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  • Writer's pictureAlex Dmyterko

5 Things to Watch in Self Storage Development in 2023

Updated: Mar 8, 2023

The last three years have taught us that we live in interesting times. If we were to write this article at the end of 2019, who could have predicted the 2020 global Covid-19 pandemic and that it would last well into 2021? At the end of 2021, who could envision 2022 would see over 300 hundred days of war between two European countries and that US inflation would rise to levels not seen since 1981 - Ronald Reagan’s first year as President? Given global macroeconomic events in the previous three years, it is understandable that people and businesses are less than optimistic when considering what 2023 may hold.

However, change brings opportunities, and I am optimistic about what the new year may hold. Streams Development is focused on completing the 562-unit STOWE Storage facility in Anderson, South Carolina, in 2023. With this project moving from development to operations in 2023 and new prospective self-storage projects evaluated, Streams Development keeps a close eye on the major economic factors that can impact these developments and the self-storage industry. This blog article will highlight five major factors self-storage developers and investors will watch in 2023.

1. Inflation

Inflation began its march to levels not seen since the 1980’s halfway through 2021. Several factors contributed to the increasing inflation, including supply chain constraints, pent-up consumer and business demand, pandemic stimulus funds, and increasing energy prices due to both high demand and the Russian invasion of Ukraine. Annual inflation rose to a height of 9.1% in June of 2022 and fell to 7.1% by November 2022. With the economy still recovering from the pandemic, the Federal Reserve didn’t begin to increase the Federal Funds Rate to combat inflation until March of 2022.

On the development side, we will continue to see escalating labor and material costs in 2023, but the rate of increase will be slower. This will increase the cost of self-storage projects currently being developed. However, it’s important to remember these cost increases will be offset, in part, by the increased market value of the self-storage facility once completed. Another important consideration is that further development costs caused by inflation will be capitalized and expensed over a period of between 10 and 30 years, which helps mitigate its economic impact.

On the self-storage operations side, inflation will further increase operating costs in 2023 and will primarily be attributed to increased on-site management, maintenance, and utility costs. A portion of the increased operating costs can be passed on to renters, but to what extent will depend on each self-storage facility's market.

2. Rising Interest Rates

As of December 14, 2022, the Federal Fund Rate is 4.5% and is expected to continue to increase into 2023. The gap between annual inflation and the Federal Fund Rate remains wide, and it’s reasonable to expect the Federal Fund Rate to continue its upward climb to close this gap in 2023, however, in smaller increments.

As the Federal Reserve continues to raise the Federal Fund Rate in 2023, lenders will continue to increase their lending rates. This will pressure self-storage developers, particularly those with variable-rate financing. Each self-storage developer will have specific finance terms and structure, and the impact of increasing rates will be unique. However, developers who chased self-storage development and acquisitions based on the low cost of debt will find rising interest rates particularly difficult.

3. Regional Differences

There are more than 50,000 self-storage facilities in the U.S., with annual revenues of around $39.5 billion. The US self-storage market has seen tremendous growth in the past decade and is projected to grow to 43.2 billion by 2023. There are ample self-storage market statistics by states and municipalities that give some insight into where future self-storage developments may make sense. However, a self-storage facility's specific location and the community it serves is a better indicator of whether an investment is worthy.

Self-storage renters typically rent storage units within a three to five-mile radius of their home. Even in states and municipalities with ample self-storage capacity that may deter self-storage development, excellent opportunities may still exist depending on the location. Specifically, new housing communities and communities without convenient self-storage facilities may be underserved by the local self-storage market. A key metric for finding new self-storage development opportunities is square feet of storage per capita. These potential development opportunities can be found along the US Sunbelt, also known as the Smilebelt, where job and household growth has been strong and is expected to remain strong.

Streams Development is focused on self-storage development in the Upstate of South Carolina, located in the northwest corner of the State. This area has seen substantial population and economic growth in the past ten years. We are currently developing a self-storage facility and a multi-family apartment complex in the Upstate, specifically Anderson, SC, which has seen its population grow by 23% since 2010.

4. Inventory Levels

Self-storage development has seen tremendous growth throughout the US, with construction spending growing from $1 billion in 2015 to $5 billion in 2018. As of 2021, there were more than 50,523 self-storage facilities across the US, up from 44,149 self-storage facilities in 2017, a 14% increase. Even with the growth in available self-storage capacity, occupancy rates were at a record level of 94.5% in 2021. It has yet to be seen if rising interest rates and record inflation will reduce the year-over-year growth rate of self-storage facilities.

Self-storage developers are watching to see if increasing interest rates and inflation will fall in the near term or if this will continue into the medium to long term. When it becomes clearer whether interest rates and inflation will remain high, this may reduce the economic feasibility of some prospective self-storage developments. Over time, this will reduce the annual growth rate of self-storage inventory levels.

5. Household Changes

The demand for self-storage continues to increase as households change their living arrangements. Baby boomers continue to downsize and use self-storage for belongings they may need in the future or want time to determine what they want to keep. With the population continuing to age, families will often put their family member’s belongings in self-storage when they move into a smaller residence or care facility. In an event where the death of a loved one is unexpected, moving their belongings into self-storage gives a family the room and time to determine what to do with the family members' items.

As the population ages and households change their living arrangements for themselves and dependent family members, the demand for self-storage will continue to rise.

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