This article was written by the U.S. Colliers Editorial Board, whose mission is to produce new and noteworthy commercial real estate thought leadership pieces to create conversation around proactive content. The Editorial Board focuses on CRE trends in the United States, and is comprised of Colliers marketing, research, communication and service line leaders.

The U.S. self-storage sector has joined the big leagues, recently attracting a great deal of interest from investors. Over the past two decades, sales volume of self-storage properties has totaled approximately $28.2 billion, according to data from Real Capital Analytics. More notable, however, is the growth this asset class has experienced in recent years — nearly 80%, or $22.2 billion, of that volume has occurred within the past five years.

Unlike other sectors, such as office, multifamily or industrial, the self-storage industry is still largely controlled by and mom-and-pop style operators, who own 74% of the facilities. A handful of real estate investment trusts (REITs) and private ownership groups account for the remainder, which are growing rapidly.

Surging demand for storage space has driven expansion in the industry, which has averaged 7.7% annual growth since 2012. According to SpareFoot Inc., one in 11 Americans pays an average of $91.14 per month to utilize self-storage space. As of March, 2019, the amount of rentable self-storage per person in the U.S. equaled 5.4 square feet. That compares to retail space per capita in the U.K. of 4.6 square feet, or just over two square feet per capita in Germany — Americans have a lot of stuff!

So, where is this rapid expansion stemming from? And with a self-storage building spree occurring over the past few years — with construction of self-storage product totaling $4 billion in 2017 alone — how is this supply impacting the self-storage market? Are we nearing, what some call, “peak storage”? Colliers’ Self-Storage Practice Group takes a look at these factors impacting the market and what investors should be aware of in today’s environment.

Demand Factors

The growth in demand has come from multiple sources and, given the sector’s performance during the Great Recession, the industry appears to be somewhat recession-proof. Once only a temporary arrangement to store belongings during a move or other life event, self-storage units are increasingly becoming a permanent solution for maintaining excess possessions.

Two generations, in particular, are responsible for a large share of this demand: baby boomers and Millennials. Baby boomers are downsizing from large, suburban homes, while Millennials are chasing opportunities in densely populated and costly urban centers. These groups, along with many others, possess items that they’re either not yet ready to part with, or have a hope to one day use again.

Impacts of Supply

Approximately 800-850 new self-storage properties were built annually over the last three to four years across the U.S. With both new developments and conversion of existing retail and warehouse boxes, developers have been aggressively building self-storage product in submarkets where demand exists. In many cases, they are experiencing lease up rates as projected. However, there are also newly developed properties that aren’t performing as projected due to negative market influences.

Despite recent drops in interest rates along with the forecasted interest rate drop of 75 basis points by the FED by year-end 2019, oversupplied self-storage markets are generally transacting at the same or at higher cap rates than two to three years ago. Pricing has thus remained the same or has dropped. While somewhat counterintuitive to a normal accelerating investor trend, it emphasizes the impact on transaction values from oversupply. Markets such as Charlotte, Raleigh-Durham, Dallas-Fort Worth, Houston, San Antonio, Denver, Atlanta, Tampa, Nashville and others have been cited by Yardi as oversupplied markets with accompanying year-over-year marketed rent rate declines of 2.5% for standard sized climate-controlled units.

Many other markets, however, are experiencing steady population growth, and despite the general market oversupply, there is tenant demand in many submarket pockets which remain underserved. Those underserved submarkets within larger oversupplied metro areas will transact at more aggressive capitalization rates (cap rates), providing that the right buyer pool of larger operators are introduced to the properties. Larger operators will transact at higher prices if they know the available portfolio is within geographical reachable distances to their existing stores, allowing for operational efficiencies and higher profitability. They will also transact if new entry into a market fits their long-term investment objectives. Typically, these groups are poised to use lower cost acquisition funds to support more aggressive transactional pricing.

What’s Next for Self-Storage?

Overall, the self-storage industry remains favorable for investors, but is still a seller’s market. “Market influences will continue to impact valuations in certain U.S. submarkets, but won’t last long as the self-storage real estate cycle is projected to move to less development and more into investment at least as forecasted over the next 12-18 months,” says Colliers’ Thomas Gustafson, CCIM, senior vice president and principal of Colliers’ National Self Storage Group. “As development slows and demand climbs, rents will again grow to support stronger valuations and transactional levels, as long as interest rates and cap rates are held in check. If you are a long-term holder, and in a strong growth market, chances are you will continue to benefit from escalating cash flows. Conversely, if you’re a seller, it is still a great time to maximize the price investors will pay for self-storage assets.

Colliers’ Self Storage Group is a dominant leader in all things self-storage real estate. Through a culture of service excellence, an experienced team of advisors with industry-specific knowledge and local expertise and integrated platform resources, Colliers’ Self Storage Group is strategically located in key markets throughout North America to support the self-storage real estate objectives of their clients.