You’ll see that advertised rates can change as much as 30% or more within a year’s time because operators are constantly adjusting pricing strategies to reflect the demand in the market. With a high student population in Austin, there’s a predictable summer surge in demand that operators respond to in real-time.
Due to the fast-paced nature of self-storage operations, advertised rental rates and in-place rental rates vary widely at the facility level, let alone within a submarket. Advertised rates can tell us a lot about self-storage demand.
Before diving into the insights these rates can provide, let’s define some key terms that are foundational to understanding self-storage pricing dynamics:
Web Rates: The rates advertised online, often discounted to attract price-sensitive shoppers. These typically include short-term promotional pricing.
Street Rates: The street rate for a particular unit is the rate that a customer would be charged if they were to walk in off the “street” and rent a unit in person at the facility. Given that customers are less likely to price-shop in this scenario, the street rate is typically higher than the web rate.
In-place Rates: The actual rates paid by existing tenants, which can exceed both web and street rates due to regular existing customer rent increases (ECRIs) after the initial promotional period.
See an example below from a CubeSmart facility. TractIQ tracks both the advertised web rates as well as the crossed-out advertised street rate to help investors inform their assumptions.
Now that we have a foundational understanding of web, street, and in-place rates, we can further explore what these rates and their relationship tell us about self-storage demand.
PART ONE: 2018 to 2020 (Pre-COVID): Discounting Rose by 50% as Self-Storage Demand Softened and Supply Increased
The graph above shows average street rates and average web rates across all unit sizes and facilities in the country from 2018 to 2020. The graph also shows the average difference between the street and web rates aggregated per-unit (yellow line).
In late 2019, demand for self-storage decreased as more uncertainty entered the U.S. market. The uncertainty was fueled by several factors.
- Dramatic policy shifts at the Federal Reserve. The Federal Reserve raised rates four times in 2018 and then decreased rates three times in 2019
- Trade/tariff negotiations with China, Mexico, and Canada
- Fear of a slowing global economy due to trade negotiations and Brexit
- The yield curve inverted that fueled fears of a recession over the next 1-2 years
- U.S. manufacturers reported slower manufacturing activity
At the same time demand for self-storage was softening, new storage supply was beginning to lease up after a record year in 2018. According to the 2020 Self-Storage Almanac, about 600 facilities were delivered in the top 50 markets in 2018. The total value delivered in 2018 was estimated at $5.25B, a 33% increase from 2017. Not only were more facilities being delivered, but the average size of new facilities also increased to 60,000 SF from 54,000 SF the prior year. This added supply eventually led to longer lease up timeframes and increased competition among operators.
Due to the uncertainty, added competition, and a decrease in self-storage demand, operators started discounting web rates as indicated by the upward trend of the yellow line in the graph above. We also observed an immediate spike in April 2020 as COVID picked up and operators drove discounting up to nearly 30% as an immediate response, up from ~20% the year prior, representing a 50% increase.
Broad economic events impact the self-storage industry. As uncertainty and competition are introduced into the market, self-storage demand suffers, resulting in operators discounting rates to attract a now more price-sensitive customer base.
PART TWO: 2020 to 2022 (COVID): As Self-Storage Demand Boomed After COVID, Rates Spiked and Discounting Decreased by 50%
The above graph shows data for a time period when self-storage demand increased to unprecedented levels (2020-2022).
To emphasize just how strong self-storage demand was at the time, Public Storage reported a same-store portfolio occupancy of 97.0% in Q2 2021. This occupancy figure is the highest occupancy ever reported for Public Storage since information became available in 2002. Street rates also increased from $1.56 in June 2020 to $2.20 in September 2021, a 41% increase.
The massive increase in demand was driven primarily by the COVID pandemic. During this time, people relocated from populous city centers to suburban areas. Interest rates were also extremely low, making it more affordable to change residences. The Federal Funds Effective Rate was 0.08%, and the 30-year fixed mortgage rate was 3.01% by the end of September 2021.
According to the SSA 2023 Self Storage Demand Study, moving is a major demand driver for self-storage. 35% of renters from the study who have short-term rental needs indicated they use storage because they are moving. As a result of lower interest rates and migration from city centers during COVID, demand for self-storage significantly increased.
Evidence of this can be seen in the graph above. You can see discounting started to decrease in late 2020 (yellow line). Because demand was high, operators gained more pricing power and did not have to discount web rates as much to attract customers.
Within the timeline of the graph above, operators seized the opportunity by raising street rates ~35% and reducing discounting to ~15% at the peak, down from ~30% shown in June 2020. In the second quarter of 2021, demand topped out and discounting dropped to an average of ~15% for the quarter which fueled a large increase in self-storage transaction activity.
Sales volume for self-storage increased by 267% from ~$6.5 billion in 2019 to $23.9 billion in 2021, according to RCA. Sales volume decreased to $14 billion in 2022, but still ~66% above 2020’s volume. As evidenced by the increase in transaction activity, investors were bullish on the self-storage industry with seemingly no end in sight to demand.
PART THREE: 2022 to 2024: Softening Storage Demand Since 2022 Increased Discounting by 120%
The period from 2022 until the end of 2024, as shown in the graph above, has been challenging for the self-storage industry for mainly two reasons.
- Increasing interest rates and falling home sales
- Oversupply, due to a development lag
Because the market was so “hot” from 2020 to 2022, developers were justified in building more self-storage due to high demand. According to the U.S. Census Bureau, self-storage construction spending of $6.9 billion in 2023 marked a 24% increase over 2022.
While 2023 marked a record year for self-storage construction spending, self-storage demand peaked in 2021. This suggests that developers and operators were late to capitalize on the overwhelming demand as they likely planned and entitled projects in 2021/2022, with construction starting in 2023. This is an unfortunate lag in timing as newly built self-storage projects began to deliver in 2023 during a time of decreasing demand.
The construction lag further highlights how pricing and discounting are, perhaps, better ways to capitalize on fickle market fluctuations. It also suggests the importance for developers to signal entry into a market. This may cause other developers to think twice before building additional storage, creating more competition.
Oversupply creates more competition between operators and shifts pricing power to the customer. In Q3 2024, the difference between street rates and web rates was ~40% (yellow line). This level of discounting even exceeds early-COVID levels, which was ~30% at its peak. Softening demand led to slower lease ups, resulting in operators being more aggressive on pricing to attract customers.
TractIQ currently tracks over 4,400 self-storage sites under development and provides data on:=
- Projected gross and net rentable square feet to be delivered
- Project details and project logs including dates and stages of construction (concept, planning, under construction, etc.)
- Developer contact information
The data on the next page from TractIQ shows the number of self-storage development projects and incoming net rentable square feet by state across the nation.
PART FOUR: Macro Policy Decisions Directly Influence Self-Storage Operations
The above graph overlays the Federal Funds Effective Rate against the percent difference in street and web rates. The correlation between these metrics is positive and discounting tends to lag behind interest rates.
For example, as a result of the Federal Funds Effective Rate being near 0% from 2020 to 2022, too much storage supply became an issue as developers took advantage of cheaper financing. Higher discounting soon followed as operators worked through the oversupply over the next two years.
Storage demand is also significantly impacted by changes in interest rates. Increasing rates puts pressure on the consumer’s discretionary spending and also makes changing residences, a major demand driver for self-storage, more expensive.
Why purchase a new home with a mortgage at a 6% interest rate when you could stay in your current home at a 3% interest rate? This has caused a major slowdown in the residential housing market.
In fact, existing home sales dipped to a 14-year low in September of 2024. When people aren’t moving, self-storage demand suffers.
PART FIVE: REITs Drive the Discounting Strategy in Self-Storage
The graph above shows street rates, web rates, and the average difference of those rates for just the self-storage REITs (Extra Space, CubeSmart, Public Storage, NSA). You will notice from the green arrows in the REIT graph above that the minimum value of the street/web rate % difference is ~15% while the maximum value is ~42%. This is a wide spread and shows that as demand decreases, REITs compete for customers by aggressively discounting and offering the most competitive prices (web rates).
REITs can afford this strategy for a few reasons.
- REITs have robust revenue management teams and change web and street rates quickly using complex algorithms.
- REITs have a volume advantage. The cost of a single customer, or several customers, defecting from a single store is low if and when their models “get it wrong”. REITs can also afford to capture an entire submarket by lowering rates more than their competitors to increase occupancy. Regional operators or owners of single stores may not have this margin of safety.
- REITs have large cash reserves and the lowest cost of capital. The table below shows cash balances and weighted average interest rates on all debt for the REITs as of September 30th, 2024. The REIT interest rates are 200+ bps better than what the market currently offers, depending on the risk of the project. This allows the REITs to withstand macro pressures and sustain discounted pricing longer than smaller operators.
REIT | Cash | Wtd. Avg. Interest Rate |
Extra Space | $88.9MM | 4.5% |
CubeSmart | $43.5MM | 2.9% |
Public Storage | $599.0MM | 3.2% |