Self-Storage Outlook: Compounding Returns in the New Real Estate Cycle
The commercial real estate investment environment has fundamentally changed. For much of the prior cycle, declining interest rates, readily available leverage, and cap-rate compression supported attractive returns.
We do not believe those same tailwinds can be relied upon today. Interest rates may moderate, and transaction markets should eventually become more liquid, but neither declining borrowing costs nor cap-rate compression should be necessary for investment success. The next cycle will reward disciplined investors who acquire strong assets at reasonable prices and create value through property-level execution.
Self-storage is particularly well positioned for this environment. Its diversified customer base, month-to-month leases, and high operating margins provide the potential to compound cash flow exceptionally well over extended periods. However, favorable asset-class fundamentals alone do not make every property attractive. Investment basis, trade-area selection, and effective asset management will increasingly determine investor outcomes.
Industry Overview: Sector Normalization Creates a More Selective Market
The self-storage sector has seen a normalization following its exceptional pandemic-era performance. Elevated mortgage rates and record home prices have reduced housing turnover to near 30-year lows. This lack of residential mobility has limited new customer demand. Recently delivered storage supply from the pandemic driven boom also continues to pressure occupancy and rental rates in certain markets.
Despite these headwinds, operating performance has remained resilient. Public REIT operators report same-store occupancy of 91% to 93%, while advertised rental rates have recently improved for the first time in nearly three years. Consumer adoption has grown to approximately 12% of U.S. households, and average tenant tenure continues to lengthen.
Meanwhile, higher interest rates and elevated construction costs constrain new development. As the existing pipeline is absorbed and construction starts decline, the operating backdrop will materially improve for self-storage owners.
We view current conditions as a much-needed normalization of self-storage operations. This cycle will reward operators that can deploy capital in a disciplined fashion and execute business plans that drive value – independent of market momentum. We focus on investments that can perform under current conditions, with improving market conditions representing potential upside.
Investment Implications: Three Strategies Across the Risk-Return Spectrum
Buchanan invests through three principal strategies: stabilized cash-flowing acquisitions, value-add lease-up investments, and ground-up development in high-barrier West Coast markets. Each addresses a distinct opportunity along the risk-return spectrum.
| Stabilized | Lease-Up | Ground-Up | |
| Risk Profile | Core/Core+ | Light Value-Add | Opportunistic |
| Net IRR Target (1) | 10%-12% | 12%-15% | 15%-20% |
| Going-In Cap Rate | >5.0% | 0.0%-5.0% | N/A |
| Stabilized Yield (2) | 6.0%-6.5%+ | 6.5%-7.0%+ | 7.0%-7.5%+ |
| Buchanan Fund (3) | Income & Growth | Storage | Direct Access |
Stabilized Acquisitions
Stabilized Class A properties in core West Coast markets remain highly competitive, frequently trading at cap rates between 4.75% and 5.0%. At these valuations, they are generally not compelling to us as a levered investor. When a property’s initial yield is below its borrowing cost, leverage can dilute rather than enhance investor returns. Asset quality alone does not justify a price unsupported by cash flow for a fully stabilized property.
We are finding more attractive stabilized acquisition opportunities in select secondary markets where values have more appropriately repriced to reflect current financing costs. We target institutional-quality properties with strong demographics, favorable supply-and-demand metrics, immediate cash flow, and opportunities to improve NOI. These investments offer the lowest relative risk and return within our strategy, with performance driven primarily by predictable cash flow rather than aggressive leverage or exit assumptions.
Lease-Up Acquisitions
Slightly higher on the risk-return spectrum, Buchanan pursues newly constructed facilities still in lease-up. Slower demand has extended stabilization periods, while higher borrowing costs are pressuring developers. In some cases, lenders are requiring additional equity, refinancing, or a sale, causing developers to become more realistic about current valuations.
Buchanan generally targets a stabilized yield on cost 50 to 100 basis points above the yield available on a comparable stabilized asset. This premium compensates investors for the time and uncertainty associated with a typical 24- to 36-month lease-up period. We seek to acquire high-quality assets in strong locations and at favorable bases, then create value by growing occupancy, achieving market rents, and implementing institutional revenue management. The return premium comes from effectively managing lease-up risk, not relying on a broad market recovery.
Ground-Up Development
At the highest targeted risk-return profile, Buchanan develops state-of-the-art facilities in urban infill West Coast markets where existing institutional-quality assets are unavailable or trade at prices above our buying thresholds. We target a 7.0% to 7.5%+ untrended development yield on cost, approximately 200 to 250+ basis points above current cap rates for stabilized properties.
Our top-down approach identifies undersupplied trade areas with strong rents, favorable demographics, and material barriers to development (high land prices, restrictive zoning, lengthy entitlement processes, and elevated construction costs). These obstacles can provide a durable advantage for those able to successfully navigate the process.
Development carries the greatest execution risk within our strategy, but it also offers the opportunity to create an institutional-quality asset at a yield and basis unavailable through acquisition. In markets where we cannot purchase the right property at a reasonable price, development allows us to create it at what we believe to be an attractive return.
1) Target IRR is based on Buchanan’s good-faith projections of capital contributions and distributions and reflects assumptions derived from internal underwriting, market comparables, and third-party historical data. Projected returns are objectives only and are neither guaranteed nor indicative of future results. Actual performance may differ materially, and investors could experience partial or complete loss of capital.
2) Stabilized yield is the expected cap rate upon stabilization, typically 4-5 years after acquisition. Ground-up development yield on cost conservatively assumes trended expenses and untrended rents.
3) Typically, these investments will fall into our Income & Growth, Storage, or Buchanan Direct Access funds. For more information on any of these funds, please contact Investor Relations at investorservices@buchananstreet.com.
Case Study: Buchanan Storage Fund – Positioned for Growth
The Buchanan Storage Fund highlights our investment approach, with a focus on “Lease Up” investment opportunities. The Fund has acquired newly constructed, Class A properties prior to stabilization, providing investors access to high-quality assets on a “wholesale” basis relative to stabilized properties that trade at premium “retail” valuations.
Since its inception in 2021, the Fund, like the broader commercial real estate industry, has faced significant headwinds from rising interest rates and a challenging capital-markets environment. Nevertheless, its strategy of creating value through the lease-up of Class A properties in top-tier Western U.S. markets has proven effective. While publicly traded self-storage REITs remain more than 20% below their 2021–2022 peak valuations, the fair market value of invested equity in fund assets has increased by over 30%. The Fund has now recorded nine consecutive quarters of valuation growth, a trend we expect to continue as portfolio net-operating-income (NOI) compounds.
Today, the Buchanan Storage Fund comprises a diversified portfolio of institutional-quality properties that is approximately 90% occupied, substantially reducing its lease-up risk while preserving meaningful embedded revenue growth potential.
As the tenant base at each property matures, existing-customer rent increases (ECRIs) provide a significant opportunity to accelerate cash flow growth. Self-storage tenants benefit from concessions and discounted move-in rates during a property’s initial lease-up.
As occupancy stabilizes and the tenant base matures, operators can gradually adjust rents toward market levels and beyond. As a result, the Buchanan Storage Fund was able to generate a same-store annualized NOI growth rate of 9.8% during Q2 2026. This significantly outperformed the 1.1% average NOI growth reported by the publicly traded self-storage REITs, demonstrating the Fund’s ability to grow cash flow well above industry averages despite a challenging macroeconomic environment for commercial real estate.
With limited new supply anticipated across most portfolio trade areas, we believe the Fund has a predictable multiyear runway to further increase achieved rents, compound NOI, and drive capital appreciation. Combined with the resilience of the self-storage sector and our portfolio’s concentration in Class A assets located in high-barrier-to-entry West Coast markets, the Fund’s high-growth cash flow profile provides a strong foundation for above-market total return potential.
The investment thesis does not depend on declining interest rates or cap-rate compression. It is supported by well-located Class A properties, limited new competitive supply, and continued NOI growth which should lead to increased distributions and continued capital appreciation. We believe this provides a compelling entry point for investors seeking tax-advantaged income, long-term appreciation, and exposure to one of commercial real estate’s most resilient operating sectors.
Closing Perspective
We know that we cannot reliably predict future interest rates, a recovery in the housing market, or changes in cap rates, but successful investing should not require us to do so.
Self-storage offers structural fundamentals that long-term investors should value, leading to the ability to compound revenues and drive property valuations. Yet realizing those benefits requires more than broad exposure to the sector.
Across stabilized acquisitions, lease-up opportunities, and ground-up development, our approach is consistent: identify favorable trade areas, invest at a basis appropriate for the risk, create a defensible competitive position, and grow cash flow through active asset management. In a market where the easy money is over, quality, basis, and execution will be paramount to long-term investment success.
No Offer of Securities: The views and information presented herein are provided solely for informational purposes and do not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing contained herein should be construed as investment, legal, tax, or accounting advice. Any investment opportunity discussed herein may be available only through separate offering documents and subject to applicable investor qualification requirements.