Americans Went All-In on Self-Storage. That Demand Is Suddenly Cooling.

Peter Chu, a retired lawyer living in Portland, Ore., pays nearly $400 a month for his storage unit in Seattle, where he used to live. That rate has gone up by roughly $150 since 2022.

Mr. Chu is caught in an industry that was booming a few years ago during the coronavirus pandemic but now finds it has built way too many rental units. As the industry cuts so-called street rates to entice new customers, its existing customers are paying substantially higher rates that are sometimes raised twice or more in a year.

The demand for self-storage cooled right as a glut of new supply hit the market, particularly in cities like Phoenix and Atlanta, said Tyson Huebner, the director of research at Yardi Matrix, a division of the property-management software firm Yardi.

“It was really attractive in the moment, but as soon as you go through planning, building, by the time you deliver, you’re kind of in a different market,” he said.

Many developers, spurred by the pandemic to invest money in new self-storage facilities, have been caught short by this drop in demand. In Sun Belt markets, where much of the self-storage spaces have been built over the past couple of years, falling rental rates combined with climbing construction and financing costs have prompted some developers to walk away from projects entirely.

According to SpareFoot, an online platform where people can search for storage units, the average monthly rent for a unit in the United States was $85.14 as of March, down from $108.58 two years earlier.

Last year, 245 self-storage construction projects were abandoned, more than double the number from the year before, according to Yardi Matrix.

Yardi Matrix forecast that self-storage revenue could outright decline in 2024 for the first time since the financial crisis in 2008. The sector faces what Michael Elliott, an equity analyst at the investment research firm CFRA, characterized as “significant headwinds” after years of growth. On average, the industry added 439 storage facilities annually from 2010 to 2019, according to Yardi Matrix. From 2020 to 2023, that number rose to 735.

One of the reasons for the drop in demand is that people aren’t relocating as much. During the pandemic, a wave of city dwellers fled their homes as offices closed, many searching for more outdoor space and residences closer to family. As people moved from apartments and condominiums, they often needed a place to put their stuff — and storage businesses raced to meet that demand.

But Americans are no longer migrating from urban centers as much. And since the Federal Reserve began raising rates two years ago to rein in inflation, the commensurate spike in mortgage rates put the housing market into a deep freeze. When the number of home sales hits a nearly three-decade trough, as it did in 2023, according to the National Association of Realtors, demand for storage — roughly half of which comes from people moving — also takes a hit.

“We’re probably closer to what would be a quote-unquote bottom with occupancy and rental rates,” Mr. Elliott said.

According to the Self Storage Association, a trade group, around 11 percent of U.S. households have a self-storage unit, but there isn’t enough new demand to make up for the many new facilities that have popped up around the country. Over the next two years, millions of square feet of self-storage projects are expected to open up.

Higher interest rates also make it harder for developers of storage facilities to finance construction.

Lee Menifee, who leads investment research at PGIM Real Estate, a division of Prudential Financial, said that “most of the decrease in construction activity is attributed to higher construction costs and less availability of construction debt.”

For existing self-storage operators, it’s much more expensive to do business today, said Timothy Dietz, the president and chief executive of the Self Storage Association. Property taxes have increased, he said, as tax assessments climbed along with real estate values over the past couple of years. Property insurance has also become more expensive, particularly in parts of the country that face regular threats from natural disasters such as hurricanes and wildfires. And higher interest rates make it more expensive for businesses to refinance existing loans.

Aside from a handful of large, publicly traded companies, such as Public Storage and Extra Space Storage, the sector is fragmented compared with other classes of commercial real estate. The Self Storage Association estimates that three-quarters of the nation’s roughly 60,000 self-storage facilities are owned by small operators, many of them family businesses that lack the deep pockets and access to financing of their larger competitors.

But even large players aren’t immune to rising costs. Executives at Public Storage told investors on their quarterly conference call in February that property taxes, which have risen quickly as real estate values have climbed, were the company’s largest line-item expense.

These higher expenses are coming as self-storage operators have to lower their rates to compete with more players. Street rates — monthly rental rates offered to new customers — have been falling. As of November, Yardi Matrix found that nationwide rental rates had dropped roughly 4 percent on an annualized basis. Rates for climate-controlled storage units, which make up much of the new development, were down 4.4 percent.

Public Storage’s president and chief executive, Joe Russell, told investors on the conference call that “the new customer environment remains challenging.”

Joe Margolis, the chief executive of Extra Space Storage, expressed a similar outlook on the company’s recent quarterly call, telling investors, “The industry as a whole will likely face headwinds from lower new customer rates in the near term.”

Storage companies have been making up for lower rates — usually offered as promotional prices — by raising rates on existing customers. The rate increases are happening at a much faster pace, too. Previously, the increases would happen after customers had been renting for around a year, but “now, that’s hitting in Month 2 or 3 — the move-in rates now are almost like a promotional rate,” said Kristin Millington, the director of the self-storage and manufactured housing groups at Crow Holdings Capital, a real estate development and investment firm.

The businesses are banking on customers like Mr. Chu, the retired lawyer who is staying put despite having his rate increase so quickly and so sporadically. He said that although “it’s painful to see all my money going toward a storage unit,” he was unlikely to move the old computers and cellphones, photo albums, financial records and other personal items he kept there because he liked the center and its location.

“Tenants have become accustomed to using their storage as an extra closet; the desire to move isn’t there,” Ms. Millington said.

Mr. Huebner agreed, saying, “For the most part, most people won’t spend a weekend moving their stuff to chase a lower rate.”

“You see customer length of stay increase over the past few years,” he said. “That’s kind of been a long-term trend. Once people put stuff in storage, they kind of forget about it.”