Self-Storage Market Growth Insights

Transaction volume on the buying & selling of self-storage facilities is down over 60% in 2023. We acquired 16 storage facilities this year, and I can personally attest it was much harder than we anticipated. Here’s what’s happened: Self-storage had a monster bull-run between 2020-2022. Record-low interest rates allowed people to pay sky-high multiples to buy storage. A huge spike in consumer demand for storage helped drive occupancy and revenue, leading to many stores seeing back-to-back years of 30-50% growth in operating profits. The industry was red-hot, and everyone wanted a piece of the action. If you owned a storage facility, you were probably getting phone calls and unsolicited offers to buy your facility on a nearly daily basis during this stretch. These offers were strong and coming in constantly. Even if you didn’t bite on them, they were hard to ignore. Fast forward to today. The music has slowed down. Low interest rates are gone. Multiples and valuations have had to come down off their meteoric highs. Consumer demand for storage is back to normal levels. Operating profits are moving closer to their historical averages. The gasoline that fueled the frenzy has pretty much evaporated. The problem is, benchmarks jumped up and then back down with such strong force in a very short amount of time. A huge bullwhip effect, which happened with unprecedented speed. Imagine owning a storage facility, and just 18 months ago having someone tell you it is worth $10M. But when you go to sell it today, you might only get $7M. Not an easy pill to swallow. As an owner in that kind of a situation, you have a few choices: 1️⃣ Sell at this perceived discounted price (valuations are still above pre-2020 levels so there is still money to be made by sellers) 2️⃣ Wait a few more years for interest rates to go down and hope that we start moving back towards the previous highs. 3️⃣ Don’t sell. Keep holding and printing money from operating the facility Unless someone has an urgent need to sell, they are typically not picking Option 1 right now. This has significantly thinned out the number of sellers who are ready to move at today’s prices, and thus transaction activity has thinned out. There is still lots of interest in storage from buyers. But simply not enough sellers who are willing to come to terms at today’s prices. In our business, every acquisition we had this year was pretty much finding a needle in a haystack. We sifted through thousands of facilities and owners in order to find a few that were willing to move at today’s prices. I am sure with time, the market will return to a more normal balance. But right now, storage is a microcosm of what has happened in the broader economic landscape.

Think Self-Storage is facing a difficult time? On the surface you'd be right. But peel back some layers and see what's underneath. 4% revenue growth last year as the housing market cooled and so did the normal rental patterns that go with movement of people. It's well established that homeowners locked in to rates as low as 2.5% (or even slightly lower) are in no hurry to sell their homes in order to buy something at 7%+. That makes a massive difference in home prices. The median home price in the US is $416,000. In late 2021 when mortgage rates dipped under 3% that meant you could get a mortgage for $1644/month at 2.5%. That same mortgage now at 7% (Which is a little low based on todays rates) runs you more than $2700. At the same time inflation has hit every other expense as well (Including Self-Storage obviously). This has stalled movement, the single biggest driver of storage. And yet Self-Storage rates are still going up? What's driving this trend. It's pretty simple really. There is more money circulating than ever before. And the REIT's (Publicly traded Self-Storage Operators) have been driving up rates for existing tenants since shortly after Covid began and it was clear that tenants weren't going anywhere. In fact a huge influx of renters came online as people cleared out space in their homes so they and their kids could work/school during the Pandemic. Fast forward a couple years and new rentals have cooled considerably, and rates for new tenants are down substantially from pre Fed rate hikes. But this hasn't slowed revenue growth. What has slowed is new development. The trifecta of rising rates, rising land prices and rising construction costs made projects very hard to pencil in late 2022 and through 2023. What's that going to mean exactly. Likely a 15 to 20% reduction in the number of new Class A facilities coming on line over the next few years. At the same time Gen Z is renting storage at a rate nearly TRIPLE Baby Boomers (16% to 6%). As Baby Boomers phase out of the market and are replaced by a greater precentage of Gen Z, expect the total percentage of Americans who use Self-Storage to rise. Even in 2022 when new developments came online at record rates, the available storage nationwide relative to population dipped. 6.2 sq ft per capita down to 6.1 sq ft per capita. What does this all mean. It's a pretty simple formula. People will start to move again eventually. But even if we see a long term trend to less movement (highly unlikely based on historical trends) less supply with increased demand always leads to the same place. Over the next five years (The life cycle of a Class A facility from ground breaking to economic stability) expect the asset class to continue to see slow and steady revenue growth. Just like it's seen for the last forty years. Some things never change.

🚨 Did You Know? Self storage is quietly rebounding—and the Midwest is leading the charge. 📦📈 After two years of ups and downs, markets like Chicago are seeing rent growth of nearly 3% YoY, thanks to strong housing demand and tighter supply. Compare that to Austin and San Diego, where oversupply has sent rents sliding by 3%+. 👉 National street rates are stabilizing, down just 0.1% YoY, and even rising 0.7% in June. 👉 REITs are flexing their pricing power, up 1.3% YoY on stabilized assets. 👉 New development has slowed in key cities—just 4.1% of inventory underway in Chicago vs 6.6% in Las Vegas. 💡 For CRE investors and developers, this signals a pivot point: the overheated Sun Belt may cool further, while Midwest metros are heating up. #CRE #SelfStorage #RealEstateTrends #CommercialRealEstate #MidwestMarkets #YardiMatrix #Multifamily #RentGrowth

Self-storage is no longer a backlot business—it’s a frontline investment strategy. In this edition of The Commercial Real Estate Report, we break down why I remain LONG self-storage, despite market volatility and development slowdowns. From shrinking home sizes highlighted in D.R. Horton’s latest earnings call to deep insights from the California Self Storage Association conference, this newsletter unpacks: *Why Millennials are driving a structural demand shift. *How development has dropped off a cliff—creating a future supply crunch. *What capital markets are signaling for smart investors. *Why California, despite its red tape, still offers unmatched upside. *How a lawsuit in Maryland could redefine zoning laws across the U.S. If you’re a broker, developer, or investor—this is your competitive edge. Read on and listen in to the full podcast to get ahead of the next storage cycle shift.