Self storage REITs are reaping the benefits of growing consumer demand coupled with a record low level of new supply coming to the market, according to R. Christian Sonne, managing director of Cushman and Wakefield's self-storage industry group.
The supply and demand dynamics bodes especially well for the industry. With supply levels at historic lows, Sonne anticipates that the sector will continue to command higher rents. While supply is low across the country, Sonne said market conditions are especially strong in key cities in the eastern United States.
Nationwide, there were less than 100 new self-storage facilities built in 2011. He added that the first quarter is off to a slow start.
"It's unbelievable how low new construction starts are now," he said. "There are only two construction projects that are already in progress during the first quarter of 2012."
He also attributed some of the industry's success to what he called the "sophisticated management platform" of the public REITs that include CubeSmart (NYSE: CUBE), Extra Space Storage Inc. (NYSE: EXR), Public Storage (NYSE: PSA) and Sovran Self Storage Inc. (NYSE: SSS).
The self storage sector generated total returns of 29.83 percent last year, while the FTSE NAREIT All Equity REIT Total Returns Index was up 11.29 percent. In the first quarter of 2012, the self storage sector had total returns of 2.70 percent.
Sonne said that during the recent recession, the foreclosure rate was low and affected mostly small operators. He added that the self storage sector has the lowest share of distressed assets of all sectors of the REIT industry.
Occupancy rates for self storage REITs are up 2.2 percent from the fourth quarter of 2011, compared to 1.1 percent nationwide for all self storage companies, according to Sonne.
Sonne said that customers of self storage units are gradually increasing their average stay. The average tenant stays in a unit between a year and 15 months.
"More tenants are using self-storage units on a regular basis," he said.
With occupancy rates rising, the average rental asking price for self-storage REITs is up 6 percent in the first quarter, compared to a 2 percent decrease nationwide for all self storage companies, Sonne said.
The growth of public self storage companies will most likely come via acquisitions as opposed to new construction. However, as talks of consolidation in the industry continue, Sonne said the pace is very slow. Although more institutional money is flowing into the self storage sector, institutions own less than 20 percent of the industry.
"There are more buyers than sellers," said Sonne, adding that many private owners are choosing to not sell and lock in the low interest rate.