SEATTLE – Single mother Kelsey Smith, 26, lives with a roommate in a Salt Lake City apartment and pays $500 a month for daycare for her 3-year-old, which makes it hard to get by on a waitress’s pay. She says she’s had to move to cheaper lodgings six or seven times.
Rather than drag all her belongings with her, Smith rents a 10-foot-by-15-foot self-storage unit for $80 a month – as much as two shifts’ worth of wages and tips. The unit contains furniture and other items she’s accumulated over the years – “just the things you’d need if you had a home,” she said. “People don’t want to let go.”
Millions of Americans are like Smith: They’re loath to give up furniture and photos, children’s toys and brick-a-brac, yet can’t find a place for it in their homes, Bloomberg Markets magazine will report in September.
That’s been a huge boon for Extra Space Storage, the best-performing of four publicly listed self-storage companies, all organized as real estate investment trusts.
REITs – agglomerations of property that sell like stocks – are booming. Investors are pouring into the asset class as they search for alternatives to a frothy equities market and low-yielding bonds. Bloomberg indexes for hotel, shopping-center and apartment REITs have returned more than 12 percent this year as of Aug. 4, compared with 4 percent for the Standard & Poor’s 500 Index.
REITs are attractive to investors because they pay no taxes if they distribute all of their income to shareholders, which gives them relatively high dividend yields.
The hottest REITs are the self-storage trusts, according to Bloomberg Markets’ second annual ranking of alternative investments. Three out of the top five of the REITs in the 141- company Bloomberg REIT Index for the three-year period ended on March 31 are self-storage companies, excluding firms with less than $100 million in market value.
The high returns are driven by robust demand for storage units, which are also used by small businesses to hold inventory.
The number of U.S. storage locations has swollen from 27,500 in 1998 to 52,000, housing an estimated 25 million units, according to the Self-Storage Almanac, published by MiniCo Insurance Agency LLC, which provides insurance to the industry. They brought in an estimated $24 billion in revenue last year, according to the Self-Storage Association in Alexandria, Virginia.
“People accumulate too much stuff,” said John Murphy, an analyst at Cohen & Steers Inc., a New York real estate investment firm that holds more than $52 billion of REITs and other securities, including a roughly 10 percent stake in Extra Space.
Extra Space is the top performer, with an annualized return of 36.7 percent for the three years and 27.9 percent for one year. Its income from operations grew more than 20 percent year over year for the 14 quarters ended on June 30.
Other storage investors include university endowments, pension plans and a host of investment firms, including Morgan Stanley, Prudential Real Estate Investors and Chicago’s Harrison Street Real Estate Capital. Blackstone Group bid on a 43-property storage portfolio offered by Harrison last year, according to people familiar with the transaction.
It lost to Glendale, California-based Public Storage, the biggest self-storage firm, which won the assets for $315 million.
Storage returned 101 percent from the beginning of 2008 through 2011, outperforming all other REIT categories, according to data compiled by Bloomberg.
“Self-storage has come out of obscurity,” said Extra Space CEO Spencer Kirk, 53. “It’s no longer the goofy real estate class. It’s the real estate class that during the recession did better than any other.”
Boom set to slow
After a decade of expansion, Extra Space operates 1,071 self-storage sites in 35 states, Washington and Puerto Rico. It owns about half of the properties outright and manages the rest as joint ventures or for other owners.
At least 11 million Americans pack spare possessions into storage units every year. It’s all about life-changing events, Kirk said: “birth, death, marriage, divorce, upsizing, downsizing.”
It’s also about how firmly Americans are attached to their belongings, according to a 2009 study of storage by Carnegie Mellon University, Harvard University and the University of Virginia.
“We do not know if people store their lava lamps because parting with them is such sweet sorrow,” the researchers wrote in an article in the Journal of Experimental Social Psychology. “But we do know that they store them because they like them and that they like them because they’re theirs.”
The good news for the big public companies – Extra Space, Public Storage, CubeSmart and Sovran Self Storage – is that there’s a steady and growing stream of customers for their steel cubicles, even as storage developers run out of cheap land in urban and suburban areas.
“There has been very little building since 2007, and as demand increases, rents go up,” said Extra Space Chairman Kenneth Woolley, 68.
Local entrepreneurs own 83 percent of existing self-storage properties, many of whom will sell if the price is right, according to the Self-Storage Association. That means the big public companies may have years of expansion ahead.
After years of double-digit gains, Extra Space’s highflying stock is no bargain. Three analysts have downgraded their recommendations on Extra Space since April.
“While fundamentals are solid in the self-storage sector, there are signs that we are reaching an inflection point and growth is set to slow,” wrote Omotayo Okusanya, an analyst at Jefferies & Co., in a May 8 report in which he downgraded both Extra Space and Public Storage to hold.
Move-in rents at Public Storage locations open at least one year averaged $114 per month in the first quarter, down from move-out rents of $123, according to Okusanya.
Investors who want to buy existing storage properties are stymied by high prices.
“It’s a tough asset class to make work for us right now, but we’re actively looking,” said Liz Raun Schlesinger, a managing director and co-head of the self-storage group at W.P. Carey, a New York REIT. “Properties have become pretty expensive.”
But still profitable
The Extra Space site charging the highest rent is a long way from Utah. It’s on West 143rd Street in New York’s Harlem neighborhood, where customers pay an average of $45 a square foot for their units annually. That’s slightly less than they would pay to rent a Manhattan apartment, which averaged $52.50 a square foot in June, according to real estate appraiser Miller Samuel Inc.
“For a concrete pad with three steel walls, a roll-up door and an incandescent bulb,” Kirk said with eyebrows raised. “It blows people’s minds.”
Another highly profitable site is across the street from the Bronx’s Co-op City, the nation’s largest housing cooperative with about 50,000 residents. There are 500,000 people within a 3-mile radius of that location, Kirk said.
“The median household income is pretty low, lower than $50,000, but because you have so many people in such a dense area with so many life-changing events, there’s unbelievable demand,” he said.
Woolley founded Extra Space in 1977 and opened 28 properties during the next decade. In 1994, he sold all but three to Storage USA in Memphis, Tennessee, and concentrated on his larger real estate business.
He got serious about storage again in 1998 and recruited Kirk as a partner. In his 20s, Kirk had helped start a computer switch and modem maker called Megahertz Corp., which was sold to USRobotics in 1995. A year and a half later, with his stake in the merged company worth $200 million, Kirk retired at 36.
Together, the pair took Extra Space public in 2004, raising $300 million. In 2005, Extra Space acquired Storage USA in a joint venture with Prudential Real Estate, adding 458 properties to its 140 – making Extra Space the nation’s No. 2 self-storage landlord after Public Storage.
Kirk was paid $2.3 million in 2013 in salary and bonus, according to the company’s annual financial statements. Kirk and trusts controlled by his family own 3.2 percent of Extra Space, according to a company proxy statement, worth $192.6 million on Aug. 5. Woolley owns about 1 percent.
The biggest challenge for storage operators is high turnover. Extra Space has about 600,000 tenants at any given time.
Every day, the company is in search of 40,000 new renters to replace the ones who move out, Kirk said.
The CEO has applied his tech expertise to the task. When he joined Extra Space in 1998, self-storage “was incredibly sleepy,” Kirk said, with property owners keeping track of leasing and maintenance with pencil and paper and color-coded pushpins on wall maps.
Kirk digitized Extra Space’s financial planning and logistics and invested heavily in online advertising.
“We’re spending $1 million a month with Google,” Woolley said.
Staff are expected to convert as many customers as possible to credit card automatic payment, thereby prolonging their tenure. Rents are raised after five months and then every nine months after that.
Extra Space earns extra money by offering insurance on the items stored, starting at about $10 a month.
“We earn 80 percent margin on that,” Kirk said.