The self-storage industry is booming, but is it sustainable? Our industry – I run a self-storage company – has been showing up in the financial press’s headlines lately as investors and operators grow with Americans’ desires to store their possessions.
A recent Wall Street Journal piece summarized self-storage’s growth history, but also raised some key questions about the future. Has the US reached the point of saturation for self-storage units, and if so, does that indicate the industry is at its peak?
My of-course-not-objective opinion? Likely not. The signs I see point to continued growth, and that’s why investors are still clamoring to enter the industry.
The self-storage business has been rapidly expanding in recent years, with demand outpacing supply in many markets. The growth has been driven by a number of factors, including:
The increasing popularity of downsizing and decluttering
The work-from-home movement, which caused people to clear out space for home offices
The rising cost of housing
Continued movement of people to suburban areas
Sixty years ago, the self-storage industry didn’t exist. Now about 10% of Americans are customers. Fifteen years ago, the most sophisticated marketing plan was to buy the biggest ad in the Yellow Pages. It was an exceedingly simple business with few operational complexities other than trying to determine the best locations for the next complex.
Success has brought sophisticated management and sophisticated competition. Online marketing drives rentals now, while a host of automated kiosks and operational software platforms are bringing sweeping modernization and optimization to the business.
Unlike the commercial office sector, where it’s hard to see a bottom in sight, self-storage’s fundamentals remain strong. My best read is that barring a deep recession, those fundamentals will stay that way for a long time. Our society continues to orient toward personal flexibility and mobility, both of which benefit self-storage facilitates.
Until recently, just about every regional market in the country supported the construction of new self-storage facilities due to pandemic-era rate increases - that is, “on paper”. However, construction costs and more recently interest costs have hyper-inflated over prior years. Combine this with rate declines and deals don’t quite pencil like they used to, especially for new entrants that are not used to the extended periods to stabilize self storage that other real estate assets don’t require.
Other challenges exist including zoning regulations that present obstacles for the industry in some metro areas. Unlike certain other commercial developments, storage centers are not job creation engines and don’t always get the favorable government reception that, for example, building a manufacturing plant might.
In addition, some markets are now overbuilt. Utilization rates are still high, but new facilities are filling up more slowly than they were a few years ago. Rents are falling after the pandemic-fueled boom, but there’s no sign of any broad-based supply/demand imbalance.
That said, occupancy rates seem to be holding strong. Demographics and higher awareness of our product means more consumers. Sophisticated operators still stick to the basics - facilities need to be accessible, well lit, clean, and secure, to appeal to the broadest possible but they don’t need to be fancy, nor repainted every time a new tenant moves in.
Pricing power is one of the industry’s secret weapons. The monthly cost of a storage unit can go up $15 or $20 and won’t affect most customers’ decision to keep their space given the room to pursue life and flexibility it provides them. Plus, years ago our industry saddled itself with promotions like “first month free”, which have become our version of retail “loss leaders”. Rate increases after a reasonable period of time move self storage owners toward a reasonable return on their investment.
Biggest wild card over the horizon? Consumer behavior. A material change in the habits and patterns of the American consumer could throw a wrench into growth prospects, but barring that, self-storage looks strong.
It’s been great to watch our industry grow – though growth has, of course, brought a higher level of competition. Being pound-for-pound the best in self storage these days requires the ability to create high quality real estate assets and deliver consistently excellent customer service.
As the Wall Street Journal piece points out, more money is chasing self-storage assets because of its track record and prospects. While it’s a fine line between “hot” and “overheated,” I remain a believer in self-storage. It’s a young and durable industry that should continue to thrive for generations to come.