NEW YORK – You can’t always take it with you, and when you can’t you put it in storage.
At least that’s what investors are betting as they put cash into self-storage real estate investment trusts.
“So far this year, they’ve significantly outperformed,” said Tom Bohjalian, vice president of New York based Cohen & Steers Inc., which holds shares in self-storage REITs.
The self-storage industry was facing overbuilding problems several years ago, which caused occupancies and rents to fall.
“We’re just now starting to see that situation really improve,” said analyst Rick Murray of Raymond James. “You’re seeing occupancies rise, and so this is going to be one of the sectors in the REIT universe that we think is going to have above-average growth.”
Self-storage REITs offer monthly leases. So as the economy recovers, they can raise rents faster than office, industrial and retail REITs, which have longer leases, said Murray.
This outlook remains rosy as long as the sector doesn’t fall back into the overbuilding spiral that hit it a few years ago.
The sector posted average returns of 38 percent in 2003 and 30 percent in 2004, outpacing equity REITs in general, which delivered returns of 37 percent in 2003 and 20 percent in 2004, according to the National Association of Real Estate Investment Trusts.
So far in 2005, self-storage REITs are up 0.5 percent while equity REITs are down 8 percent.
The potential for consolidation is great. Currently, the five publicly traded self-storage REITs own only about 15 percent of the country’s self-storage facilities, Lehman Brothers analyst David Harris said.
Over the past year, two more self-storage REITs – U-Store-It Trust of Cleveland and Extra Space Storage Inc. of Salt Lake City – joined the public ranks, bringing the total to five. The other big players are Public Storage Inc. of Glendale, Calif., Seattle-based Shurgard Storage Centers Inc. and Sovran Self Storage Inc. of Buffalo, N.Y.
Public Storage is the giant with a $10 billion market capitalization. Its cash flows, occupancy and rents are generally stable and safe. However, some of the newer self-storage REITs can offer potentially bigger returns, as they are smaller and may increase earnings faster with only a few small, smartly priced acquisitions.
“It would take Public Storage forever to double its portfolio size. But U-Store-It, for instance, has already expanded their portfolio by 30 percent since their IPO last fall,” said Michael Knott, a buy-side analyst at Green Street Advisors of Newport Beach, Calif. “Given a smaller base and an aggressive bent on acquisitions, they’re going to increase their relative size much faster.”
Market watchers see a number of reasons driving up demand for storage space over the next couple of years.
First, baby boomers are entering peak earnings years and will likely need more space to store material possessions.
Second, as the economy rebounds and jobs are created, more people will be moving to take new jobs, which will boost demand for self-storage space as people transfer from houses to apartments until they find new homes.
Third, as mortgage rates tick up, some people may sell homes and move into apartments. They would require storage units to hold belongings that can’t fit into apartments.
Fourth, there is much talk that Public Storage may be the next REIT to be admitted to the S&P 500. If this happens, it would likely lift the profile of self-storage REITs.
However, some wonder if the growth is already priced into the stocks.
“They’ve already been outperforming a lot,” said Knott.
The sector also faces risks. If there is a sudden glut of construction, it could lead to oversupply, which would pressure rents and occupancies.
Source: Miami Herald
Photo credit: JeepersMedia via VisualHunt.com / CC BY
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