The self-storage sector has decelerated from its peaks in 2021 and 2022, but the sector continues to outperform its pre-COVID levels. Fourth quarter 2021 saw $13.5 billion of investment in self-storage, per a new report from Cushman & Wakefield.
The report reveals there was a 57 percent year-over-year decrease in U.S. self-storage transactions in July. Occupancy levels remain high nationwide though, averaging around 90 percent, as the Midwest and Southeast markets experienced a slight decrease in occupancy rates, while the Northeast and Southwest markets continued to see relatively steady occupancy growth.
Self-storage has traditionally had higher capitalization rates than certain other property types, such as apartments, reflecting the higher risks that investors perceived in the sector. Yet, in second quarter 2023, self-storage cap rates neared an all-time low, averaging 5.1 percent, at the same time that apartment cap rates have risen. This indicates investors are now looking to self-storage for superior risk-adjusted returns. Given current market conditions, however, Cushman & Wakefield predicts self-storage capitalization rates will rise in the near term.
Average rents have come down slightly from their 2022 highs, yet are still roughly 30 percent above pre-pandemic levels nationally. While Generation X currently makes up the largest share of self-storage users, at 54 percent, millennials, who currently make up 40 percent of self-storage users, are aging and are a larger cohort (there are 72 million millennials, compared with 65 million “Gen Xers”). The report asserts that the sizable aging millennial population will lead to higher demand for self-storage in the coming decade.
Cushman & Wakefield also discussed how developments in artificial intelligence (AI) will affect the self-storage sector. AI’s ability to analyze data and to make decisions will lend itself well to aiding investors in more accurately forecasting where there is substantial demand for self-storage facilities. AI can also assist self-storage companies with marketing and services, which could help to attract and retain customers.
According to data from Yardi Matrix, overall street rates (for all unit sizes and facility types) dropped by $1 in July, to $141, down 0.7 percent month-over-month. This is particularly noteworthy as July has typically been a month for self-storage rate growth. Yardi Matrix’s report is based on its profiles of 30,152 completed self-storage properties, as well as 4,916 properties across the country that are currently in various stages of development (all in the United States).
One of the causes for declining street rates is the prevalence of new supply, thanks to large investments in self-storage in 2021 and 2022. As examples, Yardi Matrix points to Las Vegas and Phoenix, where storage completions in the past 12 months account for 4.8 percent and 3.8 percent of current stock, respectively. The resulting increase in competition has led to drops in street rates (compounded by the slowdowns in those cities housing markets). In metros where supply has remained low, there has been better street rate performance, such as in Pittsburgh, Los Angeles and San Diego.
Lewis Dayton is associate editor at Institutional Real Estate, Inc., parent company to this magazine.