Section 13 • Self-Storage Market Conditions
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espite uncertain macro-economic conditions, investor interest in the self-storage asset class remains high. Self-storage is resilient to both inflation and recession and is considered by many market participants to be a safe haven. For example, self-storage has outperformed other CORE sectors of real estate, such as apartments and industrial property, over the long run, according to NAREIT data. Investor expectations are changing due to expectations of improved operational and lending conditions in 2024, as well as stable to decreasing cap rates. It is interesting to note that Chart 13.1 Public Storage Same-Store Rental Activity research by Newmark Self Storage Practice, PSA Quarterly and Supplemental Public Filings: 2Q 2022 to 3Q 2023, self-storage rental income growth or actual rents increased 9.80 percent, while street rates or asking declined 18.40 percent.

In “Self-Storage Economics and Appraisal,” market conditions are outlined as the core of self-storage economics. It is described as an analysis of the market conditions that affect value using both qualitative and quantitative techniques. One tool, benchmarking, can be a starting point of analysis. For example, a measure of the total self-storage supply per person in the local trade area can be benchmarked to core-based statistical area (CBSA) data published by the Almanac. Another tool, the Cost of Occupancy (COO), can measure rents as a ratio of average household Income to CBSA data also published in the Almanac.

Investor expectations are changing due to expectations of improved operational and lending conditions in 2024, as well as stable to decreasing cap rates.

CBSA Analysis
The CBSA Table 13.1 can be used for comparisons and benchmarking; however, it does not address local self-storage market conditions. Studies and research have shown that demand for a typical self-storage facility is local. On average, most facilities draw at least 65 percent of its customers from within a three-mile radius. Moreover, as the industry continues its mainstream maturation, and product awareness on its own grows the demand side of the economics, a greater percentage of the tenant base at a given facility will source from within a larger radius than three miles. Marketing platforms focused on social media are increasing trade areas. However, in urban markets and high-density suburban markets, customers may come from inside a 1.5-mile radius. Add to that the reality that demand for self-storage is difficult to induce from outside the local submarket trade area, and finite due diligence on a specific trade area is paramount to success. It is important to understand the general market characteristics within the CBSA and then reduce the apparent demand behavior within the micro local trade area specific to the subject property.
Chart 13.1 – Public Storage Same-Store Activity
Chart 13.1a – Regression Demand Per Capita (Top CBSAs)
Chart 13.1b – Regression Demand Per Capita (Top CBSAs)
Supply data by CBSA have come directly from the proprietary database of Radius+ with known self-storage locations based upon latitude and longitude confirmations. The Radius+ database also includes actual square footage data; therefore, the square footage contained in the Almanac is reported on a site-specific basis rather than on an industry average.
Especially relevant are the overall trends within datasets, as well as comparative sets like smaller markets vs. major markets or population centers vs. more rural markets.

Determinants of the self-storage market relate to the forces of supply and demand, as is the case with other types of real estate. The analysis of demand generators, however, is focused on four key variables:

  • Population
  • The percentage of renters
  • Average household size
  • Average household income

A simple econometric model can be used to estimate self-storage demand. Table 13.1 shows the results of regression analysis using a proprietary model registered with the Library of Congress. However, this data can be easily duplicated in spreadsheet software or statistical packages. In the multiple regression model, the dependent variable is square feet of self-storage per person. The independent variables are the demographic variables by CBSA: population, percentage of renters, average household size, and average household income. Testing these variables for relationships and rank indicates a moderate correlation with a multiple r coefficient of 0.45333 and an r-squared of 0.22484. Comparing existing supply to demand can be used as a benchmark to determine if a CBSA is undersupplied, oversupplied, or at equilibrium.

Investment Considerations
General market conditions and market sentiment regarding self-storage should always be considered from a macroeconomic perspective. The following Key Performance Indicators are highlighted from our 4Q 2023 Investor Survey (published in Messenger March 2024):

  • Market participants report cautious optimism for the sector in heading into 2024. Cap rates increased only 7 basis points from the prior quarter to a current average stabilized rate of 5.75 percent. Many pointed out continued strong ECRI (Existing Customer Rate Increases) despite declining street or asking rates. The prevailing view, according to the survey, is improved operating, interest rates (lower), and investment activity in 2024.
  • Discounted cash flow modeling is more important than ever for investment and underwriting decisions. While it appears rental rates have kept pace with inflation, a “return to normal” is likely in 2024 regarding rent rate growth. Expenses will be closely monitored with concerns of rising utility and tax accounts. Remote or less on-site management and contactless customer rentals will increase as cost cutting tool of operations.
  • Supply chain problems have restricted self-storage development that resulted in a conservative pace of new product in 2023. Although supply chain is easing, city processes with permits and entitlements are not getting easier. Lenders are more conservative, and with the higher cost of funds, some projects that were feasible less than a year ago may be marginally feasible or not feasible in 2024. As a result, supply and demand fundamentals should remain strong for the sector over the next several years.
Market Analysis Summary 2024
It will always be the case that the local sub-market around any given site will provide most of the relevant data points. However, the context provided by comparing a given site or a given market to the industry overall can reveal underlying strengths and weaknesses that otherwise could be ignored. Especially relevant are the overall trends within datasets, as well as comparative sets like smaller markets vs. major markets or population centers vs. more rural markets. While rental rates or supply per capita in one market might mean very little to a specific site in another market, the trends and characteristics of the comparisons are extremely relevant.
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