2025 Self Storage Cycle Check

As we head into 2025, we want to review where we are in the self storage cycle.  The industry is known for its dramatic swings, so the question we try to answer below is where we think we are.

I got into the industry 10 years ago and at the time wrote that the industry was approaching the peak of oversupply. Today, we find ourselves at the complete other end of that spectrum.

As a result, we are incredibly bullish on the prospects of development.

Let's dive in...

Understanding the Current Dynamics of Self-Storage Demand

The demand for self-storage is driven by several factors:

• approximately 50% is linked to moving,
• about 33% is due to space constraints,
• and the rest covers various commercial and residential needs.

Over the last two years, moving activity has decreased to its lowest level in over 30 years, significantly impacting storage demand. We estimate this has led to a 10% drag on total demand.

The spike in interest rates in 2022 drastically reduced U.S. home sales for two reasons:

1.   Decreased affordability from higher mortgage payments and
2.  The 'lock-in effect', as 56% of all mortgages outstanding currently have an interest rate below 4%. (For context, the current rate as we write this is closer to 7%).

These two factors are the primary culprits that have resulted in the lowest moving activity in three decades, considerably impacting storage demand.

The decline in home sales has stabilized, and we saw a tick-up in sales for November of 2024. Historical trends indicate that home buying should increase from these levels, and at whatever pace and magnitude it does, it will be a tailwind for storage demand.

Structural Changes Are Bringing More Demand

Looking forward, we're optimistic about economic trends and their long-term impacts on storage demand.

1.  New Homes are Smaller:  Since 2016, the size of new homes has decreased by 12%. With smaller homes comes more demand for self storage.

2.  Shift Towards Renting: It has never made more sense to rent vs. buy, and as a result, we are seeing a large shift to renting. A record-high 36% of Americans now prefer renting over buying due to the unaffordable conditions. Renters generally have 2-3x the propensity to use self storage vs non-renters.

With the drag on demand abetting and the favorable internal dynamics within the housing market, we believe that storage demand is not just recovering but will continue on its secular growth path.

What's Going on with New Supply?

Beginning in 2022, we saw a dramatic turn in the factors that influence a developer's ability to build. Higher interest rates, construction costs, and a more complex rental rate environment dramatically increased the friction to build storage.  

We've discussed this trend in multiple reports over the past few years, consistently maintaining that the pace of self storage development would decelerate. This prediction came to pass in 2024, marking a year where the tangible effects of these challenges were evident.

Seven months into 2024, the number of new openings across the country was less than half of what it has been on average over the last five years.

Many developers, facing these new economic realities, opted to sell permit-ready sites rather than move forward with construction. The decline in development activity is also reflected in the data from Radius+, which saw a reduction in subscriptions among medium to large storage developers, indicating a significant retreat from the market.

Why does all of this make us bullish?

Let's look at the last time this occurred:  2008-2011

In 2009, banks were hesitant to loan on ground-up construction, and equity was reeling from the Great Financial Crisis. This dramatically impacted the number of new facilities that were built.

Given the commodity nature of storage, pricing and occupancy go up as supply becomes constrained. That is precisely what we saw in the years that followed the supply slowdown:

Currently, we have a healthy self storage market with occupancies above 90%.   In 2009, occupancies were sub-90%.  That sets the stage for strong pricing power for owners in the years to come.

2025 and Beyond

In any part of the cycle, there are opportunities for self storage investment due to the hyper-localized nature of the product.  We closely monitor the national self storage trends, but the data in the particular submarket is the most crucial factor in deciding to invest.  An oversupply of self storage in Miami doesn't mean there isn't an excellent development opportunity in Los Angeles.

Many of the trends we monitor point to a positive run for self storage in 2025 and beyond on top of an already healthy self-storage market, creating a bullish outlook for the sector.

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