The Bottoming of Storage Fundamentals

Here’s what you need to know about the storage earnings calls I listened to over the last week:

While we know storage demand has slowed due to the historic cooling in the housing market, the REITs are projecting the 2024 spring lease-up season will be better than 2023. From this, we can assume the REITs are also anticipating home sales to either remain flat or start increasing from 2023 activity.

What I found most interesting on these earning calls, and something I have discussed extensively, was the drop in new storage supply that is expected as we head into 2024 and beyond.

Extra Space Storage discussed certain data points that suggest 70-90% of storage development projects have been put on hold. Public Storage and CubeSmart had similar commentary.

While a 90% fallout rate sounds high, I hear daily from brokers and developers with existing sites they need help building, either because they can’t find the equity, debt, or both. Many of these projects do not pencil with high interest rates, high construction costs, and lower rental rates.

The bottom line is that it is difficult to find projects that have the return profile required for the risk.

With new home sales likely finding a bottom in the near-term and new development activity essentially halted, the current period is likely the bottom of the cycle for storage, and subsequently, we should only see improvement in the operating fundamentals.