Embracing Opportunities for Growth and Innovation in the Self-Storage Industry: A Resilient Path Forward

The self-storage industry is facing changes in valuations, transaction volumes, and rental rates, but these shifts should be viewed as opportunities to strengthen operations and position for future growth.

The Cushman & Wakefield H1 2024 report notes that while transaction volumes totaled $3.36 billion in the first half of 2024—a slight increase from 2023—valuations have adjusted, with prices falling from a peak of $172 per square foot in 2022 to $139 per square foot in Q2 2024. Although this represents a decrease, it's important to recognize that these adjustments signal a return to a more balanced, sustainable market after the unprecedented surge between 2020 and 2022.

This period of recalibration offers a more stable and predictable environment for future investments. By understanding the cyclical nature of valuations and preparing for the eventual upswing, operators can make informed decisions that will pay off in the long term.

Positive Advice for Operators:

• Embrace the recalibration: Rather than viewing falling valuations as a negative, see them as part of a natural market correction that paves the way for more strategic investments. Operators who focus on long-term value creation can capitalize on lower acquisition costs and optimize for future gains.
• Example: If you're considering acquiring a self-storage property, this market shift presents an opportunity to buy at a more reasonable price, positioning you for strong returns when the market strengthens again.

Occupancy levels in the self-storage industry have stabilized at a healthy 90%, according to Cushman, with rent rates also finding equilibrium after a period of adjustment. Asking rents, which spiked during the pandemic, have now leveled off at $121 per square foot in Q2 2024, down from $127 in 2023. Chuck Gordon's ISS article suggests that declining rental rates are not a cause for concern but rather part of a necessary market correction. In fact, these adjusted rates make self-storage more accessible to a wider range of consumers, ultimately expanding the customer base.

This creates an ideal environment for operators to focus on tenant retention, enhance customer experience, and plan for future rent growth as demand continues to stabilize.

Positive Advice for Operators:

• Leverage stable occupancy for long-term success: With occupancy holding steady, now is the time to engage with existing tenants and build loyalty. Offering personalized services and improving communication can help maintain high occupancy and reduce turnover.
• Example: Introduce a loyalty program for long-term tenants that offers rent discounts or bonuses for referrals. This not only encourages retention but also helps to attract new customers.

In times of change, innovation becomes the key to success. Both the Cushman report and the ISS article emphasize the growing importance of technology in self-storage operations. Technology isn't just a tool—it's a driver of efficiency, cost reduction, and customer satisfaction.

Cushman & Wakefield highlights the adoption of AI-powered tools and automated systems in self-storage operations. These innovations, such as smart security systems, predictive maintenance, and automated kiosks, streamline processes, reduce labor costs, and enhance the tenant experience. Chuck Gordon echoes this, stating that technology is not just an option, but a necessity in today's market.

By embracing advanced technology, operators can stay ahead of the competition, optimize daily operations, and improve profitability, even in a challenging market.

Positive Advice for Operators:

• Maximize operational efficiency through automation: Adopting AI-driven tools like dynamic pricing and automated access control can optimize your facility's performance, reduce costs, and deliver an enhanced customer experience.
• Example: Implement an online rental and payment platform that allows tenants to manage their units remotely, providing convenience and ease of access, which improves overall satisfaction.
• Capitalize on AI-driven pricing: Use AI to dynamically adjust rental rates based on market conditions, maximizing occupancy and revenue while staying competitive.
• Example: A facility using AI pricing can react quickly to shifts in demand, adjusting rates up or down in real-time to capture more customers without sacrificing profitability.

Amidst the current market shifts, one constant remains—customer satisfaction is key to thriving in any economic environment. Both reports stress the importance of delivering a superior customer experience, as tenant retention is far more cost-effective than constantly seeking new renters.

According to the ISS article, 83% of tenants rank service as an important factor in choosing a self-storage facility, and 39% say it's very important. In a competitive market, personalized and responsive service can set your facility apart. By focusing on building strong relationships with tenants and offering tailored solutions, operators can ensure long-term success.

Positive Advice for Operators:

• Deliver exceptional customer service: Focus on creating a welcoming and responsive environment where tenants feel valued. This can range from quick responses to inquiries, to offering flexible lease terms, to going above and beyond with customer support.
• Example: Provide tenants with an app where they can easily pay their bills, manage their units, and contact customer service with the click of a button. The convenience will keep them satisfied and less likely to leave for another facility.
• Incentivize loyalty: Introduce rewards for long-term tenants, such as rent discounts, early renewal bonuses, or move-in specials. Creating these incentives can increase retention rates and build a stable, loyal tenant base.

Another key takeaway from the ISS article is the importance of diversifying services and products to cater to a broader range of customers. While Cushman focuses on traditional storage categories (Class A, B, and C), Chuck Gordon's ISS article encourages self-storage operators to look beyond the basics and explore new ways to serve specialized markets.

Product diversification presents an exciting opportunity to boost revenue and attract new customer segments. Offering specialized services like boat/RV storage, climate-controlled units for valuables (such as wine or art), or business storage solutions can cater to niche markets and set your facility apart from competitors. These services not only increase your potential customer base but also position your facility as a premium option.

Additionally, offering complimentary services such as moving assistance, packing supplies, or even full-service storage can provide extra convenience for customers and add to your bottom line.

Positive Advice for Operators:

• Explore niche storage options: By offering specialized storage solutions like RV/boat storage or climate-controlled units, you can attract customers with unique needs who are willing to pay a premium for tailored services.
• Example: A facility near a popular recreational area could introduce boat and RV storage with 24-hour access, catering to outdoor enthusiasts and increasing occupancy during off-seasons.
• Offer value-added services: Go beyond just storage space by providing packing materials, moving assistance, or even on-demand pick-up and delivery services to differentiate your facility.
• Example: Partner with a local moving company to offer discounted moving services to new tenants, creating a seamless experience for customers while boosting your facility's appeal.

While the Cushman report focuses more on market fundamentals, Chuck Gordon's article emphasizes the increasing importance of sustainability in self-storage. Today's consumers are more eco-conscious than ever before, and facilities that adopt sustainable practices not only reduce their environmental impact but also appeal to this growing customer base.

Implementing green building practices, energy-efficient systems, and eco-friendly operational procedures can significantly reduce costs while showcasing your commitment to environmental responsibility. Whether it's installing solar panels, using energy-efficient lighting, or recycling materials, these steps can enhance your facility's reputation and attract tenants who prioritize sustainability.

Promoting your green initiatives can differentiate your facility in a competitive market, allowing you to stand out to eco-minded consumers who value companies with environmentally friendly practices.

Positive Advice for Operators:

• Embrace sustainability as a competitive advantage: By implementing energy-efficient solutions like LED lighting or solar power, operators can reduce utility costs and improve environmental impact while appealing to eco-conscious tenants.
• Example: A facility that installs solar panels not only reduces its electricity costs but can also promote its sustainable practices, attracting eco-conscious customers who are willing to support green businesses.
• Promote green initiatives: Make your facility's sustainability efforts a core part of your marketing strategy. Highlighting these initiatives in your communications can help differentiate your business in a crowded market.
• Example: Create a dedicated section on your website or social media that showcases your eco-friendly initiatives, such as using recycled materials or offering EV charging stations, to appeal to environmentally conscious renters.

The Cushman & Wakefield report highlights that rising interest rates and compressed capitalization rates have caused some uncertainty in the capital markets, leading many investors to adopt a more cautious approach. However, this environment also presents opportunities for operators and investors who are prepared to adapt and seize the moment.

While Cushman reports that 71% of investors plan to hold their properties through the second half of 2024, this caution also signals an opportunity for those willing to invest in undervalued properties. With capitalization rates rising, operators who take a long-term approach and focus on optimizing their current assets can position themselves for success when the market rebounds.

For those with available capital, now may be the perfect time to invest in properties with strong long-term potential at more attractive prices. As the market stabilizes, these strategic investments will likely yield high returns.

Positive Advice for Operators:

• Capitalize on market conditions: Instead of seeing rising interest rates as a hindrance, view this as a chance to optimize existing properties or invest in undervalued assets for future growth.
• Example: Consider refinancing or renegotiating terms on existing loans to lock in more favorable conditions, or explore acquisitions of properties that may have been overvalued during the post-pandemic surge.
• Take a long-term view on investments: Operators with the ability to hold through market fluctuations will likely see their assets appreciate when conditions improve. Focusing on operational efficiency during this time can ensure you emerge stronger.

The current challenges in the self-storage industry—rising interest rates, adjusting valuations, and shifting market dynamics—should be seen as opportunities to innovate and grow. By embracing technology, focusing on customer experience, diversifying product offerings, and adopting sustainable practices, operators can build stronger, more resilient businesses ready to thrive in the years to come.

Self-storage has proven to be a resilient sector, and with the right strategies in place, it will continue to offer value to both operators and investors. By turning these challenges into opportunities, you can position your business for long-term success and emerge from this period stronger, more innovative, and ready to meet the demands of a rapidly evolving market.