Exploring the Development of New Self-Storage Facilities: To Wait or To Act?

Current Market Challenges

High Interest Rates: The Federal Reserve’s consecutive rate hikes have significantly impacted self-storage transactions, increasing borrowing costs and potentially dampening demand due to reduced housing mobility. This situation has led to a more cautious approach among investors and developers.

Rising Construction Costs: Costs for self-storage construction vary between $25 and $70 per square foot, depending on the facility type, with prices rising due to increases in material costs and labor shortages. Tariffs on building materials may also heighten these challenges in the months ahead.

Overbuilding: The increase in new facilities during and after the pandemic led to oversaturation in some areas, resulting in declining rental rates. However, this trend appears to be slowing with rates stabilizing, suggesting a potential recovery.

Delaying development may result in passing up advantageous revenue streams. With occupancy rates above 90% in many regions, existing facilities generate income that new projects could effectively capture. Additionally, waiting may create opportunities for competitors to establish themselves in desirable locations, potentially diminishing the market share for those who choose to enter later.

The national self-storage market shows early signs of stabilization, with rental rates declining by just 0.7% year-over-year in January 2025 and even seeing slight month-over-month increases. This suggests that the sector could be approaching a balanced state following the surge in supply.

The state of Texas in particular, recognized for its strong economic growth, offers exciting opportunities for self-storage development. The state’s diverse economy and population growth fosters strong demand for storage facilities, making it an attractive location for new projects.

As the market stabilizes, the slowing decline in rental rates suggests a possible turning point, creating a more favorable environment for new facilities. Despite the challenges, self-storage operators project 2-4% revenue and NOI growth in 2025.

Despite the high interest rates, considerable capital remains available from private debt funds and new investors, eager to support development projects.

The self-storage industry is known for its resilience and potential for long-term growth. Developing new projects now positions operators for future success as market conditions improve. Occupancy rates remain above 90% in many areas, highlighting robust demand. Approximately 56 million square feet of new storage space is expected to be delivered nationally in 2025, representing a slight decrease from 2024.

It is important to note that self-storage demand tends to be highly localized, meaning that even amid a challenging national market, specific submarkets, such as those in Texas, may still present remarkable development opportunities.

While the idea of waiting for more favorable conditions may seem appealing, the potential benefits of moving forward on the development of new self-storage facilities at this time appear to far outweigh the drawbacks. By choosing to proceed, developers can capitalize on existing demand, secure prime locations, and position themselves for lasting success in a market that shows promising signs of stabilization and growth. These factors indicate that the self-storage industry is well positioned for a vibrant surge in 2025 and beyond, making this a potentially opportune moment to invest in new developments.