Hollywood has one view of Detroit; the self-storage industry has another.
In many movies, the once mighty Motor City is portrayed in almost post-apocalyptic terms—a desolate, dilapidated city gutted by the long, painful decline of the U.S. auto industry. It isn’t a flattering image. In contrast, local self-storage professionals see a hard-scrabble city in the early stages of a comeback, one surrounded by affluent suburbs in a state steadily diversifying its economy. From that vantage point, Greater Detroit looks much more promising.
“We’re doing all right,” says Peter Spickenagel, CEO of Citizen Storage and president of the Self-Storage Association of Michigan. “Detroit isn’t a market going like gangbusters, but things are pretty good. Things are definitely improving.”
The data seems to back up this sunnier outlook for Greater Detroit in particular and Southern Michigan in general. The self-storage industry isn’t expanding as quickly here as in other parts of the nation, but new supply has grown by about 7% in the last three years, which indicates investor confidence is slowly growing in the region, according to Radius+, a company that specializes in self-storage data, analytics and location intelligence. Overall, facility operators in are feeling optimistic.
Prior to the COVID-19 outbreak, self-storage rental rates were remarkably steady, hovering around $110 per month for a 10-by-10, climate-controlled unit. Like other metropolitan areas, Detroit saw a steep fall in rates immediately after the pandemic hit, followed by a strong surge in prices in the second half of 2020. As of early February 2021, prices were hovering around $138 per month, which is a solid figure, according to Cory Sylvester, a principal at Radius+. Increasing demand coupled with rate growth are encouraging signs for the market, he said.
Part of the reason for Detroit’s somewhat encouraging pricing is it has one of the lowest self-storage penetration rates in the country at 4.4 square feet of space per capita, compared to the national rate of nearly 6 square feet, according to Radius+. In all, the market has about 19.9 million square feet of self-storage.
“We’re probably one of the most underbuilt markets in the nation,” says Adam Pogoda, a principal at the Pogoda Cos., which operates 51 self-storage facilities in Michigan under the National Storage Centers brand.
Low supply has been a boon to facility owners, particularly as pandemic-era demand has increased. Moreover, the imbalance between supply and demand has started to attract the attention of more investors, who are assessing the region’s long-term prospects. In fact, Pogoda says his firm was recently outbid for a property by a real estate investment trust (REIT). “It’s getting more competitive,” he notes. “It’s not like Nashville, Tenn., or Dallas, but it’s growing.”
Activity isn’t just being driven by the REITs, either. Local players have also been aggressive in the market, especially in Detroit’s attractive suburban communities. Following REIT trends can be important, but having intimate knowledge of the market can be a key to success. In recent years, the region has become “very competitive,” according to Spickenagel.
As for the city itself, some of Detroit’s negative image is well-placed. The urban core was devastated by a decades-long decline of the U.S. auto industry, which was exacerbated by what many believe was poor political leadership. The good news is there’s encouraging redevelopment projects underway downtown, with new residences, commercial and nonprofit structures being built. Old, abandoned buildings are also being converted to new uses.
Though Detroit is far from becoming a fully rejuvenated, post-industrial northern city, progress is happening. “We’re not close to really coming back, but the signs are good,” says Spickenagel. Pogoda agrees, noting that the city’s slow rebound “bodes well for the future of self-storage in the area.” It stands to reason that if self-storage business picks up downtown, Detroit is likely to be a pretty solid market for the long term.
While Detroit recovers slowly, the self-storage market and general economy in Michigan are also improving. “Our rentals are up,” says Chad Lundberg, managing partner of The Storage Group, which owns 14 facilities. The company is based in Muskegon, Mich., which sits on the western side of the state, along Lake Michigan, about a three-hour drive from Detroit. Lundberg has been encouraged by improving factors across the state, noting Michigan has become “economically more diverse and resilient” than in recent decades.
“One of the great things about the Michigan economy is that it’s diversifying away from the auto industry,” agrees Pogoda.
Statewide, the general consensus is there’s room for more self-storage inventory. Many owners are making improvements to properties and expanding existing facilities. Some are also expanding through local acquisitions.
As for Greater Detroit, no one is saying the market is about to hit a growth spurt to become the next Austin, Texas, or Denver, but it’s an intriguing area with upside. “It’s not an extraordinarily dynamic market,” says Sylvester, “but there are encouraging signs. If it’s sustained, it looks good for the self-storage industry.”
Monty Spencer is CEO of The Storage Acquisition Group, which specializes in acquiring off-market self-storage facilities and portfolios nationwide. The company also offers market-analysis reports, underwriting and closing support. For more information, call 757.867.8777.