The State of Self-Storage Development
The legendary Sam Zell famously quipped: “Taking risks today for tomorrow’s reward is both the most challenging and difficult of tasks. Unbridled optimism must be tempered with reality.”
For this state of development piece, rather than emulating every US President at the State of the Union Address, I will temper my optimism in favor of the cold hard facts:
The State of Development is weak, but we could be turning a corner. Here’s why…
Introduction: Being a developer is hard
Regardless of the macro conditions, self-storage development, like all real estate development, has its challenges. The developer must…
- Deal with financing the project based on a budget that is subject to change over time
- Orchestrate a timely entitlement process with local municipalities who don’t share your timeline
- Protect against the change in interest rates, given construction loans are typically floating rates
- Manage the general contractor to ensure the property is built to conform with the plans and stay within budget
- Open the property in a timely manner and help the management company drive lease-up to match or exceed projections
The list goes on, and the period from early 2023 until the end of 2024, has been deeply concerning for self-storage developers for mainly three reasons:
- Oversupply, due to a development lag
- Increasing interest rates
- Declining self-storage demand
As we review the state of self-storage development, understanding these three factors are crucial to understanding how the landscape needs to change for optimism and results to improve.
Oversupply due to the development lag
Given the storage market was so “hot” from 2020-2022, developers were justified in building more self-storage due to high demand.
According to the U.S. Census Bureau, self-storage construction spending of $6.9B 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.
It also suggests the importance for developers to signal entry into a market as early as possible. 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 December 2024, the difference between street rates and web rates was ~40%. 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
There’s a lot more incoming! The below data from TractIQ shows the number of self-storage development projects (in any stage including from conceptual through under-construction) and incoming net rentable square feet by state across the US.
| State | Development Projects | Incoming NRSF |
|---|---|---|
| Alabama | 36 | 1,458,142 |
| Alaska | 1 | 15,000 |
| Arizona | 183 | 10,232,455 |
| Arkansas | 51 | 1,805,550 |
| California | 359 | 25,641,459 |
| Colorado | 62 | 2,508,002 |
| Connecticut | 92 | 3,836,744 |
| Delaware | 43 | 2,727,998 |
| District Of Columbia | 1 | 51,525 |
| Florida | 652 | 39,935,398 |
| Georgia | 221 | 10,570,785 |
| Hawaii | 8 | 405,438 |
| Idaho | 47 | 2,227,089 |
| Illinois | 90 | 4,151,761 |
| Indiana | 67 | 2,708,442 |
| Iowa | 18 | 1,284,500 |
| Kansas | 54 | 2,974,201 |
| Kentucky | 28 | 1,196,396 |
| Louisiana | 28 | 1,394,604 |
| Maine | 55 | 1,361,229 |
| Maryland | 76 | 4,187,002 |
| Massachusetts | 87 | 3,414,453 |
| Michigan | 94 | 2,981,891 |
| Minnesota | 51 | 2,284,749 |
| Mississippi | 14 | 443,118 |
| Missouri | 57 | 2,389,660 |
| State | Development Projects | Incoming NRSF |
|---|---|---|
| Montana | 7 | 360,375 |
| Nebraska | 21 | 536,464 |
| Nevada | 61 | 3,721,011 |
| New Hampshire | 44 | 1,536,575 |
| New Jersey | 150 | 9,692,738 |
| New Mexico | 13 | 734,497 |
| New York | 337 | 10,971,994 |
| North Carolina | 150 | 6,502,856 |
| North Dakota | 4 | 48,930 |
| Ohio | 92 | 4,068,083 |
| Oklahoma | 27 | 841,986 |
| Oregon | 17 | 834,616 |
| Pennsylvania | 134 | 6,358,909 |
| Rhode Island | 27 | 1,451,994 |
| South Carolina | 72 | 3,035,510 |
| South Dakota | 11 | 526,040 |
| Tennessee | 108 | 4,412,490 |
| Texas | 470 | 27,061,346 |
| Utah | 48 | 1,834,979 |
| Vermont | 14 | 234,086 |
| Virginia | 115 | 6,078,131 |
| Washington | 61 | 3,462,318 |
| West Virginia | 11 | 307,980 |
| Wisconsin | 96 | 3,307,714 |
| Wyoming | 11 | 235,849 |
Increasing interest rates
The above chart 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.
With access to cheap capital from a Federal Funds Effective Rate being near 0% from 2020 to 2022, developers over-invested in building new facilities causing an influx of supply (detailed above). This new supply led to increasing discounting rates as operators worked through slower lease ups.
Storage demand is also significantly impacted by changes in interest rates. Increasing rates puts pressure on the consumer’s discretionary spending and makes changing residences or home remodeling, 46% of the demand for short term self-storage renters (via Self Storage Almanac), more expensive.
Why purchase a new home with a mortgage at a 6% interest rate, when you could stay in your current home that has a mortgage with 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.
Declining self-storage demand
It’s no secret that the self-storage industry has faced significant headwinds since 2023. Inflation and rising interest rates have put pressure on the consumer and dampened residential migration, decreasing self-storage demand. These pressures have significantly decreased transaction and investment activity within the self-storage industry.
How do self-storage operators respond when demand dries up and the future is uncertain? They aggressively discount rental rates to attract whatever customers remain.
REITs are more willing to experiment with rates and discounting to attract more customers. Each REIT seems to be focused on different strategies that have changed and evolved over time. So which strategy is winning?
Unfortunately, a “winning” strategy hasn’t emerged.
According to TractIQ’s Q3 2024 Storage REIT Report, every REIT has experienced a decrease in revenue and NOI growth over the last year, and their stocks are down ~5.6% on average YOY. When there is simply a lack of demand in the market for self-storage, revenue and NOI growth will be negatively affected, no matter how heavily rates are discounted.
Conclusion
Warren Buffett said “to be fearful when others are greedy and to be greedy only when others are fearful.”
As others sit on the sidelines due to uncertainty in the market, this creates opportunity for investors with a genuinely unique and a long-term perspective. In times like these, Buffett, Zell, and Astor capitalized by looking at things differently.
The key will be to understand what markets will emerge as strong over a longer time horizon. To do so requires an advantage in strategic thinking and data to act with conviction on the deals that you see that others can’t.
Here’s what I would look for:
- Markets that will grow faster than “consensus predictions” because of an influx of housing starts
- Markets with a shrinking projected supply per capita
- Markets just below conventional minimum median household income but poised for income growth (e.g. due to projected employment increases and/or significant infrastructure and commercial investments)
What’s your thesis?
