The last year has brought us surging inflation, astronomical interest rates, and a housing market slump. For the self-storage industry, that has translated to rental rates and occupancy declines, reduced access to credit, and downwards pressure on NOI.
Will 2024 bring any relief?
The question may not be a matter of if, but rather a question of how much and how soon. From evolving Federal Reserve policies to shifting housing market dynamics and consumer spending patterns, 2024 presents the prospect of improving economic conditions for the self-storage industry. However, favorable changes to the overall economy are likely to be modest and gradual.
To gain a better understanding of how the self-storage industry might fare in the coming year, let’s take a deeper look at the overarching trends of 2024 and how each might play out.
Interest Rates and the Federal Reserve Policy
Through the last year, the Federal Reserve has maintained a cautious approach to monetary policy, focusing on controlling inflation without triggering a recession. Between March 2022 and August 2023, the central bank increased the federal funds rate from a historically low range of 0% to 0.25% to the dramatically elevated range of 5.25% to 5.5%. The effect has been a considerable cool own of the U.S. economy which has brought to bear higher borrowing costs, reduced economic growth, slower wage growth, and a deep freeze in the housing market.
The Fed’s policy, particularly its stance on interest rates, is expected to hold steady into the first half of 2024. As inflation continues to moderate, analysts expect the Fed to reverse course midway through next year. JP Morgan forecasts that the Fed will reduce rates up to six times starting in June, for an overall fed rate of 4% to 4.25% by the end of 2024.
What does it mean for self-storage?
For the self-storage industry, this translates to a stable but cautious financing environment. The expected stability in interest rates could make borrowing costs predictable, aiding in financial planning and loan servicing. The potential easing of interest rates predicted for the back half of 2024, may open the door for expansion activity and stepped up consolidation moves among major industry players. However, the sector must remain alert to any sudden policy shifts that could affect loan affordability and access to capital.
The US Housing Market in Hibernation
The current U.S. housing market, characterized by high demand and climbing prices, is expected to undergo some minor changes in 2024. Soaring mortgage interest rates coupled with low inventory of single family homes, have sent prices through the roof, resulting in the most unaffordable housing market in the last 40 years.
Economists see some room for the housing market to improve in 2024, albeit modestly. In an encouraging sign, the average 30-year rate fell to 6.88% in December after peaking above 8% in October, and new listings and home sales ticked up slightly. Lawrence Yun, chief economist for the National Association of Realtors, predicted sales could rise as much as 15 percent next year as interest rates continue to moderate.
What does it mean for self-storage?
Any improvement in the housing market is a welcome development for the self-storage industry. Typically, high activity in the housing market, marked by sales and relocations, generates demand for storage solutions. The current nadir in housing has had a markedly negative impact on storage demand, and as a result, storage rental rates and occupancy levels. Many storage operators find gains in those areas made during the COVID-era have essentially been wiped out.
While a slow and steady improvement for housing market activity is expected, the extent will vary market by market. Self-storage operators will need to strategize accordingly, continuing to focus on driving demand through marketing and protecting their bottom line by maximizing revenue per tenant.
Growth and Consumer Spending
Consumer spending in the U.S. saw growth in 2023, especially in specific categories that were stunted during the pandemic such as dining out and entertainment. Despite fears of a decline, holiday retail sales managed an increased 3.1% compared to last year. Many economists are taking this as an indication that the consumer base remains resilient, boosted by a stable labor market and moderating inflation. As spending rose, overall consumers burned through much of their pandemic era savings, spending $1.9 trillion out of $2.1 trillion in accumulated savings accrued during the pandemic as of June 2023.
Economic growth and consumer spending in the U.S. are projected to continue growing in 2024, albeit likely at a more subdued pace than the present due to some concerning limiting factors: diminished excess savings, leveling off of wage gains, lower savings rates, and the release of previously pent-up demand. Additionally, the resumption of student loan payments and an increase in delinquencies in subprime auto loans and millennial credit card debts pose additional limits on spending.
What does it mean for self-storage?
This expected slowdown in consumer spending growth could have a dual impact on the self-storage industry. On one hand, reduced consumer spending might decrease the accumulation of goods that require storage. The recent surge in spending on experiences and services, do little to encourage demand for storage. On the other, economic uncertainty often leads to downsizing and increased need for storage solutions as people reorganize their living and working spaces.
Self-storage operators should, therefore, prepare for a nuanced market scenario. They might need to adjust their marketing strategies and operational models to cater to a consumer base that is cautious yet still in need of storage solutions. For example, downsizing customers are likely to be more price sensitive compared to other types of tenants. As a result operators may make adjustments to planned rate increases or provide additional amenities to add more value for tenants.
The Year Ahead
From navigating interest rate changes and a shifting housing market to responding to consumer spending patterns, self-storage operators must stay informed and flexible in 2024. The ability to swiftly adjust to these economic currents will be key to thriving in the evolving real estate landscape. While much remains up in the air, it is reasonable to expect that next year will provide a recovery and stabilization opportunity for much of the self-storage industry, offering a respite to the steep declines in rates and occupancy experienced by many in 2023.
