Self-Storage Outlook

Outlook Summary

The self-storage sector demand surged due to migration patterns during the pandemic but has since dipped as mobility normalizes and home sales decline.⁴⁹ Despite softer fundamentals and a drop in construction starts, self-storage transactions remain high compared to historical levels, albeit lower than their peak.^51,54 Many Sunbelt regions continue attracting migration, highlighting underserved markets despite oversupply concerns.^51,56 While the immediate outlook suggests a cautious approach to new projects, lower interest (and, therefore, typically lower mortgage) rates may help boost mobility, rents, and occupancy.

Figure 12: Asking Rent Trends for Self-Storage

Source: National Report on 2024 Self-Storage Investment, Marcus & Millicap, February 2024. CC stands for “Climate-Controlled”; ** Forecast

Market Fundamentals

Self-storage demand initially surged mainly due to the pandemic's impact on migration and remote work however with normalization in population mobility in the last two years, demand has relatively softened as people are moving less than they did immediately after the depths of the pandemic in 2020.⁴⁹ Pair that with the fact that home sales have declined due to high mortgage rates, which has further reduced mobility.HireaHelper's migration report reveals that 2023 marked the year with the fewest moves within the last few decades.⁵⁰

According to Yardi Matrix, as storage demand normalizes, the national average for asking rents dropped noticeably.⁵¹Urban areas like New York, Chicago, and Washington, D.C., along with cities with minimal new supply like Denver and Nashville, are experiencing positive rent growth despite year-over-year declines in asking rates.⁵¹ We expect soft rent growth to persist until the housing market finds its footing, potentially following a decrease in mortgage rates.

Yardi Matrix reports that consistent with softening fundamentals, construction starts are also slowing down.⁵¹ However, despite fewer projects starting at the end of 2023, the amount of construction underway stayed about the same and did not experience a decline in early 2024, likely because projects are taking longer to clear from the pipeline and complete.⁵²

According to a recent broadcast by Nuveen⁵³, it’s essential to recognize that although self-storage fundamentals (rents and occupancy levels) have softened in the short term, they have softened from the above-average highs that the sector achieved immediately after the pandemic, meaning the sector’s performance is by no means bleak, just moderated from its recent highs.

Transaction Activity

Cushman & Wakefield report a 57% drop in Q3 2023 self-storage transactions year-over-year, yet a higher volume compared to pre-pandemic levels, which speaks to the surge of self-storage transaction demand within the last decade and shows that although self-storage transaction activity is softening, it remains historically high.⁵⁴According to Yardi Matrix, sellers have been hesitant to transact lately due to persistently high interest rates, which is keeping transaction activity muted.⁵¹

It's crucial to highlight the self-storage sector's resilience is rooted in the four D's: downsizing, divorce, death, and dislocation. However, currently, over-supplied markets might experience a temporary decline in enthusiasm from lenders and sponsors expecting difficult lease-ups, occupancy levels, and slow rent growth.

CrowdStreet’s Strategy

Sensitive to Location & Competition

With oversupply concerns, especially in some Sunbelt markets, we believe location is one of the first factors to analyze. In areas experiencing positive in-migration and subsequent population growth, we will generally consider markets with self-storage inventory below roughly 6 square feet per capita within the 1, 3, and 5-mile radius of the targeted site, the standard national average for self-storage, according to Inside Self-Storage.⁵⁵ According to PODS, the moving service, some of these top markets in 2024 include Myrtle Beach, Houston, Charlotte, Raleigh, Phoenix, with many people moving to “sunny Southern States.”⁵⁶

With the expectation of soft rent growth in H2 2024 for self-storage, we will be more sensitive to what type of inventory already exists within proximity of the prospective project, also called the competitive set. It is essential to ask questions such as: Is the competition obsolete? What type of amenities exist in our competitive set? Is it a new construction? Are any technologies being used to enhance the customer experience? We are cautious when evaluating projects with significant competition in the surrounding areas. If the number of self-storage units exceeds demand, it can lead to declining rents and negatively impact the net operating income (“NOI”).

Instead, we will focus on seeking deals in relatively untapped submarkets with limited competition, and on aging self-storage facilities that can be transformed into those equipped with advanced climate control, automation, and security features.

Existing Facilities Versus Development

Due to challenges in obtaining debt for development opportunities, we will consider deals for existing facilities with healthy lease-up assumptions, particularly if the acquisition yield supports the potential for positive leverage. However, finding such self-storage opportunities remains challenging, largely because of today’s debt conditions. Also, in our observation, some operators sell their portfolio in bulk to REITs or institutional investors, making individual asset opportunities relatively limited compared to other asset classes.

One challenge with development projects in today's competitive lending landscape is that construction loans for projects with longer stabilization timelines often face tougher standards. For example, even though self-storage development generally requires less time and capital than other real estate asset classes, the lease-up period is typically longer - in our experience, that is usually at 36 months compared to around 18 months for industrial or multifamily projects. Additionally, high interest rates increase overall debt service costs, compelling lenders to require substantial reserves until stabilization. Securing debt terms that help reduce financing risk through stabilization, typically four to five years, will be crucial to combat the longer lease-up period for self-storage development.

While tough in today’s market, securing development deals may also make sense when acquiring land at below-market costs, especially considering that growth assumptions for self-storage have relatively cooled.

“Americans Went All-In on Self-Storage. That Demand Is Suddenly Cooling,” The New York Times, April 2024.
“The 2023-2024 HireAHelper Moving Migration Report,” HireAHelper, January 2024.
“National Self Storage Report,” Yardi Matrix, July 2024.
“Yardi Matrix Continues to Forecast Self Storage Supply Increase for 2024/25,” Yardi Matrix, May 2024.
“Storage likely to remain an outperformer,” Nuveen, April 2024.
“U.S. Self-Storage,” Cushman & Wakefield, August 2023.
“3 Market Metrics to Consider When Evaluating Self-Storage Acquisitions,” Inside Self Storage, October 2021.
“Where Are People Moving to in 2024?” Pods, May 2024.