The self-storage sector has boomed over the last decade, but it experienced decelerating market fundamentals over the three years prior to the COVID-19 pandemic. During the pandemic, demand for self-storage space spiked again, bolstered by COVID-19-related migration.
With increased flexibility offered by work from home trends, people moved across states, as well as intrastate, from urban to suburban locations. People also moved in with their parents and/or decided to share housing expenses by adding roommates, leading to a reversal of household formation, which further increased demand for self-storage.
Green Street reported that increased migration and movement improved self-storage operating fundamentals over the last three years. Occupancy in self-storage units achieved levels never seen before, ranging from 94% to 96%, nationwide.16 Resultantly, prices appreciated by 64% in 2021 compared to 2019 levels. That level of performance would have been challenging for the sector to sustain so, not surprisingly, we’ve seen market fundamentals for self-storage soften over the last year with modest cap rate expansion, declining prices, moderating rent growth, and a bearish outlook for NOI growth.16
Source: Green Street - U.S. Self-Storage Outlook, 2023.
It appears that the pandemic-fueled exponential growth the self-storage sector enjoyed over the past few years may now be receding to historical norms with a reversion to seasonal patterns, lower overall mobility and some people returning back to the office. However, according to Inside Self-Storage, “drivers such as displacement, home remodels, migration, divorce, home/office downsizing and retirement” continue to keep self-storage in high demand.
Unrestrained supply has historically been risky for self-storage operating fundamentals because of the downward pressure it imposes on rents. But this risk is expected to remain relatively low, at least for the next few years.
Opportunities to develop new storage facilities continue to present themselves (albeit at a slowing pace,) especially with the increased institutionalization of the sector that has gained traction over the past decade. Older self-storage facilities often lack amenities such as climate control, modern security systems, and self-serve kiosks, creating opportunities to supply in-demand and modern self-storage facilities.
Developing these assets is relatively simple as compared to other real estate asset classes. Thus, in a labor-constrained construction market where hard costs are still increasing, the higher probability of cost certainty and speed to deliver self-storage facilities can make them a viable option. While we are primarily focused on ground up development, we also like adaptive reuse projects as oftentimes they are situated in favorable in-fill locations such as a retail center on a busy thoroughfare.
Once they are stabilized, self-storage projects can also help mitigate the effects of inflation due to the owner’s ability to change rents as frequently as a monthly basis which makes it one of the more adaptable asset classes to periods of high inflation. The nature of tenants also tends to be sticky, meaning most keep their belongings in facilities once they have stored them, rather than remove them due to an uptick in monthly rents.
We believe in the long-term prospects of this sector because of its growing and resilient demand but we are approaching the short-term cautiously to address the softening of market fundamentals. However, the continued need for self-storage due to migratory trends and a prevalence of remote work will likely continue over the course of the next cycle.
16 “U.S. Self-Storage Outlook,” Green Street, 2023.