Tightening Conditions Still Leave Self-Storage Filled with Value

Self-storage has long been a solid investment class that had seen some mild troubles before the pandemic. And while the pandemic saw renewed interest in the sector, the current economic environment has investors monitoring cautiously. It might be time for investors to take another look, explains Denise Nuñez, executive managing director and a self-storage specialist at NAI Horizon, and Elizabeth Wilke, a commercial sales and leasing agent with NAI Latter & Blum.  It would come as a relief. 

“Funding for sales at certificate of occupancy had come to a stall by 2019 and many of the established and well-known self-storage developers were taking a pause to new self-storage development activities,” explains Nuñez. That changed with the pandemic disrupting household plans on numerous fronts. “As lives were altered during the pandemic and college students returned home, families had to rent storage units to make room for their home-bound students, as well as their home offices,” says Wilke.

Like never before, the sector continued to do better than in previous business cycles. Asking rents for a 10-by-10-foot unit was up 15% from the end of 2019 to June 2022. Vacancy during that period shrunk from 8.5% to 6.6%. Work-from-home, demographic growth, and migration all played their parts. 

“Today’s environment, as a result, is a renewed interest for new development in market specific areas that have benefitted from positive migration,” Nuñez states.  While new construction continues to be impacted by higher costs and now higher interest rates, those who were able to lock in prior to recent increases with expectations of coming online in 12 to 18 months may see a  benefit as demand in those markets will continue to outpace supply. 

Self-Storage’s Future

However, while there are still good reasons to invest in the asset type, it’s necessary to be more careful. “We’re seeing a slowdown in market demand of asset sales due to higher interest rates nationwide,” Wilke explains, particularly in some areas that experienced high rates of migration. “The highest rate hikes were seen in Florida and Atlanta, which is why we are seeing the slowdown in these areas.” 

“I think we are kind of in a wait-and-see mode,” Nuñez adds. “Those who need to still sell are having to adjust their pricing expectations as compared to just three months ago.”

However, Wilke thinks eventually “capital markets are going to begin focusing on self-storage units in an attempt to offset the potential squeeze that is going to be felt in other asset portfolios, such as retail and the very slow rebound that field is experiencing.” 

Smart investors might look first to where market conditions are more amenable to the product class. Changes in migration will benefit rents, as will a graying population. . Less new development means better chances for higher rents. Nuñez says she’s seen statistics showing that New York saw a high construction rate of 19.6%, while Houston saw a low of 3.3%. 

Investors should also follow trends of what consumers seek in self-storage. “The market is now addressing the need for storing pandemic toys such as boats and RVs,” Wilke says. “Renters seek 24-hour easy and contactless access. Offer what people want to beat the competition.”