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