Self Storage REITs: Peak Supply, Peak Valuation?

Aug. 02, 2018 9:17 AM ETPSA, EXR, LSI, CUBE, UHAL, NSA2 Comments
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Chilton REIT Team
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Summary

  • Year to date, self storage has been the second best performing sector due to its short-term lease structure and an expectation for a near-term peak in construction.
  • However, we believe that it may be too soon to call the peak in self storage development.
  • 2018 will be the seventh consecutive year of accelerating new supply growth, and development returns remain attractive.
  • Additionally, capital sources appear plentiful.
  • With the expectation that the peak in supply could be further away, we believe current self storage REIT prices do not properly reflect the risk of oversupply.

Self storage is a niche property type within commercial real estate. Self storage demand benefits from all aspects of life - in good times due to home renovations, new jobs/relocation, and summertime storage between college semesters, but also during difficult times such as dealing with a divorce, the passing of a family member, and job dislocation.

The most common unit is 10 x 10 square feet, which rents for $142 a month (climate-controlled) and $126 a month (non-climate-controlled) on average, according to Union Realtime and the Self Storage Almanac, and has an average length of stay around 14 months (which is much longer than many tenants originally anticipate to stay).

These characteristics have made self storage an attractive sector regardless of the economic climate. Recently, the sector has caught a bid due to its short-term lease (one month) structure, which gives owners the ability to mark rents quickly, a desirable attribute while interest rates are rising. Year to date, the US 10-year Treasury yield has increased 56 basis points (bps) to 2.96% as of July 31, 2018. Over the same period, the self storage sector (BB:BBREPBST) is the second best performing property type with a total return of +7.3%.

According to the 2018 Self Storage Almanac, the self storage industry as a whole stands at 44,149 facilities encompassing 2.3 billion square feet of leasable area. Unlike many other property types, ownership within the self storage sector is top-heavy with only a handful of large players (Figure 1). The six major publicly traded self storage companies (Public Storage (NYSE: PSA), Extra Space Storage (EXR), CubeSmart (NYSE: CUBE), U-Haul (NYSE: UHAL), Life Storage (NYSE: LSI), and National Storage Affiliates (NYSE: NSA)) are also the largest six operators in the U.S.

Together, they make up 20.9% of the industry’s square footage and 17.0% of the facilities. Outside

This article was written by

Chilton REIT Team profile picture
1.68K Followers
The REIT Team of Chilton Capital Management, a Houston-based investment adviser, is headed by co-portfolio managers Bruce Garrison, CFA, and Matt Werner, CFA. Mr. Garrison has over 40 years of experience analyzing public REITs both on the buy-side and the sell-side. Mr. Werner joined Mr. Garrison on the Chilton REIT Team in 2009. The REIT Team’s strategy primarily pursues investments in publicly traded real estate investment trusts (REITs) and real estate related entities based primarily in North America. The REIT Team believes public REITs are superior vehicles for investing in real estate due to their liquidity, transparency, and total return characteristics. Investing in public securities enhances the REIT Team’s ability to diversify by geography, sector, strategy, property, and tenant while maintaining portfolio liquidity. REIT property types include apartments, regional malls, shopping centers, lodging, office, industrial, self-storage, data centers/cell towers, and a variety of health care related facilities. The REIT Team focuses on traditional methods of security analysis; primarily research, critical thought and analytical depth, which are integral to their investment process. The REIT Team’s investment approach seeks to combine its real estate industry experience with traditional methods of security selection to make sound investment decisions in real estate companies. The Chilton REIT Team manages Separately Managed Accounts (SMAs) for high net worth individuals and institutions. Additionally, the REIT Team is the sub-advisor for an open-end investment company, the West Loop Realty Fund (tickers: REIIX, REIAX, and REICX). Before investing one should carefully consider the West Loop Realty Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus, a copy of which may be obtained by calling 800-207-7108. Please read the Fund’s prospectus or summary prospectus carefully before investing. The Fund may not be suitable for all investors. We encourage you to consult with appropriate financial professionals before considering an investment in the Fund. Liberty Street Advisors, Inc. is the advisor to the Fund. The Fund is part of the Liberty Street family of funds within the series of Investment Managers Series Trust. The Fund is Distributed by Foreside Fund Services, LLC. Chilton Capital Management, LLC is an independently owned and operated firm formed in 1996. Chilton provides investment advisory services for registered investment companies, private clients, family offices, endowments, foundations, retirement plans and trusts. For more information about Chilton Capital Management’s REIT Team, please visit www.chiltoncapital.com/reit/ or email info@chiltoncapital.com. Additional information about Chilton Capital Management LLC is also available on the United States Securities and Exchange Commission’s website at www.adviserinfo.sec.gov. The searchable IARD/CRD number for Chilton Capital Management LLC is 104592.

Disclosure: I am/we are long LSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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