Unlock the storage of wealth with self-storage REITs, the booming real estate investment that offers the potential for high yields, low volatility, and recession-resistant returns.
This article explores a unique Real Estate Investment Trust (REIT) sector: self-storage real estate. The self-storage market exploded over the last decade. Experts expect the sector to grow nearly 32%, to 53.92 billion customers, by 2026.
If you’re interested in real estate investing and considering physical real estate vs. REITs, then self-storage may be a good opportunity for your portfolio.
What Are Self Storage REITs?
Self storage REITs are a specialty sector of the Real Estate Investment Trust market that own and operate storage facilities and rent space to individuals and businesses.
Self storage REITs generate income by collecting monthly rent from their customers. The storage facility can also appreciate, further generating wealth for its owners through the disposition of this asset.
Advantages of Self Storage REITs
Self storage REITs offer many significant advantages over other investments, such as generating passive income, low building and operating costs, and strong demand in an up or down economy.
Generate Passive Income
One of the most significant advantages of self storage REITs is their ability to generate strong dividend yields for their investors.
As of this writing, the average dividend yield for self storage REITs is around 3.5%, according to Nareit, a trade organization for REITs.
Meanwhile, the S&P 500, a stock market index that tracks the performance of 500 large-cap U.S. companies, has an average dividend yield of around 1.3%, thus highlighting an attractive opportunity for income-oriented investors.
Low Building and Operating Costs
Another advantage of self storage REITs is their low construction and operating costs.
With storage REITs, there are no expensive brick veneers to build or broken toilets to fix.
To further highlight how self storage REITs are reducing operating costs is their increasing adoption of automation technology. Many self storage operators are fully or partially automating their properties. Adopting automation can significantly increase the net operating income of a self storage REIT.
A Cushman & Wakefield white paper on self storage highlights that automation can reduce the need for an onsite property manager, saving a storage operator upwards of $60,000, thus increasing the property’s net operating income.
Strong Demand in Up or Down Market
Lastly, another key advantage of self-storage REITs is their demand resiliency. Consumers need and demand self storage units whether the economy is in an upturn or a downturn – a characteristic largely unique to the self storage business.
For example, when the economy is in a downturn, people downsize. Downsizing often requires rental space to store belongings that can no longer fit in their home or apartment.
When the economy is prospering, consumers commonly purchase more items than they can keep in their homes. And utilizing their extra income, consumers will likely rent a self storage unit to store their extra possessions.
Risks of Self Storage REITs
Self-storage real estate investment trusts (REITs) have some risks like any investment. Here are some potential risks to consider before investing in self storage REITs:
Self storage REITs are subject to regulations related to zoning, building codes, and environmental issues. Changes in laws could impact the ability of self storage REITs to operate or expand their facilities, which could affect their profitability.
While self storage REITs invest in properties across different geographic locations, they are still primarily focused on a single asset class. This lack of diversification may not be suitable for all investors looking to diversify their portfolios across multiple asset classes.
Potential for Oversupply
Because self storage has low building and operating expenses, and therefore fewer barriers to entry 5han apartment REITs, self storage REITs run the risk of oversupply, i.e., more self storage space than there is demand.
How To Evaluate Self Storage REITs
Here are some key factors to consider when evaluating self storage real estate investment trusts (REITs):
Occupancy rates are among the most important metrics for evaluating self storage REITs. This indicates the percentage of units that are currently rented out. A high occupancy rate suggests that the REIT successfully attracts tenants and manages its properties effectively.
Rental rates are another important factor to consider. Higher rental rates generally indicate a strong demand for storage units and a competitive market position.
It’s important to evaluate the geographic diversification of the REIT’s portfolio. A REIT with properties in multiple locations can help mitigate risks associated with localized economic or regulatory changes.
The quality of the REIT’s properties can impact its competitiveness in the market. Look for properties that are well-maintained, secure, and have modern amenities.\
Review the REIT’s financial performance, including revenue, net income, and funds from operations (FFO), a key metric for evaluating REITs. A history of strong financial performance can indicate a well-managed and financially stable REIT.
The experience and track record of the REIT’s management team can also be an important factor. Look for a management team with a proven history of success in the self storage industry.
Lastly, evaluate the valuation of the REIT relative to its peers and the broader market. Consider factors such as the price-to-earnings (P/E) ratio and dividend yield.
Popular Self Storage REITs
If you are interested in self storage, below are some of the most popular publicly-traded self storage REITs.
- Public Storage (PSA): Public Storage is the largest self storage REIT in the United States, with over 2,500 facilities in 38 states. The company was founded in 1972 and has a market capitalization of over $47 billion as of September 2021.
- Extra Space Storage (EXR): Extra Space Storage is the second-largest self storage REIT in the United States, with over 1,900 facilities in 40 states. The company was founded in 1977 and has a market capitalization of over $21 billion as of September 2021.
- CubeSmart (CUBE): CubeSmart is a self storage REIT that operates over 1,200 facilities in 38 states. The company was founded in 2004 and has a market capitalization of over $9 billion as of September 2021.
- Life Storage (LSI): Life Storage is a self storage REIT that operates over 950 facilities in 34 states. The company was founded in 1982 and has a market capitalization of over $7 billion as of September 2021.
- National Storage Affiliates Trust (NSA): National Storage Affiliates Trust is a self storage REIT that operates over 800 facilities in 35 states. The company was founded in 2013 and has a market capitalization of over $5 billion as of September 2021.
These self storage REITs have grown in popularity due to the growing demand for self storage units and the stable income generated by renting out these units monthly. They offer investors a way to invest in real estate without buying property.
The Bottom Line
Self storage REITs can be a good investment option for income-seeking investors and those looking to diversify their portfolio with exposure to the real estate sector.
Self storage REITs also offer the potential for long-term growth and diversification in a portfolio. However, as with any investment, it’s important to conduct thorough research and seek the advice of a financial professional before making any investment decisions.