Does the overall decline in self-storage rental rates in the U.S. signal an industrywide slump?

Well, not quite.

On the heels of roughly six to eight years of double-digit rent growth, rental rates are beginning to normalize, said Adam Schlosser, senior director of Marcus & Millichap’s National Self-Storage Group.

“The broad picture is that we’re going to get back to our normalized rent growth of between 6 and 8 percent,” Schlosser said, “and we’re going to have outliers on either side of that.”

In many markets, rent growth either has narrowed to single digits or has headed into negative territory, he noted.

Ups and downs in rates

Nationally, rental rates for 10×10 non-climate-controlled units slipped by 4.1 percent from August 2017 to August 2018, according to a September 2018 report from commercial real estate data provider Yardi Matrix. Rates for 10×10 climate-controlled units dipped by 2.8 percent during the same period, the report says.

While rental rates have fallen over the last year in oversupplied markets — such as 4.7 percent in Austin, TX and 6.6 percent in Dallas-Fort Worth, TX, according to Yardi— they’ve risen in other places.

The most notable market for year-over-year spikes in asking rates is Las Vegas, NV where prices for 10×10 non-climate-controlled units climbed 6.3 percent, according to Yardi. Meanwhile, asking rates for 10×10 climate-controlled units in Las Vegas surged by 9.4 percent.

Southern California’s Inland Empire (Riverside-San Bernardino) is another example of a market where rates are still climbing, up 2.8 percent for 10×10 non-climate-controlled units and 5 percent for 10×10 climate-controlled units.

What’s behind this upswing? Of the 31 metro markets cited in the Yardi Matrix report, the Inland Empire had the lowest share of planned or under-construction facilities as percentage of existing inventory (3.9 percent), meaning new supply is much less of a concern.

Betting on the Midwest

Similarly, Schlosser said, Midwestern markets like Cincinnati, OH; Cleveland, OH; and Indianapolis, IN (none of which were included in the Yardi Matrix report) have enjoyed healthy growth in rental rates because they haven’t been “crushed” by new construction.

Many Midwestern markets remain attractive thanks to relatively stable rents, along with comparatively low acquisition and development costs, according to David Dent, senior real estate market analyst at Yardi.

“If you think about it like a stock portfolio, you’re almost safer betting on Detroit today than you are, say, San Francisco, because at this point in the business cycle, there’s likely to be more volatility in real estate prices in San Francisco than there will be in Detroit,” Dent said.

‘Perfect storm’ is over

Still, even in markets like Las Vegas and the Inland Empire, rental gains are only in the single digits.

“We have to understand that we cannot continue to push rates at 10 percent a year — the consumer will just be priced out of the market,” Schlosser said.

Schlosser noted that the self-storage industry benefited from a “perfect storm” following the Great Recession that enabled double-digit hikes in rental rates.

“We didn’t have a whole lot of new construction. We had a bunch of pent-up demand in the space. Plus, we had a bunch of new jobs, and a bunch of people moving started moving around after the recession,” he said.

In addition, self-storage operators in recent years have stepped up their revenue-management game by adopting hotel-style models for adjusting rental rates to adjust to market conditions.

During the industry’s wintertime slowdown, Dent envisions typical rate discounts across the country, but smaller rate ramp-ups next summer in supply-battered markets like Texas.

Opportunities ahead

Schlosser emphasized that although sophisticated revenue management can’t stop rent growth from softening in supply-hampered markets such as Denver, CO, and Nashville, TN, investors and developers still might find opportunities in micro-markets — standard three- to five-mile trade areas — within those regions. Moreover, experts said, the new-supply crunch should subside over the next couple of years.

Regardless of the rental-rate environment, Alex Pettee, president and portfolio manager at Stamford, CT-based real estate investment adviser and manager Hoya Capital Real Estate LLC, stressed that self-storage demand remains “robust,” fueled by growth in apartment rentals and jobs. Strong sales activity in the furniture and home furnishings category of the consumer goods market — up 3.5 percent from August 2017 to August 2018 — also bodes well for self-storage, he added.

“In finance terms, a storage unit is essentially a cheap ‘option’ on someone’s excess storable goods. The important trend we’re watching for the storage sector are retail sales in the ‘storage goods’ categories,” Pettee said.

Looking ahead, Schlosser said he expects a two- to three-year stretch of sustained pressure on rental rates, “but the long-term outlook for the industry is as strong as it’s ever been.”

John Egan