It’s no secret that Canada is experiencing a real estate boom, and the country’s self-storage sector is no exception. The industry is experiencing a growth surge that has led to capitalization-rate compression and significant development in some of the nation’s largest cities. But Canada also offers significant obstacles to entry for investors and developers, which can make success elusive for those lacking deep pockets and institutional resources.
Expansion Drivers and Opportunities
So, what’s driving self-storage growth in Canada? Primarily, the strong economy, low interest rates, population growth and a historically undersupplied storage market. The economy has been consistently strengthening for the past several years. Canadians are earning and spending more, and they’re in need of additional space to store their belongings. There are also more businesses using storage for excess inventory, records and other uses. In fact, commercial tenants are estimated to account for 20 percent to 30 percent of all leased storage space in the country.
Additionally, as the population grows, people appear to be more mobile and are moving about the country more readily than in the past. And as we know, mobile populations lead to greater demand for self-storage.
Finally, the relative lack of storage space in Canada has led to significant new development in several markets, particularly Toronto. Unmet and growing demand is being addressed with new builds. However, with this opportunity comes significant pitfalls that require tools, resources and experience to avoid. Heretofore, the Canadian industry has been regionally fragmented and led by smaller independent operators. As the market matures, however, institutional investors and managers should lead the way.
Though the self-storage market isn’t as saturated in Canada as it is in the U.S., despite a significant amount of new product entering the market, demand still outstrips supply throughout most of the country. I believe it’ll be several years before we reach equilibrium. That said, developers must be careful not to oversaturate specific submarkets.
Obstacles to Entry
Speaking plainly, it’s very expensive to do business in Canada. You need deep pockets and significant resources on the ground. There are appreciably more taxes and fees than in the U.S., and municipalities tend to play a larger, more aggressive role in the planning process.
These factors conspire to make development very costly. As a result, newer facilities tend to be larger to realize greater revenue. This can lead to a dangerous game of cat and mouse, as owners increase operational risk and hope for higher occupancies to offset increased costs.
Furthermore, with greater input from municipalities, new facilities require a significant investment in urban design and aesthetics to secure development approval. As such, owneres are caught between increased development costs for a modern-looking facility and their bottom line.
Thus, sophisticated site selection, financial modeling and market research is essential. However, there’s a lack of industry statistics and financial data available in most Canadian markets, which makes it difficult for small organizations and traditional mom-and-pop owners to gauge demand in local areas and create economies of scale to manage facilities that sometimes operate with tight margins.
Success will probably elude those incapable of performing thorough, independent and accurate underwriting. This is likely why we’re seeing smaller, independent players replaced by institutional investors and developers with the ability to hit the bullseye on a more consistent basis. There’s simply little room for error north of the border.
Valuations are beginning to reflect the institutionalization of the Canadian self-storage industry. From a management standpoint, this allows large-scale brands to be more competitive over local owners. Large brands have more pricing power and the infrastructure to achieve economies of scale. This has put significant strain on smaller independents and adds significant risk to their business as they attempt to compete with the power of corporate brands.
Some of the larger storage operators have also added premium services to further differentiate themselves. These amenities vary greatly by brand but can include pick-up and delivery services, or wine vaults with onsite sommeliers and tasting rooms. Servicing a high-end niche, these premium services aren’t likely to become standard across the Canadian storage community, but they may cater to an affluent clientele.
From my perspective, these premium services don’t drive the value some may expect. Frankly, it’s important to remember what our core business is, which is providing additional space to store belongings. You typically won’t find institutional owners and managers offering niche amenities.
Canada is a growing market with significant upside and opportunity. However, it’s also fraught with danger for the unprepared and the unsophisticated. The margin for error is slim, and success will require a lot of money and manpower.
H. Michael Schwartz is the founder, chairman and CEO of SmartStop Asset Management, a diversified real estate company focused on self-storage assets as well as student and senior housing. Its storage portfolio comprises 108 facilities throughout the United States and Canada, including 68,000 units and approximately 7.9 million rentable square feet. For additional information, visit www.sam.com.