What's going on with storage demand?

One of the best features of storage is how diverse the demand drivers are, meaning there are a lot of different reasons why people use it. Many of those reasons are largely static in nature; they happen regardless of the state of the economy.

This is the primary reason why storage is, hands down,  the best-performing real estate asset class over the last 25 years.

So why is demand for storage so weak right now? Has something changed structurally?

Short answer is no, but the largest marginal contributor to demand for storage—home buying and resultant moving—has ground to a halt.  

Looking at a few charts, this week we saw that the number of homes currently being purchased is at an all-time low:

Mortgage applications are also at all time lows:

The culprit of this is widely known, the level of interest rates.

The run up in interest rates over the past 18 months has priced many prospective buyers out of the market, while existing owners are reluctant to walk away from sub-3% mortgage rates.

The effects of this reluctance are also on display in other realms. Just this week, a candidate for an open position at DXD expressed his concern about relocating for the opportunity because he knew buying a new home in a new city would more than double his interest rate.

This is a smaller symptom of a much larger problem. People are not moving, or intentionally delaying their move because the difference between their current mortgage interest rate and a prospective rate is enormous.

I’ve never been much of a believer in the idea of ‘pent-up demand’ as it relates to storage, but it's clear that home purchases are being delayed due to affordability issues, and unless you believe rates stay high forever, their eventual decline will unleash a wave of pent-up storage demand.

We estimate that 25% of demand comes from new home purchases, and currently 60-70% of that activity has temporarily ceased due to the circumstances discussed above. This could account for a 15-18% reduction in storage demand over the last 12 months.

The longer interest rates delay new home purchases, the more storage will rebound when interest rates recede. This is just another reason why we are bullish on buying and developing  storage facilities today.