SSA Blog

Wednesday’s benchmark interest rate increase by the Federal Reserve signals a major mood shift for what lies ahead for the self storage industry. 

The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point, the first increase since July 2023, and likely the first of two increases expected before the year is out. 

“I think another increase is certainly possible, but to me the bigger story isn't whether the next 25 basis points comes in October or December. It’s how dramatically the conversation has changed,” said Shawn Hill, principal and founding member of Chicago-based The BSC Group, a commercial mortgage banking firm. “At the beginning of the year, virtually every conversation we were having with borrowers was about when rates were going to come down. Now, we’re talking about how many additional increases we might see.”

Nine months ago, storage operators and investors anticipated rate cuts coming in 2026 would improve storage development underwriting. Perhaps more impactful, falling interest rates would spark improvement in the stagnant housing market, a significant driver of storage use.

Over the course of the past month, it became evident the Fed would respond to another raft of discouraging inflation data alongside decent labor market data. A resurgence of crude oil prices above $100 a barrel and record prices for diesel fuel added pressure. 

Hot inflation data has pushed the 10-year Treasury yield to its highest levels since 2007. Bond yields matter because they determine how much it costs to borrow money in almost every corner of the economy. Treasury Secretary Scott Bessent tried to calm the bond market by buying long-term government bonds from investors to bring down yields. It worked for only a few hours, and yields began to rise again. 

“I think the last month has been pretty meaningful,” Hill said. “To me, these are concerning signals. The market seems to be telling us that inflation, deficits, Treasury issuance and broader fiscal concerns may be more persistent than people had hoped. The Fed can influence the market, but ultimately the five- and 10-year Treasury rates are set by the bond market.”

Chris Jernigan, president, Jernigan Storage Consulting, said storage investors should focus on quality deals, given the enduring strength of the product type.

“Attempting to predict interest rates is always a perilous game even in the most normal of times, even tougher in times of uncertainty, which I believe we have been in since 2020 and the start of COVID,” Jernigan said. “As a self storage owner or developer, focusing on being involved in highly quality deals and worrying less about interest rates is always the right tactic.”

Rising commercial interest rates will not be good news for a growing number of strained storage developments. Storage brokers say they are increasingly seeing stressed deals where investors are facing the five-year investment window to sell or refinance storage developments made in 2021 and 2022, and market conditions aren’t good for either.

Hill said rising interest rates makes that predicament harder, though he added there’s still a tremendous amount of debt and equity capital that wants to be in self storage because of the historical performance of the asset class. 

“The problem isn’t necessarily access to capital — it’s the math,” Hill said. “A perfectly good property with a perfectly good borrower can reach maturity and discover that today’s debt simply doesn’t generate enough proceeds to retire yesterday’s loan.”

Borrowers and capital providers have been able to extend maturities and wait for a better rate environment, but at some point that approach will no longer work.

Hill said more borrowers have moved toward floating-rate debt this year rather than locking in longer-term fixed rates because they expected rates to decline. With interest rates on the rise, that thesis may need to be reconsidered, he said.

Rate hikes are likely to dampen storage construction but actually increase the number of storage transactions as maturities and investment horizons force owners and lenders to make decisions. 

“This environment could create some interesting acquisition opportunities,” Hill said. “As mounting maturities and approaching investment horizons force both lenders and owners to finally make the difficult decisions, well-capitalized buyers should find more opportunities to acquire newer vintage properties at or below replacement cost that simply wouldn’t have come to market otherwise. Ultimately, this environment rewards conservative capital structures.” 

On the positive side, higher rates and rising construction costs will constrain new supply, creating better supply-demand fundamentals for existing operators.

Jernigan agreed that strong operators will get stronger.

“Self storage has been a fantastic investment for six decades now, and that isn’t going to change," he said. "We might need a sharper pencil to do deals in the current environment, but we are still in the game due to our great product.”