The progressing Canadian self-storage industry… and the forces behind it

Canada’s self-storage space is no stranger to change and this last year marks yet another evolutionary time period laden with notable observations from coast to coast. Already an intricate and complex industry for new investors considering entry and existing investors looking to optimize their returns, self-storage is affected by various changes taking place across the country.

How is the economy faring?

This is a top question on every investor’s mind as they seek to navigate accordingly. Overall, the Canadian economy, while positive, is in a slow period. Particularly in both Ontario and British Columbia, residential real estate sales have seen a significant cooling with data surfacing in the latter province that indicates 10-year lows. These residential real estate market drops translate into fewer self-storage rentals and a reduction in the immediate demand for storage.

The Maritime provinces pose an interesting question. While the self-storage markets in these regions have been steady and strong, there may be a significant impact that arises from the North American Free Trade negotiations with the United States. This is because the Maritime provinces are the United States’ largest trading partner, and vice versa.=

The role of interest rates

With higher interest rates have come new challenges. With the Bank of Canada’s benchmark rate at 1.5%, up from 0.5% in 2017, and interest rates with the five major banks at 6.5% from 4% for term loans, it’s more difficult to secure financing and cash flow is diminished. This partly explains why the industry is also seeing veteran operators wait for less experienced self-storage owners to sell their properties.

Taxes are high

For the self-storage industry, property taxes are on the high side. For most self-storage owners, property tax is one of their largest annual expenses. The government assesses these sites and taxes them at rates far greater than what a homeowner might pay. In Vancouver, for example, a self-storage site owner pays more than four times what a residential property owner pays in the same region. The Canadian Self Storage Association is looking to work with Provincial Assessment Authorities in order to define a fair tax solution. It will be interesting to see if positive developments are made to reduce taxes for self-storage owners in the near future.

Developers are building

In Canada, there is no shortage of self-storage development taking place, not to mention the fact that there are also new developments in the pipeline. Since the self-storage industry has seen years of success nationwide, new investors are intrigued, however, the barriers to entry (the most prominent being the high cost to buy land and build) do present difficulties.]

There is a new trend to take note of in the market: many self-storage developments have shifted towards a large, super-style model. New facilities of the past were often between 40,000 and 75,000 square feet. Today, we’re seeing 100,000, 250,000 and even some as large as 500,000 square feet. These huge facilities pose an interesting question: how will surrounding areas absorb the additional supply of rental space and at what rate?

Further demonstrating the high action that exists on the development side of the industry, construction pricing has increased rapidly. Just a few years ago, building hard costs were around $55 to $70 per square foot. Now, those numbers are up at $120 to $230. Steel tariffs and development cost charges are also affecting new construction prices.

New facility impacts

Naturally, as facilities open their doors, existing operators are affected. Particularly in the Greater Toronto Area, a significant number of new self-storage sites have opened in strong-performing regions. As you might suspect, the first new facility reduces the occupancy rate of existing facilities and that rate only drops further as more facilities pop up.

In Calgary and Edmonton, Alberta there’s been a multi-year recession in the works following the oil pricing collapse. New self-storage facilities have opened recently in these areas and appear to be planning for a slow lease-up model, do not expect rapid (if any) rent increases, and have come into the space with greater cash reserves designed to carry owners through the first few years.

The industry is modernizing

New self-storage sites are entering the market with a contemporary look and feel, while old self-storage sites are undergoing renovations to achieve a more polished appearance. It’s essential for owners to address the digital factor since an increasing number of potential customers are searching the web and using their mobiles to find self-storage rental space in their area.

Internally, many facilities have adopted self-storage management software and applications to improve the ways in which they operate. These apps often incorporate online payments, rental reservations, and off-site management tools.

The test is underway

The Canadian self-storage industry is now in a testing period to see how it will handle this significant growth it is experiencing. The risk of overbuilding is evident, there is no denying that. Construction costs are at all-time highs and new sites are feeling the pressure to fill up at greater prices in order to meet their business plan requirements. As for older facilities, if they want to stay competitive in this dynamic market, updating and adjusting both their physical and digital spaces will prove to be an essential practice.