Self Storage Facing Multiple Headwinds Including Softening Demand

Softening demand that is mirroring migration and home sales trends has led to continued negative rent growth for the self storage sector, according to Yardi Matrix’s National Self Storage Report for October 2023.

Street rates fell month-over-month in September and year-over-year. That Minneapolis only fell 0.7% month over month made it a top performer.

The report said the decline in monthly asking rates was broad-based across the nation, with same-store street rates per square foot falling month-over-month in the top 31 metros.

Self Storage Tracks Existing Home Sales

Charles Byerly, CEO of Westport Properties, tells GlobeSt.com that since July 2022, the demand for self storage has been under pressure, tracking the decline of existing home sales which has been on a steady trend downward with the increase in interest rates.

“Mobility is the number one driver of self storage demand and when consumers buy or sell a home, which is a big piece of the mobility equation for storage, that consumer is a great candidate to use self storage.

“The pressure on demand could last for a while with interest rates remaining high which is leading to some to believe rates will remain higher for longer than initially anticipated. If this persists, self storage will need other demand drivers to pick up the slack.

“This will be important as some new supply continues to creep in, although new supply overall should slow down as projects get shelved due to high interest rates and costs.”

Not Seeing Signs of Distress

Not everyone agrees.

“There has been some softening of asking rents but we’re not seeing any signs of distress,” Brian Somoza who leads JLL’s Capital Markets self-storage team tells GlobeSt.com. “2023 has continued to see healthy YOY revenue growth, which is coming from the tried-and-true ECRI (Existing Customer Rate Increases) model that has long been the driver of operational success for storage.”

Newmark’s Vice Chairman of Newmark in the Houston office, Aaron Swerdlin is also sanguine about the sector, telling GlobeSt.com that for most of 2023, demand for storage has normalized to just above pre-pandemic levels after sitting at historic highs for most of 2020 through 2022.

“As we have moved through 2023, the demand normalization led to adjustments in pricing approaches, with the industry as a whole incentivizing new tenants with lower move-in rates,” Swerdlin said.

“Even during the peak-pandemic demand, significantly more than 50% of revenue growth came from rent increases on existing occupancy, and not from increases to street rental rates. These revenue management strategies rely upon physical occupancy to drive growth.

“Hence, the overwhelming focus has been to stimulate move-in volume, which is best accomplished through discounted rental rates.”

Looking to 2024, I anticipate we will see the historically normal trough in February and rental rates will begin to rise from March through August, making 2024 a more historically normal year across the operating landscape.”

Still Feeling Impacts of Pandemic

Neil Schiller, Co-Founder of Government Law Group points out that the negative growth rate is focused on markets still feeling the impacts of the pandemic.

“While the overall migration from cities in the Northeast and the West has slowed, affecting the overall real estate market, areas such as Central and South Florida are still seeing growth in the local storage industry,” he tells GlobeSt.com.

Self-storage demand is mostly based on existing and proposed rooftops; so, it’s no wonder that construction of new facilities is occurring at a faster pace in southern areas of the country, Schiller explains.

Despite these headwinds, self storage remains one of real estate’s most resilient asset classes, says Katharine Lau, CEO and Co-Founder of Stuf. “While self storage remains a darling among real estate investors, it is not immune to the confluence of high inflation, high interest rates, a slowing housing market, and post-pandemic normalization,” she tells GlobeSt.com.