In no surprise to anyone who’s been watching interest rates and the commercial real estate market, the number of sales in the U.S. self storage sector cooled off during the first half of 2023, according to the latest numbers from Cushman & Wakefield.
It’s yet another sign that no CRE sector, even one of the hottest, is free from the negative impact of higher interest rates.
According to Cushman & Wakefield, the number of self-storage sales during the last 12 months fell 57% year-over-year, primarily attributed to the increased cost of debt and a lack of overall liquidity in the market.
This shift has set the stage for a complex landscape, generating headwinds for higher-leveraged owners while simultaneously offering opportunities for well-capitalized investors. Cushman & Wakefield emphasized that the self storage sector remains a resilient performer, with transaction levels still higher than those witnessed in the 12 months leading up to the COVID-19 pandemic.
“Knock-on effects from rate hikes, including a stagnating debt market, have impacted all commercial real estate sectors in 2023,” said Mike Mele, executive vice chair with Cushman & Wakefield.
Mele also said that compared to other real estate sectors, most investors view self storage as providing a favorable risk-adjusted return in the current economic climate.
Properties boasting modern amenities such as climate-controlled and secured units, are sustaining their value in the market. Cushman & Wakefield’s same-store indices reveal a YoY decline of 4% in average market valuations for investment Class-A assets but a more substantial dip of 12% for investment Class-B properties during the same period.
Occupancy rates stabilized near 90% in the final quarter of 2022, and this trend has persisted with marginal fluctuation throughout the first half of 2023. The softening of occupancy rates was particularly pronounced in the Midwest and southeast markets, while the Northeast and Southwest continued to witness upward trajectories in occupancy levels.
The construction sector experienced an intriguing pattern, with record highs in starts during the latter part of 2022. However, developers curtailed their activities in the first and second quarters of 2023, mostly because of constraints imposed by the debt markets.
This strategic pullback allowed the market to absorb the additional supply of self-storage units, resulting in construction levels that align more closely with long-term trends. As of now, ongoing construction represents just 0.3% of the existing supply.
Cushman & Wakefield’s proprietary Self Storage Performance Index, which measures the sector’s performance, fell by 0.1% when compared to the first quarter of 2023 and a dip of 7.4% when compared to the same period a year earlier. As of now, the SSPI stands at 165.1, indicating a normalization of the sector after a period of record-setting levels.
“The pandemic challenged economic and social norms, having a profound impact on all commercial real estate sectors, yet pushed self storage economics to all-time highs,” said Tim Garey, managing director with Cushman & Wakefield. “As rate hikes pull the self storage market back to historical levels, the overall market fundamentals for the sector point to a favorable outlook.”
