Self-Storage In a Middle-Market
The Self-Storage Industry Amid Overbuilding and Economic Shifts
The self-storage industry, long recognized as a profitable and recession-resistant investment, is navigating a transformative period marked by oversupply and economic uncertainty. Since 2018, steady demand has propelled the sector, with an estimated 14.5 million U.S. households leveraging self-storage solutions, according to the Self Storage Association. Once dominated by private investors, the industry has evolved into an attractive asset class for private equity groups and institutional investors. This evolution has fueled rapid expansion, with 276.9 million square feet of new storage space added in the past five years, including a record-breaking 98.2 million square feet in 2023 alone. However, this surge has led to oversupply challenges, positioning the sector in a “middle market” grappling with reduced housing mobility and slowing demand.
A Pandemic-Fueled Surge
The pandemic initially drove unprecedented demand for self-storage, as shifting migration patterns and work-from-home trends prompted record-high occupancy and rents. Developers responded aggressively, with construction spending peaking at $6.9 billion in 2023, a 24% increase over the prior year. Over the past three years, self-storage inventory grew by 8.9%, with 2.9% added in the trailing 12 months, according to Yardi Matrix. Between 2019 and 2021, the average construction spending on self-storage facilities was $4.4 billion.
The Oversupply Dilemma
As the sector expands, oversupply concerns have become increasingly prominent. Developers, once eager to capitalize on future housing developments, have been met with supply-chain disruptions and rising interest rates. This has left many newly-built storage facilities without sufficient customers to fill their units.
The number of abandoned storage developments rose by 104.2%, while deferred projects increased by 44.5%. Despite these setbacks, the construction pipeline remains robust, with 3.2% of existing inventory under development as of November 2024. Markets such as Las Vegas, Tampa, Phoenix, and Charlotte continue to see growth in construction, despite already experiencing heavy supply delivery in recent years. Urban markets like Las Vegas and Atlanta delivered over 10% of their inventory in a three-year period.
The South remains the most popular destination, capturing 40% of movers, while younger demographics aged 25-44 emerge as the most mobile segment, motivated by cost of living, job opportunities, and family needs.
Regulatory Pushback: A Tug-of-War with Development
In response to rapid buildout, municipalities across North America, particularly in secondary and tertiary markets, have increasingly imposed restrictions or bans on new self-storage projects, often citing concerns about land use, negative stereotypes, and the desire to attract higher-revenue businesses. For instance, Denver has banned self-storage within a quarter mile of any light-rail train station, New York City banned self-storage development in its 20 industrial business zones (IBZs), requiring special permits for approval, and markets like Miami
and Providence, RI have enacted measures to limit self-storage in mixed-use or residential areas. Some cities, such as Brentwood, CA, have discussed banning self-storage entirely.
A significant factor behind this backlash is the perceived economic contribution of self-storage facilities. Unlike retail or hospitality businesses, storage developments generate limited sales tax revenue and create fewer permanent jobs, leading some cities to demand mixed use developments that combine storage with more attractive commercial or residential components.
Impact on Rental Rates & Occupancy
Oversupply has also placed pressure on rental rates and occupancy, an additional stress on new facilities facing lease-up challenges. In Q3 2024, average revenue growth for major self-storage REITs turned negative at -1%, driven by a 60bps decline in occupancy and a 1.1% drop in realized units. Markets with heavy supply, such as Atlanta, Orlando, and Phoenix, reported some of the worst revenue performances. Conversely, markets like Washington D.C., Chicago, and San Francisco, which have experienced limited supply growth and improved migration trends post-pandemic, fared better.
Improvement in Advertised Rates
While occupancy struggles, advertised rates have shown year-over-year improvement. Nationally, rates declined 2.4% year-over-year in November 2024, a smaller drop from the 3.1% recorded in October. Non-climate-controlled (NCC) units posted a 2.1% decline, while climate controlled (CC) units experienced a 2.7% drop, both better than Q3 averages and the previous month.
Washington D.C. emerged as the first metro to report positive year-over-year advertised rent growth (around 1%) for all unit types, aided by reduced new supply and increased demand. Markets with the largest lease-up inventories, such as Las Vegas and Atlanta, are among the worst performers in rate growth. Interestingly, despite leading in new supply deliveries, Las Vegas has outperformed some other oversupplied metros. Its same-store advertised rates for main unit types decreased 4.4% year-over-year, which, while a decline, reflects resilience compared to steeper drops elsewhere.
On a month-over-month basis, advertised rates are declining as the industry enters its slower winter season. Rates fell by 0.3% in November, a smaller decrease compared to the 1.1% month-over-month drop in November 2023. Tampa stood out as the only metro with a month-over-month increase, buoyed by disaster related demand.
Orlando, despite facing the second most deliveries over the past year (5.5% of stock) saw an improvement in year-over-year rates with declines lessening by 1.8%. As of November 2024, 61.5 million net rentable square feet of self-storage space remains under construction across the U.S., adding pressure to occupancy and rental growth in oversaturated markets. However, construction activity is expected to taper in 2025 and beyond, potentially helping to rebalance supply and demand. Year-over-year improvements in advertised rates are anticipated to persist as operators benefit from easier comparisons to the aggressive rate drops seen in late 2023. Additionally, secondary markets with lower supply growth and robust demand fundamentals, such as Washington D.C., offer more stable performance prospects amidst these challenges.
Competitive Evolution in Market Rents
The self-storage industry has moved from a market dominated by mom-and-pop operators to one increasingly influenced by larger institutional players. Historically, smaller operators—which prioritize tenant retention with stable rates, personalized service, and basic facilities—often lack advanced technology or polished aesthetics. However, the entry of larger owners with streamlined operations, upgraded facilities, and aggressive marketing budgets has intensified competition, elevating the overall standard of the industry.
These larger operators have introduced dynamic pricing models, adjusting rates weekly or even daily based on availability, to maximize returns. While this approach prioritizes revenue over occupancy, independent operators, who still own about 65% of facilities, often maintain near-full occupancy by keeping rates below market averages. This affordability continues to attract renters and retain existing customers.
For both independent and institutional players, navigating the current market demands a sharp focus on cost efficiency, the strategic application of dynamic pricing, and the exploration of underserved markets. The self-storage industry’s ability to adapt to these evolving dynamics will be critical in shaping its future success.
2025 Market Outlook
Despite recent dips in rental rates, mobility is poised to drive a rebound in self-storage demand in 2025. A survey conducted in late 2024 revealed that 37% of Americans are planning or considering a move within the next 6-12 months—a significant increase from earlier years. With the Federal Reserve signaling potential rate reductions, the same survey noted that 13% of respondents would be more likely to move if borrowing costs decline. If rate cuts materialize and the surge in relocations commences, pent-up demand for housing and storage solutions could counterbalance market concerns about oversupply and softening rental rates.
