ISS BLOG - 5 Factors Creating an ‘Epic Shift’ in the Self-Storage Industry and What They Mean for the Future of the Business

The self-storage industry is robust and growing, with plenty of room for new and expanding players. But along with growth comes change. In fact, the sector is at the precipice of a shift that promises to transform it forever.

Historically, self-storage facilities have been predominantly owned by small, private entities with less than five assets; but this is rapidly changing. Since 2010, we’ve seen a brisk consolidation of the sector, driven in part by large and institutional developers and investors, even some mid-sized firms. They’re realizing that self-storage is profitable and relatively simple to operate, with low startup and overhead costs and minimal staffing needs.

Many emerging players view it as a commercial real estate play or opportunity to diversify an investment portfolio—less as a business and livelihood and more as an asset. They’re drawn to the self-storage industry’s strong performance and its reputation as a “safe” asset class, with malleability in returns and the opportunity to invest in (or bet on) a hyper-focalized 3- to 5-mile trade area.

So, what are the factors that are driving this “epic shift” toward a more consolidated, institutionally owned asset class, and what does it mean for the industry as a whole? We see five major influences that are changing the face of the sector. Here’s what you need to know to remain relevant.

The Threat of Oversaturation

The glut of institutional investors infusing capital into self-storage will inevitably put certain markets at risk. Already, construction spending has reached an all-time record high of $6.99 billion in 2023, according to U.S. Census figures. The result of developers racing to build in high-growth markets is an oversupply of units. What follows is a battle of rental rates among operators of all sizes, which results in razor-thin profit margins.

Much of this oversaturation is occurring in primary and select secondary markets that are experiencing (or expected to experience) a housing boom, one that may otherwise never have materialized due to the high cost of materials, the labor shortage or a lack of funding.

What it means: There’s still plenty of opportunity within the self-storage sector, particularly for those who sleuth underserved markets. Look for secondary or tertiary regions with real (not projected) growth markers where rates are based on existing income and demographic thresholds. There’s also potential in areas with high barriers to entry such as geographically undesirable terrain or reluctant zoning and planning commissions. Large developers have the experience and capital to overcome these and other challenges, even though they often only focus on the top 50 markets.

Advances in Technology

While some customers will always seek human interaction, automation is modifying the self-storage experience. Millennials and Generation Z are the fastest growing segments of renters, and they’re accustomed to using their phones and other devices to complete transactions. For them, searching online for nearby locations and online reviews is second nature. In fact, these potential renters crave an online experience.

These needs conflict with the way mom-and-pop facilities have traditionally conducted business. Inevitably, low-tech, hands-on facilities will be overlooked by the younger customer segments, who opt for institutional facilities with feature-rich websites and apps for a seamless rental experience.

What it means: To compete, self-storage operators need to align their business with customers’ demands for high-tech offerings such as contactless entry and online rental portals. The technology that consolidates customer service and human interaction to a call center is more accessible for larger developers and owners to implement.

More Business-Storage Needs

Though many corporations have returned to requiring staff to work from the office, many white-collar employees still maintain a home workspace. They need storage for the things that were displaced by its creation. These users primarily seek a modern, multi-story climate-controlled facility.

We’re also seeing a lot of small businesses that need storage to house equipment and inventory. In some cases, it’s contractors or landscapers looking for a place to keep their tools and machinery. These tenants look for suburban, single-story facilities that offer external, drive-up access.

What it means: It’s important that self-storage operators and developers align their product with the demographics and subsequent needs of their primary customer base, which now includes more business users.

Slow-Moving Interest Rates

When many of the self-storage sector’s newest investors entered the market, interest rates were lower and transactions were easier to complete. Today, elevated rates have had a detrimental effect on the affordability of acquisitions. Higher interest rates have also resulted in a devaluation of assets, with the greatest impact in smaller secondary or tertiary markets. Likewise, the high cost of capital has limited sensible deals for many.

At the onset of 2024, some potential investors were sidelined, left to await the softening of interest rates. Now that a meaningful rate adjustment seems unlikely, we’re seeing a certain state of acceptance. Instead of “wait and see,” many investors are adopting a “discover and learn” approach to self-storage. The upside is transactions are slowly filling the pipeline as industry players learn to navigate the new normal.

What it means: With interest rates staying persistently high, larger, institutional players with deeper pockets lead the pack with self-storage acquisitions. Many mom-and-pop owners seeking to expand may be priced out of bigger, high-growth markets.

A Shift in the Housing Market

Moving a household is one of the most common reasons consumers seek self-storage. But with interest rates at a peak, more people are staying in place, which is choking the typical monthly influx of new renters. Though interest rates aren’t expected to decrease dramatically by year-end, a slight bump in home sales may be possible for the same reason as investments—an acceptance of the new normal. Ultimately, it’ll depend on homeowners’ tolerance for the cost of money.

What we’re seeing is many consumers are trading downtown, urban living for the expansive, more affordable lifestyle of the suburbs. The urban neighborhoods that were once inexpensive are now trending at a higher price point, making smaller markets attractive again. This lifestyle migration contributes to a potential increase in self-storage occupancy.

What it means: In 2024, occupancy has experienced a slight bump following a slow start to the year, with most activity taking place in high-growth markets. However, every market is unique, and there’s great potential in secondary and tertiary regions. Ultimately, it’s the larger developers and institutional owners who are more agile and able to capitalize on opportunity. This is keeping optimism alive for an increase in self-storage activity during the second half of the year.

Frank DeSalvo and David Perlleshi are senior directors with Franklin Street, a Tampa, Florida-based commercial real estate firm. They oversee a team that buys and sells, finances, insures, develops, and manages self-storage facilities throughout the United States. They’ve facilitated a combined $100 million in storage transactions throughout their careers. For more information, call 813.839.7300.