Self Storage Outlook Improves Amid Household Formation, Migration

The outlook for the self-storage sector is improving as new household formation accelerates, and migration to new cities encourages residents to make use of self-storage units until they have settled in.

And while these migrants often head to the popular Sun Belt or Rocky Mountain regions, many are now seeking out smaller tertiary cities there to avoid the rising cost of living in big metros – especially retired households and professionals who can work remotely.

A midyear report on the sector by Marcus & Millichap said this creates self-storage opportunities for private investors, who are more active in small markets and rural areas, while large investors favor major metros. More than half of the new supply has gone to just 25 of the nation’s total markets. “Since 2020, less than half of all institutional sales activity has taken place outside of major markets,” the report noted.

In contrast, local existing self-storage properties can benefit from the combination of less development and stronger demographics.

Nationally, self-storage vacancy is projected to rise again in 2024, up 40 bps year-over-year, but by its smallest margin in three years despite an influx of new supply. The report estimates that almost 80 million SF will be added this year, with 40% flowing to 15 metros.

“A moderating influence on higher vacancy has also come from the nuanced rent dynamics now taking place in the industry,” the report commented.

Asking rent for a standard 10-by-10-foot unit fell 6% through June this year. The report noted a 2.5% decrease in year-over-year asking rent, and predicted the national average would slump for a third straight year to $1.19 per square foot. But it also noted a countervailing factor.

“Rising in-place rents more than offset the drop in marketed rates,” the report commented. “These discounts instead can serve as loss-leaders for new renters, as part of evolving pricing models taking hold in the sector.”

Data from the largest self-storage REITs showed overall rent from both in-place and new renters held about flat year-over-year through June, after rising a combined 30% over the previous three years.

And despite a 40% jump in the self-storage inventory in the past decade, investors continued to participate, with a 200% jump in the number of yearly trades, including private investor activity. “As more organizations have entered the sector, business models have become more complex, especially in the nation’s larger markets where institutional investors have placed the most focus,” the report noted. Even if unemployment climbs and job insecurity rises, the report predicted it would have little impact on longer-run demand dynamics.

Meanwhile, investors continue to pile in, exceeding historical averages, buoyed by the hope of lower benchmark interest rates. Transaction activity rose more than 50% between 1Q 2024 and 2Q 2024. More assets priced between $10 million and $20 million were traded over the fourth quarter ending in June than in all of 2021. Most were in secondary or tertiary markets like Sacramento, Phoenix, Colorado Springs and Oklahoma City.

Large self-storage REITs have also adopted new strategies for success, with some going beyond mere acquisition to offer management services and enter joint venture developments with partners.

“Overall, capital is available for well-performing properties, but unstabilized assets or new construction proposals face greater scrutiny,” the report concluded.