How Will Self Storage Perform in 2025?
Industry experts weigh in on the sector’s future in the second installment of our outlook series.
Self storage is currently coming down from the heights it experienced during the COVID-19 era, when the sector saw its largest development boom ever. Once a niche, it has evolved into a major opportunity as investors keep searching for areas that are not only business-safe, but can also work as a way to diversify their ventures.
Self storage is now known as the asset class that performs well in almost all phases of any economic cycle due to its recession-proof nature.
Nevertheless, this past year came with a lot of changes, particularly when compared to pandemic years that created the ideal environment for the sector to thrive. What has become clear is that 2024 has been a year of adjustments to the long-term effects of the health crisis. Today, the sector’s softening fundamentals are visible across many key markers.
Ongoing challenges
Much like in other real estate sectors, the Federal Reserve’s successive interest rates increases over the past few years have had a significant impact on self storage transactions. Additionally, the advertised street rate per square foot declined 3.5 percent year-over-year as of September, to $16.55, according to a recent Yardi Matrix report.
“Performance has been lackluster,” said Brian Cohen, president & CEO of Andover Properties. “Roughly 15 to 20 percent of self storage demand comes from housing mobility and incredibly high interest rates have kept people from moving.”
The same issue was highlighted by Doug Ressler, manager of business intelligence at Yardi Matrix.
“Home sales, which helped push occupancy and rent growth to all-time highs during the pandemic, have remained near a two-decade low and this has translated into declining revenue and net operating income growth for the self storage REITS in the second quarter, driven by a decline in rents,” Ressler said.
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Adjectives such as soft, sluggish or weak are used a lot by industry experts to describe the sector’s performance this year. For Tom de Jong, executive vice president at Colliers, 2024 was a year in which the downward economic situation negatively influenced development deals and made investors wary, with the bid-ask spread between buyers and sellers keeping the sector from recovery.
Another difficulty that the market is now facing is overbuilding. During and immediately after the pandemic, self storage was doing well based on all operating metrics, including demand, occupancy and rental rate increases, among others. This made new self storage development in almost any location seem economically viable, so the industry experienced a massive wave of new facilities coming online, which led to oversaturation in some areas.
“Now markets are experiencing excess supply, pushing rents down and causing some stress on newly built projects,” de Jong said.
Adam Schlosser, senior managing director with the LeClaire-Schlosser Group of Marcus & Millichap, even anticipates an uptick in distressed assets to hit the market in 2025.
A resilient sector
But is the situation as dreary as it sounds? It might seem so if you only look at the sector’s fundamentals in 2024, but the resilient nature of the asset class will always prevail, regardless of where in the economic cycle we are because, fundamentally, self storage is driven by life events.
“When people move, get divorced, downsize, relocate, start a business, grow their families, retire or experience any number of other personal changes, they turn to storage,” noted Ryan Gibson, president of Spartan Investment Group.
Even difficulties in the overall real estate market contribute to the stability of the self storage asset class. The industry thrives on change, and economic constrictions tend to lead to people needing space, whether for personal or business reasons.
“No matter the economic condition, change is constant and the self storage industry is there to meet that need,” Schlosser said.
Meanwhile, Gibson noticed that many Americans have begun to migrate back to bigger cities, sacrificing comfort for smaller spaces close to dense urban areas. Among them, Millennials are the most numerous, making up around a third of the industry’s customer base.
“The housing market is partially responsible for this evolution,” Gibson said. “Rising costs have led to smaller living spaces. Many people—especially younger homeowners—are finding it more affordable to rent a storage unit than pay for an extra room in their house.”
Improvements on the horizon
If most of 2024 was characterized by a sluggish performance in terms of investments, it looks like the recent cuts in interest rates might reignite activity. Once momentum is back, those interested in self storage and diversifying their portfolios could return to a more balanced market, experts agree.
“Sellers have been waiting for fundamentals to improve, waiting for interest rates to come down,” Schlosser said.
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Additionally, there are a lot of closed-end funds that were bought in 2019 and 2020, and the life cycle of those funds are coming due, according to Cohen. Many new projects will either need fresh equity brought into the deals, or owners will have to sell them as the proceeds from a refinance are not going to be enough to take out the existing loans.
For REITS, which Gibson believes were undervalued in 2024, there could be a surge in acquisitions among those groups, which will eventually drive up demand and pricing. As to individual investors, investment could be determined by a specific generation.
“Baby Boomers hold a significant portion of the country’s wealth and much of it is tied up in real estate,” Gibson said. “As they retire and sell their assets, this group will be looking for opportunities to reinvest their capital. That could contribute to a greater appetite for alternative investments such as self storage.”
What to expect in 2025
Most experts are fairly optimistic about the sector’s performance in the upcoming year. De Jong expects to see a period of normalization, including stabilized occupancy, a push in rental rates and an improvement in the investment sales market as there are billions of dollars on the sidelines looking to enter the market. In fact, the second half of 2024 has already seen a number of important portfolio sales.
For example, Andover Properties acquired a six-property collection from Metro Self Storage in August. Totaling nearly 500,000 net rentable square feet and located in Florida and Pennsylvania, the facilities now operate under Andover’s Storage King USA brand.
Later, UTEX Storage purchased a three-property self storage portfolio encompassing 323,000 square feet. Brookwood Properties sold the 3,380-unit collection, which previously operated under the Storage Center brand.
With interest rates on a downward trajectory, transaction activity is expected to gain momentum in the upcoming year.
“We have some of the largest institutional investors in the world looking to deploy significant capital into our space,” Schlosser said. “Our publicly traded companies share prices remain resilient and have even grown despite back-to-back quarters of challenged performance.”
A strong lease-up season in 2025 could be driven by trends in the wider real estate market. If lending conditions continue to look up, residential transactions and improvements could also resume, ultimately leading to more need for storage space. The prospects for both the upcoming year and the near future show a well-balanced industry that can bounce back due to its specificity and its ever-present demand.
“You are not going to see the great returns we have achieved in the past 20 years,” Cohen warned. “Self storage in general has become a fairly saturated product where you can perform with stable returns, but the days of hitting home runs are over.”
