent increase from three years ago, he says.

Open this photo in gallery:

According to North American self-storage researcher Radius Plus, Vancouver’s self-storage penetration rate – or the amount of square feet of storage per capita – is still about 2.4, less than half the U.S. rate of 6.

So even given Vancouver’s staggering new supply rate, CBRE’s Mr. Bradley maintains that “generally speaking, the market is undersupplied.”

Shane Doyle, chief executive of NationWide Self Storage, says, “the word we rely on to explain our success in Vancouver is ‘luck.’”

Since 2020, the company has opened two 60,000-square-foot facilities, with three more Metro Vancouver projects under construction.

“We’ve been lucky to find land on which we could actually build self-storage. But I don’t think that luck is going to continue. Land is very, very difficult to find. And the city doesn’t want to create permitting for self-storage anymore,” he points out.

“We’re getting better rent than an apartment,” he says, “but our cost of operation is as minimal as you can get. So, we’re able to generate a lot better profitability.”

The company is currently raising financing for a sixth self-storage facility. Even if it was somehow lucky enough to score another sliver of permissible land in Vancouver, Mr. Doyle says the city’s new mixed-use rule would make the project prohibitively expensive.

“There are many examples in Vancouver where an acre of land zoned for multi-use will cost $30-million,” and significantly higher depending on where it is. “Total construction costs – you’re now looking at $240 a square foot.”

NationWide’s East Vancouver location cost $22.5-million: $10-million for land and $12.5-million for construction. A similar facility today “would cost $50-million minimum, to develop,” Mr. Doyle says.

Large cities are more profitable locations for self-storage, says Mr. Doyle. He has scouted B.C.’s second- largest city, Victoria, for three years, to no avail.

The lack of available land in that ocean-surrounded city has pushed commercial land prices as high as Vancouver’s and vacancy rates are even lower at just 0.1 per cent, according Colliers.

However, a young entrepreneur who “stumbled into the business” four years ago, recently managed to purchase two facilities close to Victoria.

Jay Barré worked for a large developer when he was assigned to market-research self-storage. “I realized it was a great, low-maintenance business with great cash flow,” Mr. Barré says.

He and his partner bought a facility on tiny Salt Spring Island, near Vancouver Island and then purchased facilities in Nanaimo, Duncan and Courtenay, on Vancouver Island.

“For us, getting into the business in those places was just less expensive,” Mr. Barré explains.

But with growing equity, in March, they purchased a two-site portfolio, with both facilities 30 minutes from Victoria’s downtown.

The $36.2-million deal offers approximately 77,500 square feet of storage units on a combined 4.5 hectares.

Since launching their company, Pacific Rim Storage, their rents have risen 20 per cent and vacancy is less than 5 per cent.

“We love the business,” Mr. Barré says. “We’re hoping to keep growing.”