Self-Storage Rising in this Market Downturn?

Question

On Tuesday, the Wall Street Journal published an article stating that the stock price world's largest self-storage company has actually risen during this crazy market selloff. See below.

So do you think this is an anomaly, or do you think self-storage is poised to rise across the board in the coming months? If this is a recession, will self-storage (and mobile home parks) perform as well as many of us have projected all along?

Here is the article:

https://www.wsj.com/articles/investors-flock-to-self-storage-rental-housing-as-safety-plays-11583780432?emailToken=3310aa650e834270dcef581eb698c5a2OOhudGeYJU3JUfoqdycTr9JWj3A8MgMeaFBun++KiJzn9mdCUPA1ihUk/SDDc+QQ+mwCmkBPWiqPX5kObTNPidMJHgy3gMy+jPeSCu5sy1uvNlTmCiEOmCG21CRVQBOl&reflink=article_imessage_share

Kris Bennett · Answer

@Paul Moore too early to tell what stock pricing will do over the next 3-6 months, but what happened is evidence that the word is out about storage being a "save haven" in recessions.

I'd like to point out that what happens to revenues at physical locations will vary based on market and competition. According to Yardi Matrix, revenue was down year-over-year in nearly every major market they track due to increased competition and new store openings. That won't bode well for revenues if consumers pull back spending in all areas of their lives, storage use included. If I had to guess, I think we'll see revenues and occupancy dip slightly over the next 3-6 months, but again, that's just a guess.

However, there is still an opportunity to acquire self storage facilities, especially with the low interest rate environment we're seeing. I don't see a reason to change that activity, but sellers should tamp down their pricing expectations.

Joseph Cacciapaglia · Answer

I worked with several self storage operators that did well in the last downturn. However, a lot of the increased business came from all the foreclosures. There is no reason to believe we will see foreclosures on the same scale in the next down cycle. The 2008 issues were in large part due to terrible mortgage terms that just don't exist today. We don't have widespread NINJA loans or 1 year ARMs in most markets. Most lenders learned their lessons, and also have better procedures in place today to assist borrowers in financial hardship. Of course, it's possible that we have an even worse recession or depression, and a prolonged downturn leads to job losses, and in turn foreclosures, but it's too soon to know if that's where we are headed.

So, it seems to me that housing should do better than last time around, and self storage not so much, unless things go very far south. That being said, I love self storage in general, because a good operator can make money with it regardless of the market direction. It's much more of an operating business than most other classes, and therefore there are a lot more levers to pull to add value.

Bill F. · Answer

@Paul Moore

I'll agree with most everyone else and say it is too early to tell/ I don't see a good long term reason for revenues to increase across the board for SS.

I understand the thesis that drove the growth of SS nationwide in 2008. I can't think of a thesis that passes the nationwide test due to supply and demand. In a lot of markets there are an over supply of SS units. The demand side could increase if things get real bad and lots of workers are laid off. Then the question is, how much excess capacity exists in the system and is it located where demand will be.

There may be some local plays to be had where owners are over leverage and can't bridge a short term cash crunch or large players seek to ditch under performing assets at fire-sale prices, but nothing across the board.

Sure SS and MHPs are somewhat counter cyclical, but I think their recession-proof-ness has been a bit over hyped.   MHPs particular rely on a tenant class who tend more to the hourly wage. they are the people who are most impacted by COVID-19 shut downs. A lot of MHP owners who have a large debt servicing could feel the squeeze quick.

Evan Polaski · Answer

@Paul Moore as mentioned, that article is too early to tell.  If you look at Public Storage current price, it is down sharply since that article was last updated.

There is no logic happening right now, hence why equities are down, bonds are down, gold is down.  When we are risk-off, money should move from equities to bonds and gold, but that is not happening right now.  But thankfully this morning, things are moving up again.

Brandon Roof · Answer

I don't have the ability to read the article but $PSA has been getting whipsawed around like the rest of the market and is well off recent highs.  I can only assume that the article is referring to a European or Asian company then.

Most stocks are moving independent of underlying fundamentals at this point in time, so I wouldn't get too attached to anything with a high-yield, real estate, utilities, etc. that become potential short-term safe havens, only for funds to later churn out of them as the dust settles.

If your belief remains that people will continue to downsize and/or be unwilling to part with belongings, then self-storage would certainly support that belief.  Specifically in the months ahead, I don't see a rational reason for there to be increased demand in self-storage as people could potentially be compromised financially and a self-storage payment isn't going to be high on their list.  They might even begin emptying units in hope to sell goods in order to make ends meet.

Long-term, I personally believe in self-storage but I'm not making any huge bets based on what transpires in the next few months.

Self-Storage Rising in this Market Downturn?

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