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Madison Development presses pause on new self-storage projects

A prolific developer in New York City, NY, is putting the brakes on new self-storage projects there after the city imposed what amounts to a freeze on self-storage development.

Adam Gordon, president of New York City-based Madison Development LLC, told the SpareFoot Storage Beat that with opportunities in their home market now limited, he and business partners Steve McKnight and Matt Dicker are abandoning self-storage development and turning toward developing properties in other real estate sectors.

Gordon pinned most of the blame for his company’s exit from self-storage development on an effort, led by New York Mayor Bill de Blasio, to severely restrict self-storage development in the city.

Unfriendly regulations

In late December, the New York City Council passed a measure that requires companies to jump through even more bureaucratic hoops to build self-storage facilities in most of the city’s 21 industrial business zones. The plan, first proposed in 2015, is designed to bolster the city’s manufacturing sector. The measure has no effect on zoning in the city’s largest borough, Manhattan.

The Self Storage Association and other industry advocates oppose New York City’s clampdown on self-storage projects.

Gordon is disappointed by de Blasio’s virtual ban on self-storage development, particularly given the benefits that he said New York City has reaped from self-storage.

“After 17 years and after investing hundreds of millions of dollars in the Bronx, Queens and Brooklyn, going back to the time when even Dunkin’ Donuts and chain grocery stores wouldn’t open there, Madison’s storage facilities have provided an essential service,” Gordon said. “Countless minority and low-income entrepreneurs started and ran their businesses in our facilities. Families in small rent-regulated apartments used storage to give them more room and improve their daily quality of life.”

More to follow suit?

Anne Hawkins, executive vice president of Hendersonville, TN-based STR Inc., a data and analytics firm whose specialties include self-storage, said she thinks the new limitations on self-storage development ultimately will lead to a decline in the project pipeline in New York City.

However, Hawkins said, existing self-storage operators in New York City will benefit from the restrictions, thanks to reduced competition in the future. Also, the restrictions could boost on-demand storage companies, she said.

STR data shows 227 self-storage facilities were operating in New York City’s five boroughs as of November 2017, with 43 facilities under development. Much of the new construction is occurring in Brooklyn and Queens. New York City was one of the most active U.S. markets for self-storage construction in 2017, according to Dallas, TX-based commercial real estate advisory firm BBG.

Cashing in

In line with its pullback from self-storage, Madison Development in recent months has sold three of its storage facilities to Saratoga Springs, NY-based Prime Storage Group for a total of $184 million. Malvern, PA-based self-storage REIT CubeSmart has been Madison Development’s longtime third-party manager.

Gordon said his company plans to hang onto one self-storage facility that’s been completed and three facilities that are still under development. All of them are in New York City.

“The next 10 years will be a wonderful time to own self-storage assets in New York City,” he said.

Even though they’re halting self-storage development, Gordon and McKnight, who launched Madison Development in 2001, haven’t soured on the New York City market. Self-storage demand continues to be high, with occupancy rates in the market hovering around 90 percent and annualized rents around $36 per square foot, according to commercial real estate services firm Marcus & Millichap.

“CubeSmart and the other large owners are going to look very wise and strategic, investing with a concentration in the largest and most structurally undersupplied market in the country … . This will always be an outstanding market,” Gordon said.

Perpetually underserved

Mike Mele, executive director of Marcus & Millichap’s National Self-Storage Group, agreed.

While major self-storage operators like CubeSmart and Extra Space Storage are likely to shy away from developing in New York City — at least for the time being — they stand to profit even more from their existing facilities as self-storage supply fails to catch up with growing demand and rental rates go up accordingly, Mele said. Today, New York City remains one of the most underserved markets in the U.S., according to Mele, with about 2.5 square feet of self-storage per person, compared with the national average of about 5 square feet per person.

Although New York City is an attractive self-storage market, it’s also a market with an abundance of nuances, according to Gordon.

“Investors tend to oversimplify New York City market dynamics. It’s an enormous city with many different submarket dynamics,” Gordon said. “For example, I would not develop in Long Island City because of looming oversupply, but Astoria — a few miles away — is spectacular and has long been supply-inhibited.”

Despite the firm’s familiarity with the New York City self-storage market, they’ve run into their share of development challenges over the years.

“We have long been plagued by knowing too much,” Gordon said, “and so we have been frequently outbid by competitors whose numbers did not properly account for true construction costs and duration, and the complexity of many of our urban sites. The double basements and sites built on fill have often resulted in buyer’s remorse, and those sites have often come back on the market or stalled when plans were finally bid.”