Cushman & Wakefield's report shows positive market fundamentals continue to attract investors.
CHICAGO, September 11, 2023 – Transaction volume of sales in the U.S. self-storage sector cooled in the first half of 2023, with the trailing 12-month volume down by 57% year-over-year (YoY), following the peak levels achieved in 2022. The increased cost of debt and lack of overall liquidity will create headwinds, primarily for higher leveraged owners, while creating opportunities for well-capitalized investors.
“While this decline is significant, self-storage remains a top performer, with transaction volume exceeding the 12-month levels leading up to the 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. “While this decline is significant, compared to other real estate sectors, most investors view self-storage as offering a favorable risk-adjusted return in today’s economic climate.”
Newer properties with state-of-the-art amenities, including climate-controlled and secured units, hold value. Cushman & Wakefield’s same-store indices show a YoY decrease in average market valuations of 4% for investment Class A assets. In comparison, investment Class B properties decreased by 12% over the same period.
Occupancy leveled near 90% in the fourth quarter of 2022 and has remained nearly flat through the first half of 2023. This softening was primarily realized in Midwest and Southeast markets, with occupancy levels continuing to track upwards in the Northeast and Southwest.
“Construction starts reached all-time highs in the third and fourth quarters of 2022 as developers chased surging consumer demand. Developers pulled back in the first and second quarters of 2023, primarily due to limitations imposed by debt markets, allowing time for the additional supply to be absorbed. Current construction levels represent only 0.3% of the existing supply, which is more in line with longer-term construction trends,” said Luke Elliott, Vice Chair.
“The sector has responded relatively well to the slowing housing market and rate of new supply as operators realign their focus on finding more innovative ways to manage and optimize operations to stay competitive effectively. We are already seeing an increase in capital investment to existing properties, including sustainability upgrades and advanced technologies,” said Jacob Albers, Head of Alternatives Insights.
The Cushman & Wakefield Valuation Index represents an aggregation of property data from nearly 1,200 properties throughout the U.S., reporting an aggregate market value of approximately $15 billion, or 4.2 percent of the total estimated market capitalization for self-storage.
Self-Storage Performance Index (SSPI), Cushman & Wakefield’s proprietary index on the performance of the self-storage sector, decreased 0.1% compared to the first quarter of 2023 and was down 7.4% year-over-year. The SSPI now stands at 165.1, indicating a normalization of the sector after reaching record levels.
“Self-storage fundamentals remain healthy at the midyear point of 2023. Conditions have cooled from peak levels, representing a normalization after accelerated growth. The pandemic challenged economic and social norms, profoundly impacting all commercial real estate sectors, yet pushing self-storage economics to all-time highs,” said Tim Garey, Managing Director. “As rate hikes pull the self-storage market back to historical levels, the overall market fundamentals for the sector point to a favorable outlook.”