Investing in Self-Storage REITs | The Motley Fool

Self-storage Real Estate Investment Trusts (REITs) own, operate and manage mini warehouses. These properties allow businesses and individuals to securely store items in individual storage units.

Here’s a closer look at the self-storage REIT business. We’ll examine its benefits and risks, as well as some leading self-storage REITs that investors should consider.

Exterior of several self-storage buildings.

Image source: Getty Images.

Understand self-storage REITs

Self-storage properties are small warehouses with multiple units of different sizes. Owners rent storage units in these buildings to businesses and individuals who need space to store inventory or household items. Some self-storage operators also rent parking spaces to store boats, RVs, and other vehicles.

Most self-storage units are rented on a monthly basis. This differs from the lease structure of many others REITs, who typically own properties that rent out space for a year or longer. On the one hand, the shorter-term lease structure enables self-storage REITs to raise rents to market levels more frequently. On the other hand, they may have to lower rents during a down market.

In addition to generating rental income, self-storage REITs have several other potential revenue streams depending on their business model. This may include renter reinsurance receipts, late fees, management fees, and the sale of moving supplies (crates, packaging, tape, etc.).

Benefits of investing in self-storage REITs

Self-storage REITs benefit from the ever-increasing demand for storage space. Industry demand drivers include relocation, decluttering, disasters, changing living circumstances and business purposes. These factors tend to keep occupancy high and drive up rents steadily.

Self-storage properties are also among the cheapest real estate investments as they are usually inexpensive to build and operate. As a result, they tend to have relatively low occupancy break-even rates. These factors allow self-storage investments to generate high margins and returns on investments.

This is why self-storage REITs have historically been among the best-performing investments in the REIT sector. Self-storage REITs have significantly outperformed other real estate investments over the past decade, including leading ones REIT ETF Avant-garde real estate ETF (NYSEMKT:VNQ), with most also delivering total returns that outperform the market.

EXR Total Return Level Chart

Data from YCharts.

Risks of investing in self-storage REITs

While self-storage REITs have been excellent long-term investments, they’re not without risk. There are two notable industry-specific risks:

  • Oversupply Risk: Since self-storage facilities are cheap to build and operate, there are low barriers to entry. Developers can rapidly add capacity, which can increase competition for customers in a market and weigh on occupancy and rental rates at existing facilities.
  • economic risk: The sector is more vulnerable to an economic downturn due to the short-term nature of self-storage leases. When the economy takes a hit, fewer people will move. Businesses could also cut spending, affecting occupancy and rental rates.

In addition to these industry-specific risks, self-storage REITs face two intertwined potential headwinds that are common to the entire REIT sector: interest rate risk and funding risk.

If interest rates rise, borrowing becomes more expensive. If a REIT has a lot of floating-rate debt or short-term maturities, rising interest rates can increase its interest expense. Higher interest rates can also affect a REIT’s ability to fund acquisitions and development projects.

Meanwhile, rising interest rates tend to weigh on REIT stock prices. This is because there are lower-risk alternatives such as bind more attractive investments as their yields increase. As a result, REIT stock prices tend to fall, which drives them higher dividend yields Compensate investors for their increased risk.

The 3 best self-storage REITs

Six public self-storage REITs entered 2022. While all focus on owning, operating and managing self-storage facilities, three of them are characterized by their slightly differentiated business models.

Self-Storage REITs

ticker icon

market capitalization

description

Public storage

(NYSE:PSA)

$63.6 billion

The industry’s leading owner, operator and developer of self-storage facilities.

Additional storage space

(NYSE:EXR)

$28.1 billion

The second largest self-storage business owner in the US and the largest self-storage management company.

National Storage Partners

(NYSE:NSA)

$5.9 billion

A leading self-storage operator with a unique business model for participating regional operators (PROs).

Data Source: Company websites and YCharts. market lid Data from January 11, 2022.

Here’s a closer look at what sets these self-storage REITs apart from their peers.

Public storage

Public Storage is the largest self-storage REIT. It started in 2022 with more than 2,700 properties and more than 198 million rentable square feet. In addition to these self-storage investments, the company also owns a 35% interest in a European self-storage REIT Shurgard Self Storage and a 42% interest in Industrial REIT PS business parks (NYSE:PSB).

What sets Public Storage apart from its self-storage REIT competitors is its real estate development platform. It is the only REIT developing new real estate; the rest are expanding mainly through acquisitions. The company’s development strategy has enabled Public Storage to achieve superior returns on investments over the years compared to acquisitions.

Additional storage space

Extra Space Storage is a leading self-storage REIT. 2022 kicked off with more than 2,000 properties, 47% of which were 100% owned, 13% owned by joint venture partners and 40% managed.

Extra Space Storage’s third-party management business sets it apart from other self-storage REITs. While most REIT competitors also manage properties owned by third parties, Extra Space Storage was an early leader in this business model. It currently manages more properties than any of its competitors.

This strategy has several advantages. It generates steady income from management fees and requires little upfront investment. In the meantime, it provides the company with a steady stream of acquisition opportunities. Extra Space Storage can buy a property knowing it very well when the owner is selling, reducing risk.

National Storage Affiliates

National Storage Affiliates is one of the smallest publicly traded self-storage REITs. It ended in 2021 with reaching a milestone of 1,000 locations.

Unique to National Storage Affiliates is that it does not consolidate its properties under a national brand. Instead, it owns, operates and manages strong regional brands. As of early 2022, it had a dozen brands, including two corporate brands and 10 participating regional operators (PROs).

National Storage Affiliates’ PRO structure incentivizes private self-storage operators to come under their umbrella. The REIT benefits from being able to expand its portfolio while PROs carry more downside risk. Meanwhile, PROs benefit from the scale of a larger company, the ability to maintain management, and participate in the upside. Eventually, PROs can sell their business to National Storage Affiliates.

Self-storage REITs have been great investments in the past

Self-storage REITs are benefiting from a combination of lower costs, high demand and short-term lease structures that have allowed the sector to steadily grow revenue. That’s helped the industry generate above-average total returns over the years. The ability to generate high returns makes self-storage REITs attractive options that real estate investors should carefully consider.