Has the Self-Storage Real Estate Sector Peaked?
August 15, 2023 | James Sprow | Blue Vault
An August 6 Wall Street Journal article asked the question: “Is There a Limit to Americans’ Self-Storage Addiction?” And answered its questions with: “Billions of Dollars Say Nope.”
“There are self-storage facilities around the world, but nowhere have they been more popular to rent and profitable to own than in the U.S., thanks to Americans’ propensity to accumulate more stuff than they can squeeze into their homes.”
“Storage is the rare investment that has done well in good times and spectacularly in periods of economic upheaval. Profits exploded during the pandemic, when bedrooms became offices and basements became gyms and the displaced items had to go somewhere. Shares of publicly traded storage companies trounced the broader stock market — and every other real estate class — from the late 1990s through the end of last year. During the pandemic, they even beat the celebrated FAANG tech companies.”
Are those days over? Year-to-date, two of the largest publicly traded self-storage companies have under-performed the stock market. Extra Space (EXR) was down 11.7% since the beginning of 2023. CubeSmart (CUBE) is down 3.2%, compared to the S&P 500 Index (^GSPC) which has risen 17.0%
According to the WSJ article, “The question now is whether the industry is running out of room for growth. Workers are trickling back to the office and the highest interest rates in years are slowing home sales, a big driver of storage demand. Self-storage facilities have seen occupancy rates decline from records, forcing them to dangle big discounts to attract new customers.”
“Storage executives say business may never be as good as it was between the lockdown summer of 2020 and last summer. “In hindsight, we may look at those and say they were the best 24 months in the history of this business,” CubeSmart Chief Executive Christopher Marr told investors at a recent conference.”
The Positive Attributes of Self Storage Investments
There is a bullish case for self-storage. Americans are pack rats. More than one in 10 Americans lease storage space. According to KeyBanc analysis, in June they paid an average of about $165.55 a month,
down 1% from records in January, but about 20% more than in June 2019. So, demand is strong. On the supply side, sharply higher borrowing costs have negatively impacted plans for new storage construction.
Demand is sticky. Once a customer signs a rental agreement for a storage unit, they are not likely to leave very soon. Industry leaders like Public Storage CEO Joseph Russell Jr. say, “Statistically, once a customer stays with us for a year, they end up staying for five years.”
Rates can be adjusted upward without a significant impact on occupancies. There are good psychological and economic reasons why.
“The only thing that competes with an existing customer is the trash can, ” said Spenser Allaway, storage analyst at real-estate research firm Green Street. “No one says, ‘This sounds like a fun way to spend a weekend, I’ll beg my friend to borrow their truck and move my stuff into another unit to save $10 a month.’ “
According to the WSJ article, “Storage is so profitable thanks to two key factors: month-to-month leases, in which the rents can be raised on short notice, and human nature. It doesn’t much matter what someone pays when they move in. Most stays outlast introductory rates.”
Earnings Calls by Extra Space and CubeSmart
Self-storage operators reported continued high occupancy in Q2 2023, but some had to moderate price increases to keep properties filled. According to Joseph Margolis, CEO at Extra Space, “The challenge is there’s not sufficient enough customers to give us pricing power,” Margolis said. “We can’t move rates and maintain that type of occupancy to the level we wanted to.” He says, consumers have less money and the weak housing market has impacted seasonal demand. Extra Space reported a 3.3% decline in core FFO year-over-year in Q2 2023. CubeSmart also lowered its full-year FFO per share guidance range and lowered same-store revenue growth projections.
Nontraded REITs and Self Storage Investments
Blackstone, the world’s largest real-estate investor, will own about 80 storage facilities once it completes the sale of 127 it bought mostly in late 2020. The buyer is Public Storage, which agreed last month to pay $2.2 billion for the Blackstone assets after being outbid in its own attempt to buy Life Storage.
The sale will mean more than $600 million profit for Blackstone’s Real Estate Income Trust, the largest nontraded REIT that was hit by shareholder withdrawals beginning in November 2022 and continuing through June 2023. (self storage is just 3% of Blackstone REIT’s RE portfolio, 16 million SF)
Other Nontraded REITs with Self Storage Properties as of March 31, 2023:
· Hines Global Income Trust, Inc. (Nashville self storage portfolio, 3,203 units, five properties, 83% leased)
· Invesco Real Estate Income Trust Inc. (10 properties, 627,190 sf, 90% occupancy Q1 2023)
· Nuveen Global Cities REIT, Inc. (five properties, 3,074 units; 86% occupancy Q1 2023)
· Strategic Storage Trust VI (17 properties, 13 in US, 4 in Canada, 12,600 units, 78% occupancy)
· SmartStop Self Storage REIT (153 wholly owned, 92.9% occupancy; 192 properties owned or managed, 13 in Canada) 102,877 wholly owned units as of Q1 2023; 11th largest owner and operator of self storage properties in the US
· Starwood Real Estate Income Trust, Inc. (25 properties, 1.8 million sf) 2% of RE portfolio
Net asset values of nontraded REIT programs do not reflect the self storage property values unless the REIT is 100% invested in the self storage asset type. Only Strategic Storage Trust VI and SmartStop Self Storage REIT are 100% in self storage properties in their CRE portfolios. Only SmartStop Self Storage REIT has published its NAV per share:
· SmartStop Self Storage REIT’s latest redemption net asset value per share was declared on December 6, 2022, at $15.21. NAV as of 9/30/22 $15.21; $15.08 as of October 2021; $10.40 as of April 2020.
Sources
WSJ, Sunday, August 6, 2023, Yahoo!Finance, S&P Capital IQ; SEC
