Self-Storage Faces Tougher Lending Environment As Demand Returns to Pre-Pandemic Levels

With so many people accumulating so much stuff and periodically moving, it’s no wonder that the self-storage category has been deemed recession-resistant, if not recession-proof. Many don’t have room for everything within their apartments and houses or follow through on Marie Kondo’s advice to tidy up. 

Moreover, many can’t move and find a bigger place, so they stay put and continue to stash their belongings in storage units. Top among this group are Gen Xers and female renters.

Yet, despite the need, the category reflects the same ups and downs of other real estate segments. According to attendees at the recent National Association of Real Estate Investment Trust conference in Chicago, the big surge of more renting a self-storage unit is cooling and returning to pre-COVID-19 levels, according to an analysis of the conference by Green Street. The move-in rate growth has declined in the low double-digits year-over-year. Recession talk and banking woes spurred numbers to drop to a low point in March, then they rebounded a bit in April and May, according to Green Street.

Occupancy and Existing Customer Rate Increases (ECRI) reflect a similar trajectory. ECRI trends, once in the 25% and higher range during Covid’s peak, remain strong but have dropped to about 15%. Occupancy levels also softened. Before Covid, the ECRI numbers were about 10%.

Because the usual peak leasing season that occurs around this period has been sluggish and move-outs are expected to return to more typical levels come fall, the same current same-store NOI growth estimates for Fiscal Year 2023 of 4.9% are anticipated.

 And like the rest of commercial real estate, self-storage operators and developers are also dealing with a constricted lending environment. There are fewer and more selective lenders who will offer attractive loan terms and interest rates. The result is a lower transaction volume. 

Also noteworthy is where self-storage shows healthier possibilities. What’s occurring is a bifurcation between primary and secondary markets, the conference revealed. Large, urban markets show greater resilience. The reason cited is that these facilities cater to a stickier tenant base that emphasizes renting storage for lifestyle purposes. Many in this category have few options to move and rent by necessity, so they need more space to store what they can’t fit into apartments. Areas like New York and its boroughs are “notorious for limited living space,” Green Street said. For the first quarter of this year, the same-store NOI growth was 9.1%. In contrast, smaller markets are more vulnerable due to their less sticky tenant base.

But even with moving activity slowing, Public Storage Chair Ron Havner told GlobeSt.com that he doesn’t expect people to give up their storage space. In fact, some may increase it if they opt for smaller apartments to save on rent.