A Look At What The Future May Hold For Self-Storage Investors

America is a nation of 350 million consumers and when that many people buy products all year round, many of them will end up with too much stuff. This explains the long-term success of the self-storage industry. This real estate sector hit record highs in 2022, but recent market data shows the sector may be cooling off and returning to its pre-pandemic performance.

The self-storage sector is not the "sexiest" in real estate but extremely profitable. That's because the self-storage business model is borderline perfect in its simplicity. Self-storage is a service people need in almost every market in the country. The near-permanent customer base means a continuing revenue source and the cost of operating self-storage facilities is generally lower than residential or commercial real estate. 

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Several self-storage REITs have strong track records of reliably generating passive income and Realty Income's self-storage REIT has achieved Dividend King Status. Even by that standard, 2022 was a booming year for the sector. Commercial real estate giant Cushman & Wakefield monitors the sector and their data shows that 2024 is weaker than 2022, but that doesn't mean self-storage is facing a slump.

Cushman & Wakefield reported that the sector’s total transaction volume was $3.36 billion in the first six months of 2024. That's an impressive number, but it's a sub-one percent improvement over the first six months of 2023. The analysts Cushman & Wakefield surveyed note that the 2024 numbers more closely resemble the sector's performance before the high performances from 2020-2022, when the sector was doing $50 billion annually.

Despite the self-storage sector's robust demand, it is not immune to the effects of higher interest rates and inflation. Higher interest rates resulted in a slightly higher capitalization rate across the sector, which increased by 90 basis points (in comparison to 2022) to 5.9%. However, the yield of the dollar per square foot was down, especially in the Midwest (11.2%) and the South (10.1%).

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Some of that decline is likely attributable to lower demand as consumers tightened their belts and held off buying or eliminated unnecessary spending. A storage unit full of stuff people aren't using certainly qualifies as an unnecessary expense, so some cancel their leases. Consequently, self-storage facilities had to lower rents to maintain occupancy. 

Since the market value of commercial properties like self-storage facilities is based on the revenue they generate, declines in dollar-per-square-foot ratios also impacted the sector’s property value. Cushman & Wakefield's analysis revealed that property valuations across the sector were down in the class A ($190 per square foot) and class B ($124 per square foot) segments. That's a drop of 20% (class A) and 15% (class B), respectively.

Overall, the numbers are off their record highs in 2022 but remain in line with the sector's performance from 2013-2020. Most investors were happy with the sector's performance during that period and a return to it would see investors growing wealth a little more slowly, but still making gains.

The 50 self-storage experts Cushman & Wakefield surveyed seem unified in their belief that there is room for improved sector performance in the second half of 2024. They forecast increased investment as uncertainty about the interest rates and presidential elections dissipates. So, if you're looking for a passive income investment, the numbers are still good in the self-storage sector, albeit not quite as good as in 2022.

Better Yields Than Some Self-Storage REITs?

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through publicly-traded REITs.

Arrived Homes, the Jeff Bezos-backed investment platform has launched its Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. It paid 8.1% in July. The best part? Unlike other private credit funds, this one has a minimum investment of only $100. 

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