Nothing in the universe ever remains constant. Everything is always in constant motion. From the subatomic level all the way to the entire universe itself, everything is in constant motion.
This includes the self-storage industry. It is evolving and changing fast.
As I move through some of the various deals I am involved with today, the markets and the deals themselves are changing at a very rapid pace.
Let’s look at what is behind these changes and the big advantage this current environment can offer the smaller investor/operator.
Political Instability
I tread here softly.
However, it does not matter if you are excited about the current U.S. political policies (Make America Great Again) or if you think we are heading headlong into the abyss, one thing is for sure: things change dramatically and unexpectedly these days.
You might wake up one morning and we are removing heads of state or are in an unexpected war.
A few months ago, we were being impacted by tariffs (especially in the storage industry). When was the last time you thought about the tariffs? Three, four months ago?
Who would have thought we would be in a war and bombing Iran? Who would have predicted the rise in transportation costs and the impact that has on the market and the economy?
In the past, with the two parties, whoever is in charge just moves the pieces on the board into different positions. Today, it is as if the table, the board, and the pieces have been kicked over.
Again, you may like this or not, but the one thing the market and the economy like is some degree of predictability. We now must learn to operate inside a different context. The winners today will be the ones that can.
Housing Market Slowed
A big driver for self-storage has traditionally been the housing market and people relocating. There are several factors keeping this industry muted:
- High mortgage rates. A 6%+ mortgage dramatically increases monthly payments compared with the 2% to 3% loans many homeowners locked in during 2020–2021.
- Affordability remains challenging. Even though price growth has slowed, prices themselves remain elevated.
- More inventory. Buyers now have more options than they did a couple of years ago, reducing bidding wars in many markets.
- “Locked-in” homeowners. Many owners are reluctant to sell because doing so would mean giving up a very low mortgage rate.
Traditionally, the housing industry has been a big driver for storage, and it is very stagnant now compared to past years.
Oversupply
The figures below are approximate national net rentable square feet (NRSF) completed each year based on Yardi Matrix, StorageCafe, and my own industry research.
| Year | New Supply Delivered | % of Existing Inventory |
|---|---|---|
| 2020 | 35–40 million sq. ft. | 1.8% |
| 2021 | 45 million sq. ft. | 2.2% |
| 2022 | 55 million sq. ft. | 2.7% |
| 2023 | 60 million sq. ft. | 2.9% (cycle peak) |
| 2024 | 55 million sq. ft. | 2.6% |
| 2025 | 57 million sq. ft. | 2.8% |
| 2026 (forecast) | 53 million sq. ft. | 2.5% |
| Total | 362.5 million sq. ft. | 17.5% |
Is supply still increasing?
Yes, but a little slower.
- Construction starts have fallen sharply because of higher interest rates, tighter construction lending, and weaker rent growth.
- The current development pipeline is significantly smaller than it was in 2022–2023.
- Yardi Matrix expects deliveries to continue declining:
- 2026: 53–54 million sq. ft.
- 2027: 45 million sq. ft.
- 2028: 39 million sq. ft.
The supply wave has been one of the primary reasons self-storage fundamentals softened over the last few years:
- Occupancy declined from the record highs reached during the pandemic.
- Street rental rates came under pressure in many Sun Belt markets with heavy development.
- New supply is now slowing, and demand gradually absorbs the inventory. Most industry analysts expect the supply-demand balance to improve through 2027–2028 if demand remains steady.
During the same time period, the U.S. population only grew by 10.3%, adding approximately 10.3 million more people. At 8 square feet per capita, that is only 82,400,000 more square feet of demand compared to the 362,500,000 square feet delivered.
So What Does All This Mean and Where Is the Opportunity?
The days of paying for future value are over for buyers in the self-storage market.
With dynamic pricing, it has become hard to really peer into a market and truly see what the rents are. For the most part, buyers are pricing off web rates (perhaps slightly higher).
There is just a lot of uncertainty, and with uncertainty, many are on the sidelines or being very safe in valuations.
As a smaller investor, I am looking for deals in high-barrier markets, where we are adding 30,000 square feet or less (due to the fact that we are not sure how long lease-up will really take). The only exception to this is if we are developing a Boat & RV project.
But more importantly, what is needed today, in my opinion, is patient money.
We may be getting less than we used to in the first few years, but we can go after deals that still generate above 20% IRRs, but it requires time, 7 to 10 years.
In the past, this would have been harder for me because, in my syndications, people wanted higher preferred returns and expected to hit or exceed them early in a deal.
Today, we are forming more partnerships and joint ventures (not in every case, but most) because we need more long-term, patient money.
This is where we feel we have an advantage over most others in the market today.
We don’t have to pass on deals because we can’t generate a higher return fast enough or alter our assumptions in the pro formas in order to hit rapid returns for the capital we are raising.
If you can focus on the right markets or trade areas, have a realistic picture of the market and underwrite accordingly, then have patient money, you are going to be one of the winners in today’s self-storage market.
Smaller investors can play the long game, and that is our advantage.
Play the game smart and for the long haul, and you can drastically increase your odds of creating the wealth this industry offers.
It’s a game worth playing.
