The resiliency of U.S. self storage and return to new normal

The U.S. self-storage sector has emerged as a resilient and dynamic industry, experiencing notable transformations due to pandemic-driven changes in lifestyles and mobility. These shifts, including increased household mobility, the adaptation of home spaces for work and schooling, and elevated home sales, have propelled the sector's growth.

While the surge in remote work may have plateaued, underserved markets continue to offer robust growth prospects. Moreover, the impending downsizing trend among baby boomers is expected to further fuel the demand for storage units, ensuring sustained market growth.

Investor interest in self-storage remains strong, evident from the CBRE Research's 2023 Investor Intentions Survey, which positioned self-storage as a preferred logistics-adjacent sector alongside data centers. Despite recent softening in fundamentals due to seasonal patterns, mobility shifts, rising property taxes, Fed rate hikes, and subdued home sales, the sector maintains resilience.

Notably, the self-storage market spans over 1 billion sq. ft., with controlled supply growth due to labor shortages, supply chain disruptions, and elevated construction costs. Although new supply is expected to rise through 2028, construction challenges have kept overdevelopment in check. Occupancy levels remain robust, averaging 94%-96%, empowering landlords with pricing leverage and driving steady revenue growth nationwide. This trend has also positioned self-storage as a robust hedge against inflation.

While transaction volumes witnessed a surge in 2021, reaching $16.8 billion, subsequent years saw a decline, totaling $13.3 billion in 2022. Nonetheless, relative attractiveness in the public market, albeit with lower cap rates, coupled with a stable cash flow profile, continues to support the sector's pricing.

Looking ahead, self-storage is poised for positive net operating incomes in 2023, primarily driven by customer rate increases. The sales activity is anticipated to rebound as economic uncertainties diminish, forecasting a gradual cap rate shift over the next five years. Total return was 15.6% in 2022, with an optimistic outlook maintaining an average total return of 9.2% over the subsequent five-year period.

In conclusion, the self-storage sector is anticipated to witness a return to pre-pandemic norms, balancing rental moderation with potential upside in existing customer rents. Supply constraints are expected to temper construction starts, mitigating oversupply risks in the upcoming years. As a preferred investment strategy, self-storage continues to garner investor interest due to its adaptive lease structures and sustained user demand.