Negative Storage Headlines: What Do They Mean?

Last week, an article was published in the NYTimes with the headline, “Americans Went All-In on Self-Storage. That Demand Is Suddenly Cooling.” The article primarily cites oversupply in markets like Atlanta and Phoenix and the cooling of pandemic migration behaviors. This isn’t the only article to assert cooling demand and highlight lower pricing for self storage units. One of our principals, Cory Sylvester, responded to this article on LinkedIn earlier this week, too.

We say this at almost every meeting, “The Achilles heel of self storage is oversupply.” It happens in many markets, every cycle. Understanding that this product type is particularly prone to overbuilding means that focusing on trade areas (roughly a ten-minute drive time from the subject site) with high barriers to entry is, if not essential, extremely important. Mitigating trade-area competition during the lease-up phase is important to protect the rental rate projections and timeline of a self storage investment. We also know that fewer self storage facilities have been delivered over the last couple of years and expect to deliver even less in 2024-2026.

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Self Storage Supply Growth

It is very likely the NYTimes article's author looked at markets that were oversupplied some time ago and are taking longer to lease up than anticipated. That’s what any seasoned self storage investor or developer would expect to see and why trade area analysis and barriers to entry are important. The most recent DXD delivery in Daytona has blown our projections out of the water, achieving 10% occupancy inside the first month–about 4x what we would expect.

Pandemic migration cooling and the rapid rise in interest rates means that fewer people are selling homes and moving across the United States. This is well documented and fairly straightforward: Whether you’ve just moved and completed the transition to remote work or you want that job in Denver, but don’t want to give up your 4% fixed-rate mortgage in Austin, the result is the same in the near term. You and your family are staying put, kicking the can, waiting for a better moment. At any given time, about a quarter of self storage tenants are in the process of moving. This demand has cooled over the last year, which is part of the reason for falling “street rates.” But it’s just one small piece of the puzzle, not a fundamental change for the industry.

We have written extensively about the REIT rate strategy change that happened about 18 months ago. Because the web rates/street rates/promo rates have been slashed so drastically, the falling rents look exaggerated in an analysis that isn’t contextualized by looking at the existing customer rate increases. The result is below; at the same time that web rental rates are declining, the achieved rent and revenue continues to grow.