REITs Shine in Commercial Sector
Self-storage REITs posted a total return of 35.2 percent, the strongest gain of any REIT sector for the second consecutive year, according the National Association of Real Estate Investment Trusts (NAREIT). The results outpaced the 8 percent return for all REITs, as measured by the Dow Jones All REIT Equity Index.
“There are a few factors that contributed to the sector’s strong performance,” said Diane Piegza, vice president of corporate communications for Sovran Self Storage, which operates under the Uncle Bob’s Self Storage brand. “Certainly, the lack of new construction benefits the existing supply as well as our ability to keep expenses in check. Self-storage operator’s expense challenges pale to those faced by higher-end property types.”
Another key component for last year’s performance was the reduction of the use of concessions, Piegza said. “Many operators moved away from the aggressive offers of 2009-10 and returned to more traditional discounts. Not only that, but we are seeing the return of need-driven customers as compared to the more discretionary user of the mid 2000s. Put the two together and you’ll see positive results.”
Regardless of the economic highs and lows, self-storage is and will always be a need-based product. “Based on this, we’ve proven that, while not recession-proof, storage is to some extent recession-resistant,” said Clint Halverson, vice president of corporate communication and investor relations for Extra Space Storage. “People find that life events do not stop. These changes that people experience drive the need for storage. The events taking place may shift, but the demand for the product has remained consistent.”
Many feared the decline in new-home construction over the past three years would result in fewer people moving and less storage demand. That’s not the case, Martin said. “What they may have missed is that as home ownership has declined, the population of renters has increased. People who rent move more often and often use storage as an ongoing solution for their lifestyle.”
The overall sentiment is 2012 will be a good year for REITs, Piegza said. “While I’d like to think the self-storage sector will outperform the others, I expect we’ll see some strong competition from the multi-family and lodging sectors as the economy strengthens.”
Regardless, if self-storage continues as the top-performing REIT sector, all signs point to another active year for acquisitions. “Certainly, the larger players have the capital and the appetite, but the quality and pricing of the properties on the market will play a key role in acquisitions,” Piegza said.
Sovran, Extra Space and CubeSmart also claim new self-storage development is simply not feasible at this time as many markets are simply oversaturated. “There is plenty of inventory out there,” said Martin, who expects the consolidation to continue through ownership/acquisitions and third-party management.
And while reducing concessions will continue to be a challenge in the majority of markets, the REITs expect to see modest increases in rental rates this year. “Occupancy and concessions should remain at more customary levels fluctuating with seasonality and demand,” Piegza said. “The majority of concessions—at the least in the short term—will remain in parts of Florida, Texas and the Gulf Coast. Ultimately, operators who have a strong Internet presence, employ call centers, and draw on solid revenue management practices will reap the largest rewards.”