The Canadian self-storage market experienced significant changes in mid-2006 with the formation of InStorage Real Estate Investment Trust (REIT), focused on the acquisition of self-storage facilities. In one year, the company amassed the largest self-storage portfolio in the country. In the process, cap rates went from the 8.5 percent to 9 percent range in 2006 to the 7 percent to 7.5 percent range in 2007.
Spurred by the activities of InStorage REIT as well as low interest rates and readily available financing, other portfolio owners became more aggressive in their acquisition activities and cap rates dipped to the lowest level ever seen for self-storage—below 7 percent.
Although there were a few sales in Western Canada in late 2007, there was almost no sales activity in 2008, evidence of a disconnect between vendors listing at 2007 cap rates and purchasers unwilling to pay 2007 prices in the changing economic climate. This period of limbo continued into early 2009.
Occupancies faltered in late 2007 (from 95 percent-plus in most markets) and seem to have dipped slightly in late 2008 and early 2009, but the outlook for occupancies in the year ahead is that they will hold steady. Supply increased at the usual rate in 2008, but the outlook for 2009 is for sharply reduced new supply.
Rents continued to increase in most markets through 2008, but the outlook for 2009 is that rents will be level or selective increases will be implemented in specific unit sizes based on occupancy. The general forecast for the year ahead is self-storage in West Canada will hold steady with a balanced supply in most markets.
New Development Slows
Most of the major markets in British Columbia and Alberta have experienced a significant increase in supply over the past five years. The Vancouver Lower Mainland supply has increased by more than 400,000 square feet, or an average of six facilities per year between 2005 and 2008. The average facility size is 55,000 square feet. The total supply is estimated at 5.7 million square feet in 106 facilities, or 2.33 square feet per capita as of December 2008.
The outlook for 2009 is for a very limited increase in supply. According to industry sources, 45,000 square feet comprising phase one of a new facility in Mission will open in March 2009. There is also a small expansion of an existing facility in Surrey under way (10,000 square feet), and completion of phase two of a new facility in Richmond may move forward in 2009, adding another 20,000 square feet.
Two new facilities are in the development-permit process and will add approximately 180,000 square feet to the supply if completed in 2009. One facility will be removed from the inventory through an expropriation for highway purposes. The potential net addition to supply in 2009 may be as low as 10,000 square feet.
The Capital Regional District has a supply of approximately 672,000 square feet in 21 facilities, with an average size of about 32,000 square feet. Supply has increased by almost 50 percent in the past three years. In 2008, two new facilities totaling 67,500 square feet were added to the supply. There are no new additions proposed for 2009.
The Nanaimo trade area has a current supply of 332,000 square feet in 14 facilities, with an average size of about 23,000 square feet. Construction for a large two-story facility (90,000 square feet) will begin soon.
Edmonton and Calgary each have an estimated supply of about 2.5 square feet per capita. The Edmonton supply was recently surveyed and comprises 2.34 million square feet, or 2.52 square feet per capita. The average facility size is 51,000 square feet, but average unit sizes are generally larger (130 square feet).
Three new facilities commenced construction in 2008, with a total area of just under 200,000 square feet. Two of these are currently leasing, the third will be completed in 2009. Phase two of one of the new facilities may be developed in 2009, adding another 40,000 square feet to the inventory, and an expansion of 39,000 square feet is proposed for an existing facility. Otherwise, there is no new supply proposed for 2009.
The highest rents in Canada are found in the Lower Mainland, with the overall highest rent per square foot generated by a well-located facility in Vancouver at $3.24 per square foot per month, with an average unit size of 75 square feet. Otherwise, rents range from $1.31 per square foot per month in the suburban areas, depending on the unit mix.
Operators are reporting increased demand for smaller units because of price points. The majority of operators contacted said no rent increases were planned for 2009, or only selective rent increases by unit size would be implemented depending on occupancy.
Rents in Victoria are generally lower. The highest overall rents are being charged by two facilities with a small average unit size (45 square feet), which are obtaining an overall average rent of $2.55 to $2.72 per square foot per month. Otherwise, the range is from $1.56 to $1.79. Rents in most facilities were raised in 2008 be at least 5 percent.
Nanaimo rents are considerably lower than rents in either the Lower Mainland or the Capital Regional District. A 2008 survey determined the highest overall rent per square foot per month was $1.35.
A survey in Kamloops last year indicated the highest overall rent per square foot per month was approximately $1.45. This may change with the completion of a new 65,000-square-foot facility proposed for construction this year.
Edmonton rents are generally lower than those of the British Columbia urban centers, partly due to larger unit sizes. Projections for a multi-level new facility currently under construction with an average unit size of 106 square feet are at $1.51 per square foot per month. Recently reported average rents in two older facilities with average unit sizes of 130-plus square feet are in the range of $1.04 to $1.08 per square foot per month.
Prediction for 2009: Rents will remain level while incentives to lease up new space will increase. This could include free rent periods, free locks, free use of a truck to move in, etc.
Occupancies in most western markets were in the 95 percent-plus range until fall 2007 when occupancies dropped by an estimated 5 percent and did not recover. Occupancies appear to have softened again in the last six months, and call volumes are reported to be down.
In general, the softening appears to be by 2 percent to 4 percent in the Vancouver Lower Mainland and Edmonton. Occupancies should hold steady this year, ranging from 85 percent to 90 percent in markets with a balanced supply.
Buyers and Sellers
The self-storage market in British Columbia in 2007 and 2008 was characterized by few sales. This was mainly because of lack of product on the market. One Lower Mainland portfolio was under offer for almost a year at a cap rate of about 6.3 percent before the purchaser closed the transaction in March 2008.
In 2008, there was one share sale of a small interior facility in the 9 percent-plus range. There is a reported recent sale of a small facility in Edmonton, which had not closed at the time of this writing in March. No income information is available, but the price per square foot is just under $100. The previous sale in 2006 was $71 per square foot.
The last sale in Edmonton was negotiated in 2007, closed in January 2008, and comprised the largest facility in the city. It is located on 12 acres of land, and the cap rate was in the 6.4 percent range. There have been no confirmed sales of self-storage facilities in British Columbia and Alberta since mid-2008.
On the national scene, InStorage REIT is in the process of being acquired by Canadian Storage Partners ULC, an acquisition that began with an unsolicited offer to the unit holders in mid-October. Canadian Storage Partners is a member of the TKG-StorageMart group that owns, operates or is developing 67 self-storage facilities in North America (principally in the United States).
By December 2008, the initial offer of $3.75 per unit (cash) had been raised to $4 per unit, and the InStorage board of directors recommended acceptance. The most recent announcement by Canadian Storage Partners (at the time of this writing) is the offer had been extended from Feb. 26 to March 13 pending consent from certain lenders or servicers of mortgage loans to InStorage.
InStorage made no new acquisitions in 2008 other than acquiring its own development arm, InScotia Developments, which added eight properties in varying stages of lease-up to a portfolio that now contains 60 operating facilities.
Public Storage, the second largest owner of self-storage facilities in Canada, purchased three development sites in 2008. The company operates 49 facilities in Canada, 25 owned by Public Storage Canadian Properties, a publicly held limited partnership, and 24 privately held by the Hughes family. Development has been initiated in Dorval and La Salle, Quebec, and the facilities are anticipated to be completed in late 2009. In October 2008, Public Storage purchased a site in Orleans, Ontario.
There is currently more product on the market, but asking cap rates are still in the 7 percent range in West Canada, and disconnect between vendors and purchasers continues. In 2009, expect cap rates to range from 8 percent to 8.5 percent, or 9 percent to 9.5 percent for non-urban properties.
Supply and Demand
For the first time in many years, several projects did not move forward in the Lower Mainland in 2008 because they were not economically feasible due to high land costs ($1.5 million or more per acre), high construction costs ($65 to $75 per square foot) and rent levels too low to justify the costs.
Self-storage financing has become difficult to obtain because of the perception of risk relating to tenant mobility. Significantly fewer lenders are willing to finance self-storage development. The most important factor influencing self-storage development is the tightening of financing with fewer lenders, higher equity requirements, higher fees and interest rates.
Lease-up of new facilities in oversupplied markets has been slow—less than 2 percent per month. Facilities in lease-up are increasingly aggressive in securing tenants, which affects rents in individual markets. However, lease-up in markets that are undersupplied continues to be strong. One new facility reports 35 net units leased per month; another reports 50 percent lease-up in five months.
The self-storage market is being affected by the same economic forces influencing other industrial-commercial investment properties resulting in projected level rents, softening occupancy, higher cap rates and reduced development. Summing up the Western Canada outlook for 2009, I anticipate the market will hold steady in rents and occupancy. There will be limited additions to supply, and cap rates will return to pre-2007 levels.
Candace Watson is the principal of Canadian Self Storage Valuation Services Inc., which provides appraisal and feasibility analyses to self-storage owners and developers. Watson has been appraising self-storage facilities since 1978 and has evaluated approximately 40 percent of the current supply in the Lower Mainland. She is a regular speaker at industry tradeshows and conferences. To reach her, call 604.681.2929; e-mail [email protected].