Self-storage has somehow become one of the most sought-after ways to invest in real estate due to consistently strong returns. The focus of commercial investing has classically centered around apartment properties, but with the current influx of apartment construction, vacancy rates have recently increased.
Millennials can’t afford single-family homes, which are going up in price, but they still want to move out of their parents’ houses. This brings the demand for apartments up, setting off an excess supply of apartment construction, in part due to the slowing of job expansion. In 2016’s first quarter, rents dipped 4% and vacancies nudged up. Research firm Green Street Advisors projects a tapering of growth in revenue per available foot between now and 2020.
With the continued growth of apartments, why focus on self-storage?
Self-storage has a distinct advantage. It seems to be recession proof. During the 2008 economic downturn, self-storage was the only REIT sector with a positive return of five percent including dividends. In a bad economy, people trade in luxury goods. The appeal of storage units lies in unassuming nature of the investment. Consistent returns follow. B. Wayne Hughes managed to build a $2.4 billion fortune on self-storage.
Everyone can use a bit of extra storage. And for about $100 a month, all of your excess stuff can be kept conveniently out of your likely cluttered home or office. And just as everyone wants storage, you don’t have to be the wealthiest investor to get in on the self-storage trend. Ordinary investors can participate in the self-storage real estate market by purchasing shares of a real estate investment trust, or REIT, that concentrates on this industry.
The biggest REITs own vast pools of commercial property, such as offices, shopping centers or, in some cases, self-storage facilities, sometimes strewn across the country. Unlike buying and selling a building or a stake in a self-storage property partnership, a cumbersome process involving deeds and brokers and lawyers, trading in and out of REIT shares is as easy as buying and selling stock on a stock exchange.
Self-storage REITs comprise roughly 8% of the REIT Index, i.e. the Vanguard REIT Index (VNQ). These are the five REITs which account for roughly $60 billion in market value: CubeSmart (CUBE) Extra Space Storage (EXR), Public Storage (PSA), Life Storage (LSI), and National Storage (NSA).
The demand for storage is inelastic. In 2015, self-storage was up 40 percent while other REIT sectors and stocks as a whole were fairly flat. This year, self-storage is in third place among REITs in terms of returns.
Self-storage sector also has a promising future ahead. As more baby boomers retire, many homes are downsizing. After selling their multi-bedroom houses, these retirees still want to hang on to possessions to pass down to kids or for a future vacation home. But households aren’t the only market for storage. Many small businesses have begun using self-storage as a place to house excess inventory in lieu of maintaining an entire warehouse.
Storage facilities need little capital outlay or upkeep, their property taxes are modest, and net acquisitions in that sector have surged. When an occupant moves out, management doesn’t have to repaint or fix the plumbing. All that’s needed is to sweep out the now-empty unit. Also, break even for self-storage only requires 45% occupancy.
Historically, as an investment class, equity REITs have done quite well. Over five, 15, 20 and 25 years, equity REITs have outdone the S&P 500, the standard benchmark for stocks. This doesn’t mean that self-storage investments will magically create wealth. Occasionally self-storage REITs have a negative year – just hardly ever during recession and usually followed by a strong comeback. And it won’t create the glamorous and exorbitant wealth of some other investments.
Publicly traded REITs are likely the safest bet for investors, as analysts follow them very closely, they are transparent and there is no fee for purchase. With a private REIT, you can’t cash out your investment instantly, as you can with a public REIT. You typically are locked in for a set period, maybe up to 10 years, although some allow you to withdraw piecemeal after a while. This has some meaningful advantages. In a market downturn, the REIT doesn’t have to worry about having to sell off properties to cover redemptions. So, if you’re a wealthy, patient investor who values the idea of being involved with others like you, this may be a worthwhile investment.
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