For years, the self-storage industry in the United States has relied on what insiders call the Four D’s: death, divorce, displacement and disaster. But the coronavirus pandemic, combined with aggressive competition and brash overexpansion, has made what once seemed like one of the few recession-proof parts of the commercial real estate industry look as vulnerable as many other businesses.
The industry had been expanding since the last downturn as companies increased their footprint, eager to meet an appetite for storage space. Rising rents attracted rivals that courted consumers with new technology and improved customer service.
Rents have begun to recede in the pandemic, however. In June, monthly rent for new customers before one-time discounts for a 10-by-10 unit without air-conditioning and heat, for example, declined 4.3 percent nationwide on an annualized basis, according to the research site Yardi Matrix. For the same unit with climate control, rent fell 6.7 percent.
And as coronavirus cases surge around the country and leaders call for more restrictions on schools and businesses seeking to reopen, the growth of the self-storage industry could be hampered further.
“Growth and new supply was starting to weigh pretty heavily on fundamentals,” said Ryan N. Clark, director of investment sales at Skyview Advisors, a brokerage firm based in Tampa specializing in self-storage sales. “The Covid pandemic obviously accelerated and exacerbated some of those challenges.”
In a sense, the longtime success of the self-storage industry helped sow the seeds of its current problems. The industry got its start in the 1960s, when swelling consumerism led Americans to buy more stuff than they had room for. Ever since, self-storage businesses have steadily grown.
Rates for storage units, with climate control and without, climbed nationwide in the years after the last recession as demand ballooned. Americans, flush with discretionary income from the economic boom, bought more stuff and needed more places to store it.
The number of self-storage facilities nationwide grew to more than 60,000 in 2020 from around 47,000 in 2008, according to the research firm IBISWorld. Revenue increased 2.6 percent annually to $38.6 billion in 2019 from 2014. Development of self-storage facilities surged, and a wave of consolidation swept the industry as larger operators sought to capitalize on the growth.
This has all contributed to a professionalization in the industry. Not only did the management and the investment in self-storage firms become more sophisticated, the facilities grew sleeker.
“They were single-story, cinder block, surrounded by barbed wire, gravel driveway, maybe a guard dog, behind the industrial park or the dump,” Joseph D. Margolis, chief executive of Extra Space Storage, said of his industry’s facilities not too long ago. “Now if you look at them, they look like beautiful retail stores.”
The new look made consumers more apt to rent, which drew more competition.
Thousands more operators, most tiny independents, poured into the business, and institutional investors followed as self-storage shifted from being “more of a cottage industry” in commercial real estate, according to Joseph Iacono, chief executive of Crescit Capital Strategies, a lender. Publicly traded real estate investment trusts such as Public Storage and Extra Storage, the country’s two biggest operators by number of facilities, bought up competitors.
The sector’s success — and the fact that its customer service and marketing had been slow to change for decades before the last recession — also gave birth to a new class of rivals focused on full-service options. Start-ups backed by venture capital, such as Clutter and MakeSpace, leaned more on technology to interact with customers and offered perks like pickup and delivery.
“Storage for the past few decades has really not innovated on the customer experience itself,” said Rahul Gandhi, a co-founder and the chief executive of MakeSpace, which was started in Manhattan in 2013. “Much of the stress of this service has been put on the customer.”
But the number of storage facilities soon climbed past demand in many places. Average rents for storage started to decline slightly in 2018 and 2019 in some markets. Analysts began talking about a peak in the industry, which relies on the churn of Americans moving their stuff around. The pandemic hastened the decline.
“You had less move-ins and less move-outs,” said Mr. Clark of Skyview Advisors. “When mobility is hurt, self-storage is hurt.”
The industry also faced eviction moratoriums in the pandemic similar to the ones meant to protect residential tenants. The most prominent was in Los Angeles, which in June passed an ordinance deferring rent and late fees for self-storage tenants delinquent because of the pandemic.
Self-storage suppliers struggled with the same challenges that other industries were confronting, including keeping surfaces cleaner and reducing the potential for crowding at facilities. States’ lockdown orders regarding essential businesses also varied. Adding to the confusion, a federal directive, revised in late March, placed self-storage businesses among those deemed “so vital to the United States that their incapacitation or destruction would have a debilitating effect” on the country.
Revenue buckled as rents stagnated. By the end of May, the average rents for the largest publicly traded self-storage companies, including Public Storage, Life Storage and Extra Space, were about the same as the year before, according to research firm Green Street Advisors.
But self-storage companies keep building, compounding the oversupply challenge that the industry faced before the pandemic. Properties under construction or planned nationwide accounted for 8.9 percent of overall inventory in June, an uptick from the month before, Yardi Matrix said.
The pace of new development is expected to slow, however, in part as a response to oversupply and because of obstacles thrown up by the pandemic, including the shutdown of construction and permitting in some areas. New supply in terms of properties and rentable square feet is expected to drop through 2024, according to several industry forecasts, similar to a decline coming out of the last recession. This should help rents rebound.
In the meantime, some operators will be able to repurpose unrented units for experiential retailing, conventional retailing or last-mile delivery warehousing, according to Adam Petrillo, head of the industrial services group at the brokerage firm Savills. This will be particularly true in mixed-use developments in urban areas that include self-storage businesses.
And if that doesn’t work, there are still the Four D’s. The coronavirus might have worsened industry trends, but Americans still need places to park their stuff — maybe more so because of the pandemic’s ripple effects, including residential evictions and hasty relocations.
After several weeks of unevenness, operators reported a turn toward typical rates of move-ins and move-outs beginning in May. The occupancy rates for the largest publicly traded providers were north of 90 percent that month.
Even with the pandemic, the self-storage industry remains a better financial investment than other real estate sectors, like offices, hotels or even life sciences projects buoyed by the hunt for Covid-19 therapeutics and vaccines, although it lags malls, health care and apartments, according to Green Street Advisors.
In all of this, the industry might prove to be recession-proof after all, or at least immune to a pandemic.
“As the economy reopens in various communities and people get back to more normal,” Mr. Margolis of Extra Space said, “we’ll snap back to normal very, very quickly.”