24th January 2023
Self storage REITS, also known as real estate investment trusts, own, operate and manage mini-warehouse facilities. They are properties that enable both individuals and businesses to store their belongings in individual storage units safely and securely.
In this blog we look at what self storage REITs are and how they work. This will help you decide, as an investor or entrepreneur if self storage REITs are the right option for you. Below you will see we have shared the advantages of self storage REITs along with some of the disadvantages. This will enable you to make an educated decision about how self storage REITs (Real Estate Investment Trusts) could work for you.
What Are Self Storage REITs?
Self storage properties are often small warehouses or factories. They will be made up of multiple units that vary in size. The owner of the small warehouse will lease these units within the building as storage units. These storage units are rented to businesses that need additional space to store home or business items, possessions and belongings.
Generally speaking, self storage facilities will be available to be rented on a month-to-month basis. This is different from the traditional lease structure of many other REITs. Typically, more traditional REITs lease space properties lease a space for a year or more. This can have good points and bad points. For example, shorter term lease structures mean that self storage REITs (Real Estate Investment Trusts) have the ability to raise their rents more frequently to match the market rates. However, on the bad side, these self storage REITs may also have to reduce their rents more frequently to match a down turning market.
In addition to the rental income that you can generate from a self storage REITs, there are other potential revenue streams and sources too. While this is dependent on the self storage REITs model, there are still some additional revenue streams to consider. For example, you could charge late fees or management fees. You could offer self storage insurance directly or for a referral fee from a local insurance company. There is also the opportunity to offer and charge for a removals service, packing service or van hire. You could also sell packing and moving materials such as boxing, packaging, tape and more.
What Are The Advantages Of Investing In Self Storage REITs?
There are lots of benefits available to those investors that choose to invest in self storage REITs (Real Estate Investment Trusts). For example, the steadily rising demand for self storage units by business owners and individuals can only be a good thing for those investing in self storage REITs.
There is huge demand for self storage from a wide range of sectors and reasons. Some of the reasons that people chose to use self storage units in Peterborough and Darlington for their belongings is due to relocation, disasters, decluttering, changing life circumstances and business purposes too. With so many needs and uses of self storage units, you can see that their popularity and the demand for self storage facilities is only set to grow.
These factors will all tend to keep occupancy levels of the self storage facilities high. In addition, these factors will also steadily push the rent rates of the self storage units higher as demand and popularity grows.
You will also find that investing in self storage properties is one of the lowest costing REITs. This is because, generally speaking, they are inexpensive to build, manage and operate. These factors mean that self storage investments can generate high margins as well as good returns on your investment.
Over the years, self storage REITs have been seen as the best performing investments within the REIT sector. Within the last decade we have seen self storage REITs significantly outperform other real estate investments. There has also been proof of self storage REITs delivering market-beating total returns.
What Are The Potential Risks Of Self Storage REITs?
Now we have looked at the advantages and benefits of self storage REITs (Real Estate Investment Trusts), which have been seen as an excellent long-term investment, it’s time to look at the potential risks. As with all investment opportunities, none come without risk. So, let’s look at the potential risks of self storage REITs so you are fully informed when making your decision about investing in self storage REITs.
The first notable risk is the risk of oversupply. As we have mentioned, self storage facilities are cheap to build and operate. There is also a low barrier to entry for this business. A developer could quickly build new capacity. In turn, this could increase competition for the customers looking for storage solutions. This will result in additional weight on occupancy levels and rental rates for existing self storage facilities.
The second notable risk is the economic risk. Self storage leases are short-term, this is the very nature of the business and industry. This means that the self storage industry could have more exposure to an economic downturn. If the economy was to take a hit, fewer people will move house. This could reduce the need for storage units in these cases. Businesses may also be looking at ways to cut back their expenses. This could involve not using storage and keeping items on site. In turn, this could impact both the occupancy of your self storage units and rental rates too.
In addition to the sector specific risks of investing in self storage REITs, there are also potential risks that are common to those within the REIT sector. These are interest rate risk and financing risk.
Interest rates have been rising. If they continue to rise borrowing money can become more expensive. If a REIT has a lot of floating rate debt or even near-term maturities, these rising rates of interest can increase its interest expenses. There will also be an impact on the ability of the REIT to finance acquisitions and development projects if the interest rates are rising.
Financial experts have also confirmed that rising interest rates will tend to weight on REIT stock prices. This is because the rising interest rates will make lower-risk alternatives more attractive investments as their income yields rise. These lower-risk alternatives could include things such as bonds, for example. In relation to this, REIT stock prices will tend to fall. In turn, this will push up their dividend yields to compensate the investors for their higher risk levels.
As with all investment opportunities, it is important to understand the potential benefits as well as the drawbacks.
What Are The Three Best Self-Storage REITs?
As we entered 2022, there were six publicly traded self storage REITs (Real Estate Investment Trusts). While all of these focus on owning, operating and managing self storage facilities, for us there was three that stood out. Below we have shared the three best self storage REITs that stood out to us for their slightly differentiated business models. There are Public Storage, Extra Space Storage and National Storage Affiliates. Below we take a closer look at what makes these three self storage REITs different from their competitors and why they stood out to us.
- One Of The Three Best Self-Storage REITs: Public Storage
Public Storage is the largest self-storage REIT. In 2022, it had more than 2,700 self storage properties. This made up more than 198 million square feet of rentable space. In addition to the self storage investments of this company, Public Storage also owns 35% interest in a European self storage REIT and has a 42% interest in an industrial REIT.
We feel that what makes Public Storage from the other self storage REITs is that property development platform that it is built on. Public Storage is the only self storage REIT that develops new properties. The rest are primarily expanded by acquisition. Public Storage has a company development strategy that has enabled them to earn higher investment returns compared to acquisitions of self storage REITs over the years. This is why we have put it in our top three best self storage REITs.
- One Of The Three Best Self-Storage REITs: Extra Space Storage
One of the leading self storage REITs is Extra Space Storage. As of 2022, the business had more than 2,000 self storage properties. Out of these, 47% are wholly owned. 13% of them are owned with joint-venture partners. The final 40% of the 2,000 self storage properties are managed.
We feel that it is the third-party management of Extra Space Storage that sets them apart from other self storage REITs that they could be competing with. Most self storage REIT rivals in this industry also manage properties that are owned by third parties. However, Extra Space Storage was an early leader when it comes to this type of business model. In fact, research shows that Extra Space Storage currently manages more self storage properties than any of its competitors in the self storage REIT market.
This third party managed self storage properties strategy does have several benefits. For example, it generates a steady management fee. It also requires little up-front investment. The other benefit is that this business and investment strategy provides a steady stream of acquisition opportunities for the company too. Extra Space Storage can sit comfortably knowing that it can purchase a self storage property that they know very well when the owner sells. The result of this is that they are thereby reducing any potential risk.
- One Of The Three Best Self-Storage REITs: National Storage Affiliates
National Storage Affiliates is perhaps one of the smallest publicly traded self storage REITs. The business ended 2021 by achieving its milestone of having at least 1,000 locations of self storage facilities.
We have put National Storage Affiliates into our top three best self storage REITs because it is unique in the fact it does not consolidate its properties under one national brand. Instead, National Storage Affiliates owns, operates and manages strong regional brands. As of 2022, National Storage Affiliates had twelve brands. This included two corporate brands and ten Participating Regional Operators, also known as PROs.
What is interesting about the Participating Regional Operator (PRO) structure of National Storage Affiliates is that is incentivises private self storage operators to come under the banner and umbrella of National Storage Affilates. This self storage REIT benefits from being able to expand its portfolio while the Participating Regional Operatives (PROs) absorb more of the downside risk.
However, the Participating Regional Operatives (PROs) benefit from the scale of a large company behind them. These businesses also gain the ability to maintain management and participate in the upside of the business. Research shows that many of these Participating Regional Operatives (PROs) eventually go on to sell their self storage business and facilities to the National Storage Affiliates.
Are Self Storage REITs Great Investment Opportunities?
Historically, self storage REITs (Real Estate Investment Trusts) have been great investment opportunities for investors and entrepreneurs. A self storage REIT benefits from a combination of both lower costs and high demand. It also offers short-term lease structures. This has enabled the self storage industry to steadily increase its income.
These factors have helped the self storage industry to generate total returns over the years that above average for REITs. One of the attractive things about self storage REITS are the ability for investors to earn high returns on their investments. Self storage REITs are definitely an option that real estate investors should consider closely.
What Sort Of People Invest In Self Storage REITs?
Research from the USA shows us that nearly 145 million Americans live in households that invest in self storage REITs (Real Estate Investment Trusts). There reasons for investing in self storage REITs is the historically competitive total returns along with the comparatively low correlation with other assets. This is what nearly 145 million Americans say that makes self storage REITs an attractive addition and diversifier for many investment portfolios.
If you are looking for self storage solutions in Peterborough or Darlington, call the team at Quick Self Storage. We have two reliable, secure and safe self storage facilities in both cities. You are welcome to book an appointment to look round and view the sizes of the self storage units available. We offer good quality self storage units, a reliable service and competitive rates for your self storage needs in Peterborough, Darlington or local areas. Call our team of storage experts now to find out more.