Self Storage Market Update: Notes from the 2023 SSA Conference

I spent this week at the annual Self Storage Association (SSA) conference meeting with developers, vendors and other industry professionals. Here are some of the highlights:

ATTENDANCE WAS DOWN

While I don’t have the final numbers, I have been going to the SSA conference for almost a decade, and the attendance  appeared to be lower than previous years.

I partially attribute this to fewer merchant builders looking to build new storage sites.

EXISTING CUSTOMER RENTAL RATE INCREASES (ECRI'S)

The overall tone remained cautious, but optimistic about demand, and there was discussion about the revamped REIT pricing strategy, which we covered a few weeks ago.

There was a discussion about the risk of local municipalities attempting to regulate price increases through legislation. While I consider the real risk of widespread price controls to be remote, it highlights the importance of tracking the legislative tones where you operate self storage.

Unsurprisingly, California is the area where these controls seem to be discussed the most. I would highlight that this is not a new risk, or that these discussions are much different than a year ago, but industry participants are nonetheless discussing it more than they have in the past.

STORAGE DEMAND

There has been no marked deviation in trajectory from the last twelve months in the industry at large. While we noticed higher move-outs and lower move-ins over the last few weeks, it is commonplace for the seasonality that self storage experiences each year.

My current view on demand, absent any marked change in the economic environment, should support flat rental rates next year, which would be a win for the industry as rates are at the highs from 2016, the last rate peak of the cycle.

DEVELOPERS FACING HEADWINDS

I had several discussions where over-levered development sites were running into issues. Rising interest rates have caused developers to spend more money on interest payments, which has eroded the working capital that they set aside. We are continuing to monitor these opportunities and may see more of them as we head into 2024.

We continue to model a high interest rate environment to avoid any shortfalls in the projects we are building. If interest rates do decline, DXD returns will benefit.

CONSTRUCTION SLOWDOWN AHEAD?

Construction material costs have leveled off and some are beginning to decline. General contractors are telling us that they are seeing a decline in steel costs, while concrete and other materials aren’t seeing much movement yet.

General contractors are seeing fewer projects in their 2024 pipelines. Our largest GC is estimating a flat 2024 versus 2023, which we believe is due to gaining market share. Other contractors are simply bidding fewer projects.

Additionally, the number of contractors at the show appeared to be higher than previous years. This seems to indicate some contractors might be visiting the show in order to stimulate more business.

While it’s too early to start modeling lower construction costs, it could start occurring soon.

CLASS A INDUSTRIAL WEAKNESS?

Another factor that impacts construction costs is the activity level in Class A industrial development.  We heard from several sources that leasing activity for new Class A industrial is slowing and edging on distress in some markets. Weaker demand for Class A industrial means development of new industrial will slow. Given the magnitude of concrete, steel and electrical materials that new Class A industrial development demands, it stands to reason this could positively affect self self storage through lower material costs.