The self-storage landscape has continued to grow during periods of economic uncertainty and market volatility. Where other sectors struggle to combat high inflation and rising rates, self-storage facilities continue benefiting from high consumer demand, growing rent rates, and growing interest from private investors.

As we approach the end of 2022, let’s take a look at self-storage performance so far and what we can expect for 2023.

Vacancy to Stay Below Pre-Pandemic Levels

The pandemic’s impact will continue to be felt in how people work and where they live. Even as we move toward a new level of normalcy, there are certain lifestyle changes that aren’t phasing out anytime soon. Things like travel, new construction, and general contracting work are experiencing extraordinary demand — far exceeding pre-pandemic levels.

As more families downsized, moved out of cities, and consolidated, the need for self-storage rose too. And like other impacted industries, that rise in demand remains persistent even as a sense of normalcy returns to our day-to-day lives.

Vacancy rates contracted 190 basis points between June 2019 and June 2022 to 6.6%.[1] Again, this drop was no surprise, considering the immense demand for self-storage space following the onset of the pandemic. 

The Marcus & Millichap’s 2022 National Report does predict, however, that vacancy rates may rise in the coming year to 7.25% — a 60 basis point increase. If true, this will be the first rise since 2018. But, vacancy rates will still stay far below pre-pandemic levels.[1]

Rent Continues to Rise

High demand, coupled with rising inflation, continues to influence how much people are willing to pay for self-storage.

On average, the rental rate of non-climate-controlled units rose 3.9% over the last year.[1] And in markets where home prices have skyrocketed, we’ve seen a rather substantial increase in self-storage rates as well. Areas of California saw year-over-year rental rates as high as 9.5%, while Jupiter, Florida experienced rent hikes up to 12.6% since last year. [2]

Even in states with lower costs of living and less demand, rent remains on the rise. In Arkansas, the going rate of storage units in certain areas has grown 10.2%, and in parts of New Mexico it’s up 8.8%. [2] 

Why Smaller Markets Are Experiencing Growth

There are likely several reasons why rent continues to increase across the country, rather than remaining localized to large metropolitan markets.

First, the majority of millennials are in their 30s or 40s, which are ages often associated with homebuying and family building. As the number of people looking for homes rises, a shift in population relocation occurs. Millennials are starting to move away from big cities and into smaller secondary cities or rural areas with larger homes and lower costs of living.

In addition, baby boomers are nearing or entering retirement. With that transition comes a change in income — retirees are often required to tighten their spending while adjusting to a fixed income. Because of this, it’s not uncommon for retirees to downsize from the family home to a smaller condo or apartment and move to an area with a lower cost of living.

In general, high inflation plus an explosive demand for homebuying has likely pushed these demographics away from large metropolitan cities and toward secondary markets like small towns and rural areas.

Hedge Against High Inflation

From an investor perspective, self-storage units offer a rather unique and enticing quality: they’re primarily leased on a month-by-month basis. With inflation rising at rapid rates in 2022, this gave facilities the distinct advantage of adjusting rent rates more frequently than most other types of commercial leases. 

As a result, investors have remained heavily engaged in the self-storage sector, thanks to continued consumer demand and its ability to hedge against inflation.

Would a Recession Impact the Self-Storage Sector?

Many economists are predicting a recession in 2023, which may dampen investor sentiment. However, it’s worth noting a few countercyclical factors that set the self-storage sector up for a positive outlook, despite recession worries.

In an economic downturn, families tend to tighten up their spending and consolidate where possible. Young adults may move back home with their parents, older parents move in with their adult children, etc. Adjusting to smaller living quarters means an added need for self-storage space. 

Plus, the need for self-storage doesn’t always rely directly on the economic cycle or cataclysmic events like the pandemic. Life changes and transitions are going to occur despite what’s happening in the markets. A college student needs to store their belongings for the summer, spouses move in together after living in separate homes, families need to store items after the passing of a loved one — the list goes on and on. 

Considerations as We Approach 2023

The pandemic created the perfect storm for self-storage demand. But as high inflation and rising interest rates persist, it’s possible consumer demand could soften. The increased cost of goods may mean fewer purchases — eventually impacting the need for more storage.

There was an increase in self-storage facility transactions during the first half of 2022, despite climbing interest rates. This is a good indication that the sector will remain strong as we move into the new year. However, it’s impossible to predict what, exactly, will happen as the Fed continues fighting inflation by hiking interest rates.

The self-storage space has proven over the last several years to be a safe haven during periods of economic uncertainty. It continues to offer private investors security, reliable passive income, and ongoing opportunities for growth.

If you’re interested in learning more about investing in the self-storage sector, please don’t hesitate to reach out to our team.

Sources:

[1] Marcus & Millichap Self-Storage National Report September 2022

[2] https://www.storagecafe.com/self-storage-industry-statistics/