Start here.
The most useful number in self-storage right now is not a street rate or a cap rate.
It’s a concept called construction-justified rent.
Heitman used it. Here’s what it means, how to estimate it for your market, and why a 40 to 50 percent gap is a buying signal — not a warning.
The quote
Jennifer Boss, Managing Director & Head of Portfolio Management at Heitman, said it directly in a Multi-Housing News article published August 4:
“Looking ahead, we see a similar scenario, with storage rents 40 to 50 percent off construction-justified levels.”
She was describing why Heitman — which sold assets in 2024 and 2025 because they called conditions “frothy” — is now buying back in. The firm has been investing in self-storage since 1996. They own or manage more than 1,200 properties across roughly 140 markets. They collect operating data from over 600 of those properties every month.
When a firm like that says rents are 40 to 50 percent below where new construction pencils, the number is worth understanding.
What construction-justified rent actually is
Construction-justified rent is the rate a facility would need to charge to make building it from scratch a viable investment.
The calculation starts with what it costs to build. Land cost. Hard cost per square foot — the TractIQ/ARCO-Murray dataset released this week pegs the median at $84.23 per gross square foot for a class A building under three stories, up 47 percent since 2021. Sitework alone went from under 8 percent of project budget in 2016 to nearly 20 percent today. Soft costs: permits, fees, legal, architecture, financing costs during construction. Then lease-up — the months or years it takes to fill the building. Then a return on the whole thing.
Divide that total by the number of rentable square feet. What comes out is the monthly rent per square foot that the market would need to support to justify a new build.
That number — construction-justified rent — is the floor for what a facility is fundamentally worth. Not what it trades for today. What it would cost to replace.
Why a 40-50% gap is a buying signal
Here’s the deal. If current market rents are 40 to 50 percent below construction-justified levels, it means no one can build a new facility and make it work at today’s rates. New supply is uneconomic. That is not a market in decline. That is a market where the entry price for new construction sits far above where existing facilities trade.
Every dollar between today’s market rent and construction-justified rent is structural upside the seller is not capturing in their asking price.
The gap does not mean rents will automatically recover. It does not guarantee returns. Past performance is not indicative of future results. But it does mean the asset you buy today sits inside a spread — between what it earns now and what the economics of new construction would require — that benefits the owner who holds through the recovery.
Heitman’s own data shows this playing out. More than 60 percent of their same-store properties now report year-over-year revenue growth, compared to roughly 45 percent a year ago. Properties with no exposure to recently delivered supply are seeing growth of up to 15 percent. Their average tenant stay now exceeds 24 months.
The firm that sold at the top is buying at the bottom. That is the cycle.
How to estimate construction-justified rent for your market
You do not need Heitman’s database. You need four numbers.
1. The local cost to build per square foot.The ARCO/Murray data is a starting point. Your market’s construction costs vary by region, story count, and building type. A broker or general contractor who builds storage in your target market can give you a real number.
2. Efficiency ratio. A typical three-story facility runs about 74 percent net rentable square footage relative to gross. You pay to build the gross square feet. You earn rent on the net. That 26 percent gap matters.
3. Lease-up period. Most lenders underwrite a 24- to 36-month lease-up to stabilized occupancy. During that period, the building carries negative cash flow. Be conservative. The longer the lease-up, the higher the rent needed to justify the project.
4. Return threshold.The minimum yield that would make the project worth the risk. For most institutional buyers, that’s a stabilized yield north of 6 percent. For a private investor, it depends on your cost of capital and your alternatives.
Run those four numbers through a development pro forma. The rent that makes the project pencil — that’s construction-justified rent for your market.
Compare it to current street rates. The gap tells you whether you are buying at the bottom of a cycle or into a market where new supply can still compete with you.
What this means for a deal today
If you are underwriting a facility right now, the construction-justified rent in your market gives you a reference point that most sellers’ pro formas do not include. A seller’s T12 shows what the facility earns today. Construction-justified rent shows what the market would need to support to build a competing new facility from scratch.
When the gap is 40 to 50 percent, the deal math pencils differently than it would in a market where the gap is 10 or 15 percent. Bigger gap means more protection from new supply. It also means more potential upside in the stabilized NOI.
The deal still has to work on its own merits. Rent roll. T12. County call. Expense ratio at 35 to 40 percent. If it does not work at today’s rents, walk. The deal you don’t do is the smartest deal of the year.
But if it works at today’s rents and the gap is wide, you are buying with a structural tailwind rather than a structural headwind. That matters.
Run the numbers.Take the hard cost per square foot in your market, multiply by building efficiency, add land and soft costs, divide by a reasonable lease-up schedule, and see what rent would make the project pencil. Then compare that to what facilities in that market earn today. The spread between the two numbers is not guaranteed future income — nothing is. It is a reference point for whether the price you are negotiating reflects the asset’s fundamental value or just the current low point in the cycle. Run the numbers. Then run them again.
Past performance is not indicative of future results. Figures in these posts are historical results for those specific deals or the cited industry data, not projections, and nothing here constitutes investment advice. The math that decides a deal is the math you do before you sign — underwrite it yourself, or have someone you trust walk it with you.