well-executed self-storage facility can be steady, resilient, and reliable even when other real estate sectors struggle. For the most part, that’s true. But beneath those strong fundamentals is a structural weakness anyone who’s been in this business long enough knows all too well.

Self-storage is incredibly vulnerable to an oversupply of new construction. When a submarket gets too many new facilities at once, you don’t get a soft landing. You get a knife fight over tenants. Unlike multifamily, retail, or industrial, we don’t have a dozen levers to pull to increase performance. We have one big lever (reduce rental rates) and one small one (increase marketing spend).

And nowhere is that vulnerability more acute than during the 18-month to 30-month lease-up period after a facility opens, when every operator is sprinting toward stabilization while competing head to head with whoever else delivered down the street. It’s the most fragile period in a project’s life. If your timing collides with a wave of new supply, even the best-designed facility with the best manager can find itself stuck in neutral.

To understand why, we need to look at the bigger picture. The broader real estate world is wrestling with high interest rates, frozen capital markets, and rising distress. Multifamily distress has jumped into the teens. Office is above 10 percent. Hotels are near 9 percent. Looking at CRED IQ’s CMBS commercial real estate loan analysis, only 0.1 percent of self-storage loans are currently in distress.

See Overall Distressed Rates by Property Type Chart.

The lease-up phase is where oversupply does the most damage. In a typical cycle, 18 to 30 months of runway is enough for a professionally managed facility to ramp occupancy and grow NOI toward stabilization. But that timeline assumes you’re not fighting a pricing war with a brand-new competitor offering two months free down the street.

Unlike other asset classes, storage operators can’t retreat to a long list of value-add levers.

Take hotels. Hotels can change their brand flag, remodel rooms, replace management, add amenities, upgrade food offerings, promote loyalty programs, and on and on. People do dumb things for loyalty points. They’ll stay in a crappy Marriott because their status gets them a free waffle and microwave egg breakfast. Hotels can differentiate.

Self-storage doesn’t have that much leeway. Operators will disagree with me, but there is not much brand loyalty in self-storage. When potential customers need storage, they pick based on price, proximity, and availability, and it’s usually the first facility they look at.

There lies the vulnerability for self-storage.

Nationally, the sector still looks healthy. REIT occupancy sits in the low 90s. Revenue growth softened, but mostly because operators have been using heavier move-in discounts. Cap rates have drifted up from the unrealistic lows of 2022 but remain attractive. Lenders still like the asset class.

Viewed from 30,000 feet, storage looks bulletproof.

But national averages hide local chaos.

Roughly 3 percent to 4 percent of the nation’s storage inventory is still under construction, which is seemingly modest until you see where it’s landing. The top 10 metros account for more than a quarter of all deliveries. In several markets, Dallas/Fort Worth, Atlanta, Charlotte, and Nashville, the pipeline is stacked on top of already-high per-capita supply.

Dallas has roughly 13 square feet of storage per person, and millions more square feet are coming. Atlanta has more than a million square feet scheduled to deliver in just two years. Charlotte, Phoenix, and parts of Florida are showing similar patterns.

This is where lease-up gets dangerous. A 90,000-square-foot project might model a 24-month lease-up at strong rents. Add one nearby competing facility and stabilization can stretch to 36 months. Add two or three, and then you’re looking at 48 months or longer with heavy discounting and strained cash flow.

Oversupply hits self-storage harder than almost any other asset class because:

• Price is our only meaningful lever. Multifamily can renovate units, add amenities, revitalize the pool area, or target new tenants. Retail landlords can re-tenant. Industrial leases offer long-term insulation. Self-storage has month-to-month leases and interchangeable units. Price is the battleground.
• Storage demand doesn’t expand just because supply does. Multifamily demand grows with new jobs and headwinds to buying a home. Industrial demand grows with e-commerce and manufacturing. Storage is like a funeral home; when you need it, you need it. But when you don’t, no price can convince you to use it.
• Lease-up cash burn is unforgiving. Every extra month in lease-up below proforma eats into returns. When the loan begins amortizing and/or the property doesn’t meet the bank’s debt coverage ratio, the stress compounds.
• Stabilized competitors can undercut you. And they often will. They can slash rates temporarily and stay profitable. A new facility cannot. That imbalance is what makes oversupply so dangerous.

It’s important to clarify: The industry as a whole is not oversupplied, but pockets are. Even in Dallas, where there is an enormous supply in place and planned, there are opportunities for new development.

Many, many markets have healthy demand for new storage. They have strong occupancy and significant barriers to entry, such as strict zoning, limited land availability, or challenging approvals. In these markets, development pencils, and lease-up is more predictable.

And yes, interest rates do matter. Higher rates compress returns, but interest rates don’t kill good new storage deals. Tip: If your underwriting works at a 5.5 percent interest rate and not a 7.5 percent interest rate, you should not be building the project. Well-located self-storage can survive an interest rate above 7 percent. It may not survive three new competitors.

The biggest mistake developers make today is pretending the real estate frenzy of 2021 to 2022 should be the new norm for occupancy, rental rates, and cap rates. The pandemic created the perfect storm of self-storage demand.

That pandemic-related demand has faded. People are moving less. Home sales hit a 30-year low, and new multifamily construction is almost nonexistent. And yet, some developers still underwrite aggressive lease-ups in markets with obvious supply pressure. If you see two or more other developers are planning new construction within your three-mile radius, it doesn’t matter how pretty your REIT comps look. You’re in the danger zone.

So, the outlook is cautiously optimistic, especially when you look at who is using self-storage. Younger generations use it more than older ones. For example, according to the SSA’s Self Storage Demand Survey, only 6 percent of baby boomers had self-storage. That number is 16 percent for millennials and a shocking 16 percent for Gen Z, whose age range is 13 to 28. I don’t know many 18-year-olds, much less 13-year-olds, renting self-storage. That 16 percent is crammed into the 20-year-olds to 28-year-olds. As that generation gets older, the percentage of Gen Z using self-storage could be in the mid-20 percent range.

There’s no existential crisis in self-storage. The industry remains one of the strongest performers in commercial real estate. But the margin for error in development is thinner today than it’s been in years. The threat isn’t macroeconomic collapse. The threat is the facility down the street delivering when you do.

Get your site selection right, understand your competitive set, underwrite conservatively, and avoid submarkets where cranes outnumber moving trucks.

Get it wrong, and you’ll learn quickly that self-storage’s Achilles heel isn’t interest rates—it’s oversupply.