Self-Storage: After Pause, Opportunities Begin to Emerge

Going forward, we expect a recovery in self-storage fundamentals over the medium term due to a combination of demand and supply related factors.

Over the past two years, self-storage has seen fundamentals normalize as the pandemic induced boost in demand has subsided. Higher mortgage rates have led to a decline in home sales, a pivotal seasonal demand driver and a proxy for population mobility (See Exhibit). With sellers reluctant to trade lower in place mortgages and buyers facing high home ownership costs, home sale volume is at a decade low.[1] For reference, 77% of outstanding mortgages are below 5%, around 200 bps below where mortgage rates are currently.[2] Simultaneously, new completions continued to enter the market post-COVID.[3] Given that self-storage properties take longer to stabilize, new supply can strain fundamentals for an extended period relative to other property types. Both supply and demand related factors have put downward pressure on occupancy and move-in rates.

 

Home Sales Activity and Self-Storage Occupancy

 

Source: NCREIF and NAR. As of March 2024.


Despite these challenges, 2023 NOI growth for the property type was a positive 3.9%.[3] This was primarily due to existing customer rental increases (ECRIs), a revenue maximizing mechanism unique to self-storage. Over time, existing customers are hit with frequent rent renewals offsetting the negative impact of declining move-in rents on revenue. This mechanism is particularly effective in self-storage for a few reasons. First, self-storage leases are monthly, allowing for frequent rent resets. Second, tenants tend to be sticky with 50% of existing customers staying longer than a year; this is a 10% increase since pre-COVID.[4] Last, self-storage rents, on average, make up about 2% of monthly median household income. As such, large increases in renewals can be absorbed by a sticky customer.[5]

Going forward, we expect a recovery in self-storage fundamentals over the medium term due to a combination of demand and supply related factors. From a demand perspective, expected rate cuts should provide some relief to low home sale volume, encourage population mobility, and lead to stronger seasonal demand. We expect this relief to materialize not just as a normalization of the home sale market, but also potentially as a release of pent-up demand created due to today’s high mortgage rates. Pent up demand could create a period of slightly higher-than-average home sale activity. On the supply side, project sponsors are reporting a difficult and expensive construction-financing environment.[6] A combination of declining supply and recovering demand should create a ripe environment for the property type over the medium-term. Separately, longer than expected lease up periods, declining move-in rates, and maturing construction loans are creating opportunities to acquire newly delivered self-storage properties at an attractive basis.

Structural demand drivers also remain intact. First, we are seeing improved household formation rates among millennials, a demographic that is using self-storage at higher rates than other generations.[3] Second, with office attendance still half what it was pre-Covid, hybrid work seems like it is here to stay for the foreseeable future, creating demand for more space.[7] This is especially important as apartment developers did not consider the need for this new lifestyle preference prior to the pandemic. As a result, the existing overweight of small unit sizes and lack of multiple bedroom designs may not meet the needs of dwellers and could continue to generate additional demand. 

Additional Resources

Embracing the New Normal in the U.S. Office Sector

The office sector is going through a period of change intensified by COVID-19 lockdowns.

U.S. Real Estate: Risk or Opportunity?

Doomsday headlines may persist, but do not be fooled: The outlook for real estate is getting brighter.

1. NAR. As of March 2024.

2. FHFA. As of December 2023. Primary Mortgage Market Survey (PMMS). As of May 2024.

3. Green Street. As of January 2024.

4. Self-Storage Almanac. As of December 2023.

5. Yardi-Matrix; U.S. Census Bureau. As of December 2023.

6. Yardi-Matrix. As of March 2024.

7. Kastle Back to Work Barometer. As of May 2024.

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