Market Trends for U.S. Self Storage: A Return to Normal in 2024

In the first half of 2024, the total self-storage transaction volume reached $3.36 billion. While this represents a slight increase of less than 1% over the first half of 2023, it's a notable departure from the explosive growth seen between 2020 and 2022, when the industry witnessed nearly $50 billion in transaction volume. This surge, driven by pandemic-related factors, far exceeded the $35 billion recorded in the seven years prior (2013–2020). The recent numbers indicate a return to pre-pandemic investment patterns, where self-storage was still a popular asset class, but not as frenzied as during the boom.

As interest rates have risen, so have capitalization (cap) rates across all sectors of commercial real estate, including self-storage. From their Q4 2022 lows, self-storage cap rates have increased by 90 basis points, reaching 5.9% in Q2 2024. This rise reflects the broader trend in commercial real estate, where higher borrowing costs are tempering property valuations and investor yields.

Regionally, the Midwest and Southwest have been hit hardest, with rent per available square foot dropping by -11.2% and -10.1%, respectively. These areas have seen the most significant impact on property fundamentals, as demand growth has been slower compared to other regions. However, there are signs that these declines may be leveling out as the market adjusts to new interest rate dynamics.

Property valuations in the self-storage sector softened considerably in Q1 2024. The average price per square foot (psf) for Class A properties declined by 20%, falling to $190 psf, while Class B properties saw a 15% decrease, averaging $124 psf. Although these declines are significant, recent data suggests that valuations may have bottomed out and could slowly tick upwards in the second half of 2024.

This softening in property valuations has created opportunities for investors looking to enter the market at more favorable price points. While uncertainty remains, especially with interest rates continuing to influence cap rates, the general expectation is that the self-storage sector will stabilize as property market fundamentals improve and the capital markets regain confidence.

One of the key takeaways from recent investor surveys is that there is little expectation for further significant changes in cap rates over the next 12 months. Although the average spread between cap rates and the 10-year treasury is still below historical levels, many investors believe that the worst of the volatility is behind us.

Looking ahead, increased investment activity is anticipated in the second half of 2024. As the market absorbs the impact of higher interest rates and valuations begin to stabilize, the fundamentals of the self-storage sector are expected to improve. Investors remain cautiously optimistic, recognizing that despite ongoing crosscurrents, the long-term demand for self-storage remains robust, driven by changing consumer behavior, downsizing trends, and the continued growth of e-commerce.

While 2024 may not bring the explosive growth seen in previous years, the self-storage sector is gradually finding its footing in a higher interest rate environment. Transaction volumes and valuations are stabilizing, and investor sentiment suggests that the market is beginning to adjust to the new economic reality. With the fundamentals of self-storage still strong, especially as market conditions improve, the second half of 2024 could present new opportunities for both seasoned and new investors alike.

Whether you're looking to invest in Class A or Class B properties, the current landscape offers a chance to enter a market that is beginning to stabilize, with potential upside as the industry adapts to shifting economic conditions.