Self Storage Investors Wait for Housing Recovery, Lower Rates

This is supposed to be the “busier” spring leasing season for self-storage but the mood in the industry is mostly “somber” but optimistic for the future, according to a new report from Yardi Matrix.

“Performance slipped in 2023 and there are few signs that market conditions are picking up,” according to its “Self Storage National Report.”

The industry is hoping for a recovery in the housing market later this year or in early 2025 that would bolster the sector.

Sellers are waiting for more certainty on interest rates and a bottom for street rates and occupancy, which has slowed deal flow. Meanwhile, street rates continue to decline year-over-year across top metros, remaining negative in February.

The average annualized same-store asking rent per square foot was $16.37 nationwide for the combined mix of unit sizes and types, according to the report, marking a 3.6% decrease compared to the national average of $17.16 recorded 12 months prior.

Adam Roossien, Director, JLL Capital Markets, tells GlobeSt.com that declining street rates are the primary topic of discussion across the sector today, but optimism continues to be fueled by the fact that average in-place rates, which decide actual rental revenue, have continued to grow year-over-year.

Public Storage’s average in-place rate during 2023 was $22.94, compared to $21.67 in 2022, marking a 5.9% increase thanks to successful revenue management via ECRIs, Roossien said.

“Self storage continues to outperform as it always has, but we can still expect a tone of conservatism across the sector until street rates improve,” he said.

Tom Dao, Principal, Gantry, tells GlobeSt.com that while the mood may appear gray, year-over-year revenue increases in actual performance are occurring.

“Stores are still experiencing increases in existing customer rate increases (ECRI),” Dao said. “New facilities in initial lease-up are experiencing pressure on street rates, especially when larger operators are cutting rates to fill up their facilities.

“From a lending perspective, more conservative lenders are looking for performance history and awarding loans that show continuous strong performance. Other lenders also focus on real estate underwriting fundamentals: Strong location, strong demographics, good expense management, strong sponsorship, as well as consistent performance.”

Waiting for a Home Sale Rebound

Although growth for online rental rates has been negative, there is more to the story, according to Drew Dolan, Fund Manager and Principal, DXD Capital.

He tells GlobeSt.com that “REIT operators have changed their rental rate strategy in the past 18 months, which has resulted in an exaggerated perceived drop in rental rates.

“Operators have introduced ‘promo’ rates, which are online exclusive prices well below the rental rates of existing customers, constituting the real market rate. This low rental rate is structured as an introductory rate, and customers can expect to see rent increases as soon as a couple of months after occupancy.”

The lack of home sales has led to fewer home movers, affecting the self-storage industry.

“While this has resulted in a short-term macro demand reduction, it is expected to manifest as pent-up demand once the home buying and selling activities normalize,” he said.

“Acquisitions of existing facilities and ground-up development have slowed to a trickle largely due to a difficult and expensive debt environment and sidelined institutional capital. The deceleration in new development is a positive trend for the self-storage industry, as it significantly reduces the risk of overbuilding in the next half-decade.

“This implies that the current deals are the most promising opportunities in the current cycle. Despite the perceived decline in rental rates and the tight capital market, development opportunities are robust enough to attract debt and equity.”

DXD analyzed 69,000 opportunities in 2023 and successfully executed seven investments last year, Dolan said.

With interest rates remaining high, self storage providers are all fighting for a reduced bucket of demand, according to Charles Byerly, CEO of Westport Properties.

He tells GlobeSt.com that 2024 will continue to be a challenge for occupancies and pushing rents.

“We’re hopeful with the slight pause in development today and the hope for interest rates normalizing over the next 12 to 24 months, that 2025 and 2026 will be very strong. For now, operations are a continuing challenge that we all are facing.”

Chris Tourtellotte, Managing Director, LaTerra Development, LLC, tells GlobeSt.com that he remains optimistic about the future of the self-storage industry because as Millennials enter their prime years for first-time homebuying, he expects to see continued increases in household formations, particularly with an expected rebound in existing home sales as interest rate cuts commence.

“New supply will decrease going forward as new construction starts continue to drop, which should bolster occupancy and rent growth in 2026 and beyond, especially in already supply-constrained markets such as Los Angeles, which has one of the lowest square feet of storage per capita of any market in the US,” Tourtellotte said.

Some Reducing Space, Need Storage

Tricia Peterson, Managing Partner at Accord Group Holdings, tells GlobeSt.com that uncertain and inflationary economic times such as these can often lead consumers to substantially reduce the square footage of the spaces where they live and work, which establishes a subsequent expanding demand for self-storage opportunities where belongings can be safely stored on a month-to-month rental basis.

Cushman & Wakefield recently reported that cap rates for self-storage reached an all-time low of 5% in the fourth quarter of 2022, only a mere 7 bps above the average multifamily cap rate. As interest rates rose in 2023, average cap rates remained low, averaging 5.1% in the second quarter of 2023, even while cap rates fluctuated across various other sectors.

“Some investors look at self-storage as a haven of sorts due to the asset class’s countercyclical nature and ability to thrive in both good and bad economic conditions,” Peterson said.

“When the economy is struggling, the increase in foreclosures, downsizing, and other financial forces grow the need for affordable storage options, thus catalyzing the consumer demand for self-storage.

“Conversely, when the economy is booming, people tend to move and increase their discretionary spending, both of which are financial actions that bolster the need for spaces like self-storage to store and organize personal items.”

Net Lease Spring:

Held April 16-17 in NYC, Net Lease Spring will bring together hundreds of dealmakers from the nation’s top firms. This year’s program will feature 5.5 hours of face-to-face networking and over 5 hours of content focused on micro and macro trends for 2024, being resilient through market volatility, how to serve your corporate tenant clients and much more! Learn more or register here.