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11 Aug 2020

Replay Review: Has Self Storage Show It's Resilience?

Kurt Smook

Valuation Services Director

The timing of this article coincides with perhaps one of the most unprecedented economic influences in a generation. As COVID-19 continues to impact markets across borders, multiple commercial real estate (CRE) sectors and our communities; economists and real estate experts grapple with the economic fallout. Amid the chaos, many are in search of safe havens for their nest eggs, investment portfolios or stash of cash under the mattress. At CIVAS we have weekly national webinars and discussions regarding the impact COVID-19 has on commercial real estate across all property types. Most discussion on these conference calls is centered on multi-family, retail and hospitality sectors as they seem to be most impacted by current events. You may be wondering how this will affect self storage? How is this fast-growing sector of CRE fairing?

To find out more, I had a conversation with Ben Bradley, CEO of Patagon/ Get Space, a national self storage developer, investor and owner. His company has built 14 facilities, own 9 currently, have three additional properties under construction, and two others in permitting.

Despite the economic changes, none of the properties under construction or in permitting are on hold. Mr. Bradley indicated that the first quarter of the year was one of the strongest since he began self storage development in 2012. In fact, the on-site managers have reported strong move-ins for the winter months. Though April is proving to be more of a mixed bag. This is likely a result of the coronavirus.

Mr. Bradley indicated that the majority of their facilities are still showing positive net rentals for the month, which is a lot better than anticipated given the current environment. The suburban stores are seeing the biggest impact to new rentals (down about 30%) while stores in core areas haven’t seen as much of a difference on new move-ins (down about 10%), compared to pre-COVID-19 figures. This is a stark contrast to multi-family and retail sectors showing escalating vacancies and dramatic market rent compression. Mr. Bradley anticipates some risk will likely be reflected in capitalization rates in the near future, but has not personally seen any liquidity restraints that may influence cap rates.

This preview into the market indicates that parts of the real estate sector can offer insulation against economic downturns, such as the COVID-19-sparked recession the US will likely be entering in the near term. Another indicator of successful CRE sectors would be the performance of Real Estate Investment Trusts (REITs). REITs offer one way to tap into different areas of the market. REITs buy up property, collect rent and pass most of the money along to shareholders. REITs that own retail shopping centers, malls, lodging properties and senior living centers indicate heavy losses in recent months. Though infrastructure, self storage and industrial REITs have held up relatively well, and data center REITs have gained ground. These REITs performed better than others over that period, indicating their possible resilience during a recession.

Self storage REITs reportedly lost around 8% during the month of March, 2020, far better than the broader equities market. In contrast, the apartment, single-family and manufactured home segments were down by around 20%. This is most likely to occur as people continue to be furloughed and/or lose their jobs permanently. Unemployment encourages those individuals to reassess their biggest expense - housing. To accomplish this, they downsize or otherwise adjust their living situations. Good news for us self storage geeks. This will likely increase demand for off-site storage as people search for more affordable ways to store grandma’s broken heirloom rocking chair, James Bond’s 1989 submarine car, and all the treasured belongings they no longer have space for at home. (Please see the REITS table, page 7.) The S&P 500 indicates a decline of 15.6% (as of end April 2020) since its peak in February. However two REITs appear to be overachievers in a market that has lost substantial ground in recent months: Extra Space Storage and Public Storage.

Public Storage’s REIT (ticker symbol PSA) is the biggest self storage REIT. It lost around 9% during the month of March. Its annual dividend yield was recently 4%. Extra Space Storage has a market capitalization of more than $12 billion, EXR (ticker symbol) is the next-biggest self storage REIT after PSA. As of December 31, the company owned and/or operated more than 1,800 self storage properties with 1.3 million units and about 140 million square feet of rentable space. EXR is listed among the most defensive buy-rated REITS with the highest distribution yields. Recently, EXR yielded 3.8% annually. The company’s shares dipped around 5% during March.

Bank of America CRE analysts wrote that self storage is “often considered a risk-off sector due to consistent tenant demand” and that the property segment has been resilient during prior recessions. These trends and market interviews reflect that self storage may offer some respite from the storm as the world markets seek a path back to normalcy.

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