Self-Storage Performance in a Recession: Why This Slump Is Different From Past Downturns

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By Jeffrey Rogers and Matt Swanson

The self-storage market has improved, but it’s clear the industry is experiencing a different dynamic in today’s environment. While the current economic climate has raised questions about resiliency in the property type, a more fundamental question is whether existing and potential tenants have changed their habits around self-storage.

In past recessionary periods of the early 1990s and 2001-2003, self-storage occupancies and revenue were generally not negatively impacted. For most facilities, revenue continued to increase year over year, and self-storage development turned out quite well for investors and developers.

The following table shows recent quarter-over-quarter changes in rental rates and occupancies based on a nationwide survey conducted by Integra Realty Resources. This reflects the nationwide market and illustrates current market conditions, which are unlike any historic trends.

Period

Rental Rate

Occupancy

1Q 2010

-2.2%

-0.6%

2Q 2010

0.0%

-0.3 %

3Q 2010

-5.2 %

-1.2 %

4Q 2010

-1.1%

-3.3 %

1Q 2011

0.0 %

-3.5%

2Q 2011

-2.2%

-3.5%


In this most recent recession, history has not repeated itself. Because of cuts to many individual incomes, elevated unemployment and lower purchasing power, the use of storage has moved into a more discretionary spending category. The result has been a slow but progressive slide in rental rates and revenue.

A review of recent revenue changes at more than 100 self-storage facilities in major markets nationwide shows many markets are starting to settle or experience a slowdown. In 2010, revenue decreased by 5.2 percent. During the first two quarters of 2011, it decreased by 1 percent.

What Changed?

The change from prior recessions is multi-faceted. After around 1995, self-storage construction spiked, with a massive amount of development taking place in most major markets. With historic strong returns for existing facilities, this property type caught on not only with existing owners but first-timers wanting to enter the industry.

The financial barriers caused by limited financing were also toppled as banks and institutions specifically sought out this property class for loans. As most developers were not known for strong due diligence and lending sources focused on just placing loans, the overall inventory increased between 1995 and 2007 by about 25 percent.

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