Explore more Stock of the Week episodes here
Andrew Willis: Amidst talk of a potential recession, you might be thinking of going on the defensive a bit - perhaps with real estate . But housing isn’t exactly cheap in Canada right now, and how much of a competitive advantage can you get in office space?
Consider instead, the wild world of self-storage. Public Storage (PSA), you know, the orange buildings next to the highway, are one of the biggest stars of self-storage, and in the digital realm, they’re in 93% of unpaid search engine results, according to equity analyst Suryansh Sharma.
There are certain industry dynamics that make the self-storage industry more conducive to earning a moat than other REITs, Sharma says, as other commercial real estate sectors like offices, industrial, and multifamily, can operate as stand-alone entities. With self-storage, if you’re the likes of Public Storage and you have a dominant market presence, you’re able to reach your end customers directly online and off the highway, driving frequent signing of leases on a same-day basis.
A significant source of demand for Self-storage comes from broad societal and economic shifts, which led the sector to outperform all other real estate asset classes during the global financial crisis – and experience tremendous growth in the past few years.
From pandemic-related disruptions to downsizing and just population growth, it’s worth noting that self-storage tailwinds continue but look to be normalizing this year, which isn’t a bad thing – and maybe good news for the rest of your portfolio, anyway.
For Morningstar, I’m Andrew Willis.
Bulls Say
- Public Storage’s commanding lead in supply-restricted West Coast markets leads to consistent revenue growth.
- Public Storage’s industry-leading balance sheet leaves room for low-cost consolidation opportunities in a fragmented market.
- Pandemic-fueled changes like work from home, decluttering, migration, and so on, have persisted and have created more demand for self-storage facilities leading to historically high occupancy rates and strong rental growth.
Bears Say
- Supply has increased over the past few years, which could significantly affect management’s ability to pass along price increases.
- A focus on development over acquisition could lead to slower growth opportunities given the obstacles associated with zoning laws and community opposition toward self-storage facilities.
- The demand drivers for self-storage space over the past two years may start to weaken leading to pressure on self-storage fundamentals.
Editor's Note: All images are courtesy unsplash.com and AP Images.
