Self-storage may not have the glamour of high-rise office buildings, luxury hotels or urban apartment lofts, but it should be a strong contender for an individual’s investment portfolio — whether that’s in the form of public shares of REITs, brick-and-mortar property or crowdfunding.
“If I were to invest in one type of real estate directly, over the course of my lifetime, my investment would be self-storage,” said David Corak, an analyst with FBR, who covers publicly traded self-storage REITs.
While self-storage has been on a fast track for the past few years, its speed of growth has slowed this year. Still, the asset class has plenty of potential upside.
Investing in Self-Storage REITs
“Self-storage is a polarizing sector right now,” says Corak, “On one hand, you have the highest fundamental top-line revenue of any REIT sector, but on the other hand that growth is decelerating in the face of new supply.”
Self-storage REITs, when growth is slowing, tend to underperform other REITs, Corak says. He estimates the industry will add about 675 new stores for a growth rate of 1.6% this year, and 950 stores in 2017 for a growth rate of 2.3%.
“Over the past 10 years, self-storage has been the best performing REIT sector; it has outperformed all of the major REIT sectors,” he says.
The five publicly-traded REITs are Public Storage (PSA), Extra Space Storage (EXR), CubeSmart (CUBE), Life Storage (LSI, formerly Sovran Self Storage) and National Storage Affiliates (NSA).
In 2015, the sector outperformed the others by about 40%. This year is different. In the third quarter, self-storage REITs were among the worst-performing REITs, with a return of -12.2%, whereas all REITs had a 1.5% return.
Time to Go Long
Still, investors with a long-term view have opportunities.
“Some of these stocks might look expensive, but in the long-term, with a 10-year hold period, they are very good investments,” Corak says.
The publicly traded self-storage REITs have well-known brands, a low cost of capital and superb digital marketing platforms for economies of scale that give them an advantage.
“These are brand-like companies that are able to scale and acquire other regional and one-off operators to achieve tremendous scale,” said Brad Thomas, editor of the Forbes Real Estate Investor newsletter.
Benefits for future growth potential include inexpensive tenant turnover costs and sticky tenants who often move in and never leave.
“Once someone moves into storage, usually they stay,” Thomas said.
Build Your Own
“The market is still very strong,” said Chris Sonne, National Self Storage Group leader at CBRE’s Valuation and Advisory Services. “There is still tremendous optimism in the sector.”
Operators are still obtaining increases of rents-in-place, although not as high as they have in the past couple of years. Occupancy also remains robust despite new construction, Sonne says.
Traditional bank financing for self-storage is readily available at low interest rates, Sonne notes.
Ryan Rhodes, president of the general contracting company M&R Associates of Sanford NC, said M&R received a $2.25 million construction loan and operating capital from Wilmington, NC-based Live Oak Bank for the company’s first foray into self-storage. The company is building a 40,000-square-foot, 300-unit storage facility called Wilson Road Self Storage that is scheduled to open in November.
Although Rhodes and M&R are new to self-storage, Live Oak general manager Terry Campbell said he felt it was a good risk.
“It was evident early on that he was a guy who does his homework,” Campbell said. “He knew a lot about the industry and he had already engaged someone for a feasibility study.”
Rhodes said he began researching opportunities in 2008 but financing at that time was unavailable.
“What’s attractive to us about the self storage industry is that it is really resilient,” Campbell said.
If you are looking for another way to invest in storage development, take a look at publicly traded Jernigan Capital (JCAP), an investment bank that makes loans to storage developers.
Investors can also put their money into a crowdfunded deal.
Under this investment option, individual investors pool their funds via an online crowdfunding company to into a self-storage opportunity that the crowdfunding company has researched and offered — with the hopes of earning higher returns than more traditional forms of investing.
One drawback is that many of these opportunities are available only to accredited investors, which the Securities and Exchange Commission defines as someone with a minimum annual income of more than $200,000 and a net worth that exceeds $1 million.
Advice For New Investors
1. Do your homework. Whether you investing in a REIT, developing, acquiring or considering a crowdfunded investment, study the deal and its fundamentals. Attend conferences, reach out to operators and experts, do online research.
2. Learn the metrics. The earnings metrics on REITs are different than ordinary publicly traded stocks. Examine the funds from operations (FFO) as the core earnings metric. There are both public and private storage REITs
3. Diversify your portfolio. If you do invest, don’t put all your eggs in one basket.
4. Talk to a professional real estate broker or a stockbroker familiar with the sector.
5. Factor in lease-up time. If you are acquiring or developing, it will take time to lease the facility and reach a positive cash flow.
Featured photo: Skyler White (Anna Gunn) and Walter White (Bryan Cranston) – Breaking Bad – Season 5, Episode 8 – Photo Credit: Lewis Jacobs/AMC