Self Storage: The Strong, Stable REIT Investment

by Jeff Shaw

The self storage REIT industry is sizzling hot. Last year, when stocks were flat and REITs generated a mere 2.8 percent return on average, self storage REITs returned a whopping 40 percent, far surpassing all other REIT sectors. Occupancy rates at the 51,000 self storage facilities in the United States have grown by 11 percent from the first quarter of 2012 to the first quarter of 2016.

The need for storage facilities continues to increase as Baby Boomers retire and downsize, while millennials flock to rental apartments without garages and basements. In fact, the growth in the inventory of self storage facilities mirrors recent increases in apartment occupancy. Although net absorption of apartments is slowing, self storage REITs remain a solid investment. That’s because the existing inventory of storage facilities is relatively low due to a slowdown of construction during the recession. This lack of sufficient supply prompted Integra Realty Resources to predict record-level prices and continued demand for this strong investment type into 2017.

H. Michael Schwartz, Smartstop Asset Management

H. Michael Schwartz, Smartstop Asset Management

One of the advantages of self storage is that it involves so little capital outlay when compared to other kinds of commercial real estate, such as malls, offices or apartments. Indeed, it requires less capital to own and operate storage facilities than any other commercial real estate property. For example, most storage facilities require just 45 percent occupancy to break even. In addition to minimal capital expenditures, self storage REITs offer real estate investors many advantages, including low average property prices, consistent cash flow, and no tenant improvements or leasing commissions. Unlike offices and apartments, self storage facilities don’t need to invest heavily in re-leasing vacant space. The only turnover requirement is a sweep of the floor and a new light bulb.

Self storage facilities are known to be fairly recession-proof. When the last recession hit in 2008, self storage was the only REIT sector to post a positive return at 5 percent, according to the National Association of Real Estate Investment Trusts (NAREIT). Since the crash in 2008, self storage REITs have continued to outperform, averaging a more than 22 percent return to investors. Self storage units also tend to have short lease terms and tenant turnover rates that are similar to apartments, so changes in rents are more quickly recognized, providing a hedge against inflation. Because self storage facilities have lower average property prices relative to other commercial real estate, investors can spread their investments nationwide, diversifying them against market-specific economic forces.

Self storage net acquisitions have increased by $8 billion since 2012, NAREIT reports. About $2 billion of that was spent in 2015. The Bloomberg Self Storage REIT Index has averaged 1,200 basis points better than Bloomberg’s MSCI US REIT Index in every calendar year since 2010. According to the Green Street Advisors’ Commercial Property Price Index, the value of REIT-owned self storage facilities has risen 77 percent from 2007 through July 31, 2016 — more than 3,400 basis points higher than regional malls, the next closest sector.

Smartstop sees areas like Phoenix, and Northern and Southern California as top areas for self storage investment for many reasons. Phoenix’s population is rapidly expanding and offers a low tax structure, while California markets have high barriers to entry with long lead times and generally high rental rates. Smartstop will continue to pursue institutional-quality properties situated in strong demographic markets, while being mindful of new construction.

Investors predict self storage REITs will have the highest cash flow per share growth of all REIT sectors in 2016 and the second highest in 2017. This product type has proven resilient in various economic conditions due to the consistency of its demand drivers, including death, divorce, downsizing and dislocation. Self storage investment opportunities should continue for years to come.

H. Michael Schwartz is chairman/CEO of Smartstop Asset Management

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