When supply of a particular type of property exceeds the market’s demand, it can cause vacancies to soar. Oversupply can also erode pricing power.
Self-storage properties are cheap to build and barriers to entry are low. So oversupply can become a problem quickly.
In fact, the main reason that self-storage REITs have been one of the real estate sector’s worst performers in recent years is oversupply. It appears that supply and demand are finally starting to balance out again, but this is a lingering concern in the self-storage industry.
Most (but not all) REITs use some degree of borrowed money to finance growth. REITs with higher leverage are more susceptible to recessions and other adverse market conditions.
In other words, REITs with lots of debt may not be able to meet their interest obligations during tough times. They’ll have to cut dividends or sell assets. This is especially important in economically sensitive subsectors of real estate. That category definitely includes self-storage.
Self-storage REITs are economically sensitive, or cyclical, businesses (I’ll discuss this more in the next section). Self-storage units are often a discretionary expense, and they’re generally leased on a month-to-month basis. So it’s easy for tenants to vacate when they need to cut back.
When recessions hit, it’s reasonable to expect self-storage vacancy rates to climb. They tend to climb more than vacancies in less cyclical types of properties, like offices and healthcare.
How do self-storage REITs hold up during recessions and tough economies?
Not all types of commercial properties are in the same business category. There are two things to consider when looking at a REIT. First is cyclicality or economic sensitivity. Second is its lease structure.
When it comes to cyclicality, self-storage REITs are a mixed bag. A self-storage unit is a discretionary expense and vacancy rates tend to spike during tough economic conditions.
But self-storage real estate also comes with one of the most recession-friendly cost structures in the entire real estate industry. Minimal maintenance and operating expenses are good news for investors.
Vacancy rates spike during tough economies because of self-storage lease structures. It’s hard to cut back on an expense you’ve agreed to pay for a long period of time, like a mortgage or car payment.
Unfortunately, self-storage units are generally leased on a month-to-month basis. This makes it easy for tenants to leave on short notice.
The “big five” self-storage REITs
The self-storage industry is quite fragmented. There are only five major publicly traded REITs that specialize in self-storage properties. And they own less than 16% of the approximately 44,000 U.S. self-storage properties between them. The rest of the existing self-storage inventory is owned by smaller companies or independent operators.
With that in mind, here are the five major self-storage REITs, the relative size of each, and their dividend yields: