Since the pandemic began, the best bet in real estate has been that Americans need to store their extra stuff.
Self-storage stocks have been big gainers since last year’s economic lockdown, outrunning e-commerce warehouses, rebounding malls and rental houses.
Investors dumped self-storage stocks when the pandemic hit, unaware that the business of leasing lockers was about to boom. Americans cleared out bedrooms and garages for home offices and gyms. Others packed up apartments and headed for COVID-19 cabins or home from campus. Businesses fearing shortages rented space to stash inventory. Availability dwindled and rents shot up.
Since Feb 21, 2020, just before the pandemic tanked markets, self-storage shares in the FTSE Nareit All Equity REITs Index have returned more than 85% between price gains and dividend payments. That compares with a roughly 18% return on the broader real-estate investment trust index, which tracks the performance of 153 companies that own income-producing properties, from cell towers to timberland.
Extra Space Storage Inc. shares are twice as valuable as when the pandemic began, and Public Storage stock has returned 73%. The S&P 500 index, to which both companies’ shares belong, has delivered a total return of about 41% over that time.
Leading the market is a familiar position for these storage providers. Public Storage pioneered the self-storage business, and as its bright orange signs became ubiquitous, its stock-market value has swelled to more than $64 billion. A $1,000 investment in Extra Space shares in 2009, at the depths of the housing bust, would be worth more than $60,000 today, including dividends.
Self storage thrives in good times and bad. Marriage and household formation are good for business. So are divorces.
Investors large and small streamed into storage, and by 2019 a flood of new units threatened to outpace the rate at which Americans were amassing excess belongings. Another 5% of space was added nationally in each of 2018 and 2019 and 3.8% hit the market in 2020, according to Green Street, a property-investment research firm that estimates roughly 1 in 10 Americans use storage units.
The pandemic helped fill the new space. The four largest storage companies each reported record occupancy above 95% in the third quarter. Extra Space and Public Storage, with about 345 million square feet of space between them, were nearly 97% full.
The average monthly storage bill in the U.S. hit $155.65 in November, the highest in five years of credit- and debit-card data examined by analysts at KeyBanc Capital Markets. Rents aren’t rising as sharply as they did this summer, yet they charged higher in November – by more than 10% year over year for a 10-foot-by-10-foot space in many places, according to real-estate data firm Yardi Matrix. The hottest markets for storage are the same as those for houses: Florida, Texas, Phoenix and Atlanta.
Analysts at JPMorgan, Raymond James and Truist Securities have recently reconsidered their earnings forecasts for storage companies and raised price targets for the stocks. "Despite robust rate growth for new and existing customers, we are hearing of little change in customer behavior," Jonathan Hughes of Raymond James wrote to clients.
For many, it is easier to pay an ever-rising monthly bill than figure out what to do with grandma’s old dining set. Nonpayers’ belongings are auctioned off online sites such as storagetreasures.com and lockerfox.com. The big firms suspended auctions at the pandemic’s onset, but they are back to clearing out space for nonpayment.
Land & Buildings Investment Management LLC, a hedge fund that invests in real-estate stocks, has a $41 million stake in Public Storage. "We decided self storage is a great place to be in an inflationary environment," said founder and Chief Investment Officer Jonathan Litt.
The company says self-storage is a good hedge against inflation because operational costs are paltry compared with properties such as hotels, which require more staffing and upkeep. Monthly leases offer more opportunities to raise rent than properties subject to multiyear contracts, like malls and offices.
Rising construction costs have set off a scramble for existing storage facilities. Green Street analysts don’t expect supply growth to return to the 2020 rate until 2025. Big public companies, particularly Life Storage Inc. and CubeSmart, have been bulking up with acquisitions. Big investors are buying, too.
KKR & Co. has spent more than $300 million on storage facilities in recent months and started a company to operate them and add more. Roger Morales, who leads KKR’s commercial real-estate acquisitions in the Americas, said the firm is betting on increased demand from businesses stashing just-in-case inventory as well as from people who have been priced out of larger houses and apartments by rising home prices and residential rents but need more space.