Storage REITs: When Business Is Too Good It Becomes A Problem
The operating efficiency and relative simplicity of the self-storage business is second to none in the real estate sector, where properties can breakeven at sub-50% occupancy rates with sub-par management.
For self-storage REITs, the business is almost too good. Developers and new operators have flocked to the sector in recent years, adding new supply at a furious rate, weakening fundamentals.
2018 appears to have been the bottom for self-storage fundamentals, but 2019 will be another challenging year. We remain neutral, noting ample supply but solid demand tailwinds from household formations.
With capital so plentiful, self-storage REITs have not been able to put their competitive advantages to work, but acquisition and consolidation opportunities will be plentiful over the next decade.
It turns out that millennials buy and store stuff too. Strong demand from renter households and businesses has kept rents and occupancy generally flat in the face of ample supply.