Nerves & Steel: Tariffs And Their Impact On Self-Storage

Brace for impact: starting today, the tax on imported metals has jumped to 50%, twice what it was yesterday. President Trump announced the latest trade war offensive last Friday, while visiting a US Steel plant outside Pittsburgh. "[It] will even further secure the steel industry in the United States," Trump said. "Nobody is going to get around that."

Of course, the self-storage industry has been bracing itself for possible fallout of tariffs imposed by Trump for months, as threats, pauses, and rollbacks persisted. Now, unless the President makes deals or a court intervenes (the state of California is looking to appeal over a court ruling dismissing its challenge to the Trump tariffs) the 50 percent will remain in place. Like many other commercial real estate sectors, this tariff rollout, combined with continued elevated interest rates, is bound to impact self-storage significantly and in potentially unexpected ways.

While it seems that the strategy around tariffs fluctuates week to week, clear trends and outcomes are emerging.

New Development Slows

The volatile cost of construction materials since 2020, though stabilized somewhat in 2024, is expected to return to uncertainty. Many pundits are predicting a five percent increase in total construction costs due to tariffs. Combined with continued elevated interest rates, new construction is a costly proposition, causing those developers attempting to thread the needle in an already challenging market to retract even further.

The reality is that construction of many new self-storage facilities is being delayed or postponed in many cases. Instead, many developers are pursuing new sites or readying them for development by tackling the necessary entitlements and due diligence, buying time for when costs once again regulate, or the economy is more predictable.

Tariffs also drive volatility in the overall macroeconomic market. As a result, many developers and investors may be without an excess of capital (and down payments on potential sites).

Less Reliable Proformas

Today, financial re-trading is at an all-time high. Lenders are finding it more difficult to uphold financing terms once interest rates fluctuate, and suppliers are struggling to honor estimates and original terms once tariffs are applied.

The fallout from this market volatility will continue to impact the long-term strength of the self-storage sector, and this will be exacerbated if the tariff policy continues to be modified weekly. It will be some time before quotes, lending terms, and other financial negotiations are considered firm and unchangeable prior to the close of a deal. This constant flux only adds to today’s exasperating pursuit of the construction of new self-storage facilities.

Market Oversaturation Drained

However, the pause in the construction of new self-storage facilities, particularly in high-growth, overactive markets, may actually benefit the industry. With limited new inventory surfacing, primary and secondary markets now have the opportunity to absorb excess product. Rental rates are starting to climb in some major metropolitans, and elevated occupancy levels will only cause these rates to rise even more leading to growing profit margins.

REITs and market operators that were once driving rates to below market standard are now leading this adjustment. The potential exists for rental rates to approach pre-pandemic levels as operators decide to add value to existing properties instead of building or acquiring new assets.

Strategic Development Shift

With the slow in new development comes the emergence of an unexpected silver lining. A sector that once experienced an influx of impulsive players hoping to capitalize on a high-growth market is now attracting more thoughtful developers seeking to fulfill the needs of a community.

Thinner margins and more stringent financial thresholds are forcing developers to more accurately define a facility scope that best serves each unique market. Factors such as the overall number of units, as well as the quantity of each unit size, along with the features expected by the trade area clientele, commonly result in a more lucrative asset.

Whether additional RV storage is planned, drive-up storage is more sensible, or an old-school, single-story, climate-controlled structure is best is all driven by understanding the surrounding market.

Investment Opportunity Haystack

Today’s market might feel a bit like the recent pandemic, when labor and material costs skyrocketed and stock market uncertainty peaked. But there is one significant difference: During the pandemic, the cost of capital was relatively low, which in turn spurred the overall growth of the self-storage industry. Today, the unfortunate result of that capital infusion is an industry somewhat plagued with oversaturation and, in some cases, a fall from grace as an investment darling.

For new developments and acquisitions, deals are challenging to pencil, let alone close. Instead of three to four percent, interest rates have climbed to seven percent to nine percent for construction loans, ultimately limiting profitability.

However, where capital exists, opportunities remain, albeit harder to find. Historically, the self-storage sector tends to be lucrative even during an uncertain economic landscape. Currently, it is performing better than the office sector but not as well as assets in the necessity retail or med-tail categories. Still, when opportunities materialize, more than likely, developers and investors with funds will enter or grow their stake in this resilient asset class.

Those opportunities may just be around the corner for the discerning investor. As five-year loans mature on facilities built or acquired in 2021 and 2022, owners will be forced to either refinance at a higher interest rate or sell, potentially at a loss as those properties have yet to experience appreciable growth. For most, breaking even will be considered a win. On the bright side, inventory will be available for the right investor.

Far-Reaching Impact

Tariffs have the potential to cause widespread financial disruption that will impact more than just development and construction of any asset type. Tariffs ultimately affect consumer behavior.

Consumers’ limited tolerance for climbing self-storage rental rates could lead to another cycle of bottomed-out rents. Markets with stronger demographics and higher household incomes are more immune; however, consumers in communities where economic strife and uncertainty are widespread will force rental rates lower by limiting spending. More storage facilities will be clamoring for fewer consumer dollars due to loss of jobs and higher costs of living in places such as Washington, D.C.

History has proven that slow and steady economic flux, even in the wrong direction, actually benefits the self-storage sector. However, rapid economic shifts, and subsequent recessions, are a detriment to occupancy levels. The reality is that strained finances and employment uncertainty force consumers to sell or discard stored belongings in an effort to minimize living expenses as a result of financial duress.

Importance Of Connection

An accurate pulse on the state of tariffs, interest rates, and other factors, and the impact they have on commercial real estate, particularly self-storage, is vital to stabilizing asset and portfolio health. Today, resources with first-hand knowledge, such as brokers and asset managers, are the compass and key to successfully navigating the reality of economic ebbs and flows.

–

David Perlleshi and Frank DeSalvo are the leaders of Franklin Street’s National Self-Storage Investment Sales Platform, providing comprehensive real estate solutions for owners and investors of self-storage assets throughout the country. They have a combined $250 million in self-storage transactions throughout their careers.

COMMENTS