By Frank DeSalvo and David Perlleshi

ot so long ago, the self-storage asset class was booming. Investors and owners were sleeping soundly, dreaming of all the profits that they were earning. Investors were attracted to the asset’s high profit margins, its ability to adjust pricing monthly as market factors dictates, and its minimal overhead when compared to other commercial asset classes. Industry experts were calling it a recession-proof opportunity, a business that practically ran itself with minimal expense.

However, today, what was once considered an easy-to-run business is now facing challenges. From mom-and-pop operators who’ve owned their businesses for decades to financial institutions eager to jump on the bandwagon, self-storage owners and investors are now tossing and turning at night.

The changing landscape of self-storage means that industry players are wondering how they can control the myriad of factors now affecting their businesses. Understanding the issues and potential solutions may offer self-storage operators ways to rest a little easier.

Let’s take a look at the nightmare scenarios causing angst and hesitation in the industry.

Stagnant occupancy rates have plagued the self-storage industry recently. Consumers relocating are responsible for approximately 25 percent of storage rentals. According to the U.S. Census, the percentage of people moving households has declined since 2006. In 2006, 16.8 percent of the population moved, but that number dropped to 12.1 percent in 2023. This downward trend is likely to continue due to many factors, including higher interest rates.

Oversaturated markets are feeling the strain, particularly those experiencing an influx of new competition within their trade areas, leading to declines in occupancy rates. Recently opened facilities in these markets are struggling with historically slow lease-up rates due to increased supply. The oversupply challenges are most prominent in primary and secondary markets across the Sunbelt region.

However, since this summer, occupancy rates are trending upward across many markets. If interest rates continue to decline and inflation stabilizes, homeowners are expected to start house hunting once again.

The insurance market is rapidly changing, and extreme weather is driving massive increases in insurance rates—in some cases, increases of up to 200 percent year over year for self-storage owners.

Unlike a residential product, commercial insurance providers have not exited states or regions; however, challenges remain for self-storage owners in certain regions more prone to weather incidents.

Investors in states such as Florida and Texas who entered the market with high rental rates are now faced with both declining rental rates and increasing insurance costs. Investment in these regions will likely be stagnant until insurance rates stabilize.

The good news: If rates start to stabilize, it could mean more reasonable premiums in places that are not more susceptible to weather-related catastrophes. Regions that are more likely to be impacted by extreme weather may continue to pay higher insurance rates, but owners could also decide to self-insure and eliminate existing financing.

For decades, the self-storage product was undervalued, a significant advantage for real estate investors. Assets were frequently traded at $30 to $40 per square foot. Today, the cost of entry averages $80 to $90 per square foot for a new facility and upwards of $150 per square foot to acquire an existing, stabilized asset, depending on the market.

Since 2020, municipalities have reassessed property values based on more relevant factors, such as sales comparisons and construction costs, and they’re taxing accordingly. Previously, tax liability could be negotiated and restricted for four years based on property values of $20 to $30 per square foot. Now in some municipalities, negotiations only apply to the current tax year as asset values are re-evaluated annually.

Likewise, millage rates are on the rise, especially in high-growth markets where exponential demand is driving housing and commercial prices higher. Some municipalities are following that trend, although actual self-storage property values may be far less as the data used to establish millage rates is now outdated by two years. This, combined with the recent drastic shifts in interest rates, construction costs, and other factors, and the resulting valuation is unrealistic at best.

Only if the market normalizes or regulates and municipalities form valuations based on data drawn from period without rapid fluctuations will property valuations be more realistic. Until then, tax appeals may offer owners some relief.

Losing sleep over inflation is an issue familiar to most Americans. Grocery bills, rent, utilities, and other expenses now cost between 10 percent and 30 percent more than they did two to three years ago.

These rising costs are also affecting the self-storage industry. Increases in the cost of material goods, labor, repairs and maintenance, and other expenses are negatively impacting profitability. Couple that with lower occupancy rates and rental rates, and self-storage operators are feeling the squeeze. Simultaneously, rising costs also affect the housing sector limiting new construction and residential moves, also contributing to the aforementioned low occupancy rates.

A perfect storm of high-priced materials, costly labor, and expensive financing is taking new facility builds off the table for many. The good news is inflation is already cooling, and prices should mimic the decline.

Rental rates are in a race to the bottom, particularly in oversaturated markets. For most markets, rates are 25 percent below the peak of the pandemic, but that number drops to 50 percent in markets with too much inventory. The evolution of the self-storage industry has created variations from market to market, resulting in broad swings for what is acceptable.

This, coupled with all the other economic factors, is damaging this sector’s bottom lines.

Now is not the time to push rental rates, as saturated self-storage markets make it too easy for tenants to switch facilities. Owners and operators should work to build occupancy, so that when the economy returns, existing and new customers are more receptive to price increases. Promotions and discounts give tenants a reason to stay put.

While there are certainly nightmares keeping many self-storage investors awake at night, dawn is on the horizon.

With more institutional capital entering the market, the industry is emerging more sophisticated and savvier than ever. New and existing operators are embracing technology and developing a more informed understanding of how to run successful self-storage operations.

Booming industries tend to hatch new third-party service providers, and the self-storage sector is no different. For instance, owners now source accurate and timely sales comps, market rents, and other valuable statistics that result in more proficient operations and business strategies.

There are still safe havens. For every market that is oversaturated, there are plenty that are still relatively untapped. Even today, secondary and tertiary markets, those outside of the top 50 markets, as well as rural markets, offer sound investment opportunities for those seeking self-storage opportunities.

The occasional sleepless night is to be expected in any industry. Understanding those nightmares, and how to avoid or mitigate them, is key to finding success in this business moving forward.