2024 Transaction Volumes and Cap Rates in the Self-Storage Industry: Navigating Market Shifts

The self-storage investment market experienced a dramatic upswing after the COVID-19 pandemic, culminating in an all-time high of $13.5 billion in the fourth quarter of 2021. This unprecedented level of activity was primarily driven by institutional capital, which focused on large portfolio investments. Self-storage, often seen as a recession-resistant asset class, attracted significant attention as investors sought stable returns amidst broader economic uncertainty.

Even as transaction volumes subsided in 2022, they remained well above pre-pandemic levels, reflecting the sustained interest in the sector. However, 2023 saw a shift in the market. With rising interest rates and a softening in property market fundamentals, self-storage transaction volume began to normalize. Though activity slowed, it remained bolstered by a few key portfolio transactions in the third quarter.

Heading into 2024, the self-storage market has seen a slight softening in property fundamentals, but investor interest remains robust. A significant amount of "dry powder" capital—funds waiting to be deployed—is diligently seeking self-storage investment opportunities. This persistent interest underscores the sector's appeal as a reliable investment, particularly in times of economic uncertainty.

Although the broader market has cooled slightly, the fundamental drivers of self-storage demand, such as increased residential mobility and business downsizing, continue to support the industry's long-term outlook. Investors are particularly attracted to the sector's countercyclical demand drivers, which can provide a buffer against economic downturns.

Historically, investors have turned to self-storage for its attractive risk-adjusted returns. At the end of 2022, capitalization rates (cap rates) for self-storage assets reached a historic low of 5.0%, just seven basis points above the average cap rate for apartments. This trend highlighted self-storage's increasing alignment with more traditional real estate asset classes in terms of return profiles.

However, the rising interest rate environment in 2023 and 2024 has exerted upward pressure on cap rates across all commercial real estate sectors, including self-storage. By the second quarter of 2024, self-storage cap rates had increased by 90 basis points to 5.9%. Despite this rise, the relative stability of self-storage cap rates, compared to other asset types, reflects the sector's appeal as a safe haven for investors during periods of economic volatility.

Looking ahead, self-storage remains a favored asset class for many investors, particularly in the face of broader economic headwinds. While rising interest rates and market softening have impacted transaction volumes and cap rates, the overall outlook for the sector remains positive. Investors continue to view self-storage as a relatively safe investment, driven by countercyclical demand and stable long-term fundamentals.

In 2024, we can expect self-storage cap rates to remain stable, with investor interest driven by the sector's resilience during economic downturns. For investors looking to diversify their portfolios, self-storage offers a compelling blend of stability and growth potential in an otherwise uncertain market.

While the self-storage market has undergone some cooling after the post-pandemic surge, it continues to attract high levels of investor interest. Rising cap rates and a more normalized transaction volume reflect the broader shifts in the real estate market, but the sector's fundamentals remain strong. As we move through 2024, the self-storage industry is poised to continue offering attractive opportunities for investors seeking stable, risk-adjusted returns amidst an evolving economic landscape.