Garage Parks - Unusual investment potential in an under-supplied market

by

REFIRE recently spoke at length with Daniel Borger, managing director of Daniel T. Borger Real Estate Advisory. Borger has produced a comprehensive White Paper focused on Garage Parks in Germany – a niche segment with considerable investment potential.

While the sector can be viewed as a subset of the Self-Storage industry – itself a rapidly-growing investment segment which has been the subject of a number of recent articles in REFIRE – it nonetheless has its own dynamics, and should be looked at on its own merits.

Read this interview to gain an overview of the investment opportunity. Then email Mr. Borger direct (d.borger@danieltborger.com) to secure yourself a copy of the White Paper, which offers the single most comprehensive market overview of this existing, barely-developed market, an overview of the competitive situation, product description, current market trends, and market entry possibilities.

The ongoing migration and urbanization, increasing mobility, and changing lifestyles and business models are driving a continuously growing demand for external space solutions

REFIRE: So-called garage parks or garage courtyards in Germany commonly refer to garages for parking purposes. However, your white paper focuses on drive-up garage parks in the sense of storage garages. What is the difference?

Borger:  Parking garages serve the purpose of principally accommodating automobiles and are predominantly located in residential areas. Drive-up garage parks are a segment of the self-storage industry and, in contrast, offer oversized garages for storage purposes – the daily parking of cars hereby is insignificant. The facilities are mostly located in designated light industrial zones near cities which are easily accessible via highways and federal roads. Within the garage park premises one can conveniently drive up to or into the garage units – hence the technical term "drive-up". The garage parks are typically equipped with video surveillance, fenced in, and accessible only to tenants and users through automatic gates – around the clock. Unit sizes usually range from 18 to 40 square meters with an average area of about 30 square meters.

What do these storage garages commonly look like?

In their basic construction, the majority of garages have a gross area of 28 square meters – 3.5 meters wide by 8 meters long – covered by a single or double pitch roof and with an interior height of 4 to 5.5 meters. Roofs and walls are made of sheet metal and each garage unit has generally a manually operated sectional door. The individual units can be combined in a modular way to reach further sizes of 56 or 112 square meters. Due to the height, the garage units provide storage not only for conventional items but also for the accommodation of motor homes and other large vehicles. The height also allows usually for the installation of a mezzanine level in the rear part of the garages. Another important feature in connection with the ample space available is the ability to access the garage units directly thus using them conveniently and quickly without any reloading, i.e. without any further corridors, additional entrance portals or freight elevators and staircases.

How many units are typical for a garage park?

Drive-up garage parks typically range from 20 to 100 units with an average of 76 garages, although larger operators occasionally provide facilities with several hundred units whereby the threshold for years was around 300 garage units. However, in 2021, two garage parks with nearly 500 units were built, reaching a scale that was previously mostly found only in the United States.

Who is the target group for such storage garages?

Demand comes primarily from private individuals who want to store for instance valuable classic cars and leisure vehicle, as well as small business owners. Just the increase of over 70,000 newly registered motor homes per year in Germany alone has to be accommodated somewhere, because the public roads where they like to spread are no longer sufficient in many towns and cities. In addition, there is a growing need for large-volume storage space such as machinery and equipment, work and construction materials, or for the handling of goods by start-ups, online retailers, and smaller contractors. Big ticket items to be stored from the private sector as well such as larger sports equipment, surplus household goods or whatever else is not used on a daily basis or appears worth keeping. Space is at a premium, especially for larger items in offices and homes, so self storage is on the rise – a growing industry worldwide.

Why do you believe it is a growth industry?

Self storage represents a business idea that took its roots over 50 years ago in the United States, primarily with the rental of garages as storage space. For a long time, the sudden need for extra space to store predominantly household items was driven by life-changing events such as divorces, deaths, relocations, or downsizing of living spaces. Now, in addition to these factors, the ongoing migration and urbanization, increasing mobility, and changing lifestyles and business models are driving a continuously growing demand for external space solutions. Where for instance attics are now preferred living space and basements disappear for cost reasons, more solutions are required to address the needs of a consumer society that has grown to infinity. The resulting competition for space between mankind and things are fueling self storage markets worldwide.

What is the current state of the garage park market in Germany?

Until 2015, there were just 80 garage parks in Germany with an average of 79 large garages. Currently, there are already over 500 facilities, and 60 to 70 new ones are added each year, making this segment currently the driving force of the self-storage industry. In addition to a favorable cost-income ratio, this is also due in particular to the manageable investment volume for the construction of garage parks.

Are garage parks of interest to investors?

Garage parks are generally developed by the operators. As a result, virtually no facilities come up for sale. However, an increasing number of project developers in Germany have discovered the construction of garage parks as a new property class for their business with the sale of the individual garages as partial ownership. These large storage units are now popular with retail investors because they are usually quickly leased-up due to the limited supply. The sales volume is around ten garage parks per year – roughly equivalent to 500 to 1,000 garage units – reflecting an average market share of around 15 percent. The targeted net rental yields are four to five percent per annum. In addition, garage investments offer higher tax depreciation and income is not reduced by items such as supporting tenants with leasehold improvements, frequent maintenance expenditures or estate agent commissions.

How do garage parks perform in terms of ongoing letting? How resilient is the investment class?

Garage parks are usually fully let and experience very little turnover vacancy since a limited availability of storage garages leads to tenants renting these back-to-back and often from waiting lists. In addition, the self storage business has demonstrated its resilient nature during the recent Corona pandemic as well as it did during the previous global financial crisis. Even more, during these economic downturns the industry was recording an increase in occupancy rates, rental levels and annual turnover.

What is the potential for garage parks in Germany?

The supply of garage parks is by no means comprehensive, focusing with 40 percent of the supply predominantly on North Rhine-Westphalia. However, even in this region, the provision of storage garages falls significantly below its potential. For instance, larger mid-sized cities like Wesel or Dorsten each have five garage parks with 400+ garage units per location, while comparable cities such as Iserlohn, Herford, or Lüdenscheid have no supply at all – not to mention the rest of the country. This highlights the enormous growth potential in Germany. However, there is currently insufficient initiative from the domestic real estate industry to seize the lucrative opportunities of the market and create widespread offerings.

The sustainability topic: How do storage garages perform in this regard?

The operation of garage parks takes a leading position in climate protection. Since the garage structures do not provide building infrastructure or extensive system components (except for electricity), do not require on-site staff, and do not consume water or generate waste, the carbon footprint is minimal. Many garage parks are equipped with photovoltaic systems on their roofs, contributing to clean power generation. Unlike most conventional buildings, self storage does not generate high traffic. As studies reveal, 75 percent of customers visit their self storage unit once a month or less and 20 percent fewer than 3 times a year – with mostly short travel times of 10 to 20 minutes. Only a few users or tenants heat their units. Furthermore, garage parks are becoming increasingly digitalized with for instance the objective of making the rental process keyless thus eliminating the personal handover of storage units.

What about sustainability in the construction of garage parks?

Compared to conventional building structures, garage parks perform significantly better due to their simple construction and the use of mostly steel as the main building component for storage garage units. Steel is an extremely economical, durable, and low-maintenance building material that is 100 percent recyclable without loss of quality, reducing carbon emissions by a third during production. Prefabricated steel for construction also simplifies the transportation process and shortens construction time, as the main components are cut and ready for assembly on-site without lengthy and energy-intensive use of construction machinery. If another utilization of the property is intended, such facilities may be dismantled quickly and completely.

What about the availability of building plots?

Garage parks are mainly located in designated light industrial zones and can be found in a wide range of locations, from large and medium-sized cities to townships with fewer than 5,000 inhabitants. Regarding individual plot selection, they also allow the acquisition of areas in second rows and outskirts, such as next to railway tracks, as well as fragmented or residual plots and conversion areas that are regularly difficult or impossible to use for conventional construction.

You have created a white paper on drive-up garage parks in Germany – why?

As part of a consulting assignment to support a project developer of garage parks in the search for expansion capital, I was faced with the question of data, facts and trends: How many garage parks are there? Who are the operators? Is this a worthwhile line of business and how should it be classified? However, virtually no ongoing market research could be found on this segment of the self-storage industry - at least in Europe. The white paper therefore processes intensive research results on the topic and is intended to provide orientation for those who want to know more about a somewhat different niche of the real estate market. It can be ordered free of charge in digital format for download.

You’re clearly seeing plenty of potential here?

Given the blatant undersupply and taking into account the favorable cost-income ratio for both the construction and operation of garage parks, the fundamentals for this self-storage segment appear favorable for years to come. It is therefore likely to be of growing interest to local and international investors – on either a small or a large scale.

To request a copy of the White Paper on Garage Parks, send an email to: d.borger@danieltborger.com