Storing people's stuff may have become too profitable a business for its own good in recent years.
Analysts and investors are worried that the self-storage industry has attracted so much investment during a yearslong bull run that America's for-rent storage space may be outpacing the volume of the country's excess belongings.
Self-storage stocks have surged since the economy began bouncing back from 2008's housing collapse. Shares of the four largest self-storage owners have each quadrupled or better since bottoming out in early 2009. Public Storage (PSA), CubeSmart (CUBE), Life Storage Inc. (LSI), and Extra Space Storage Inc. (EXR) have each outpaced the S&P 500 (.SPX) on a total-return basis over the last decade, counting price changes and dividend payments.
The 10-year total return on Extra Space, the sector's second-largest player by locations and stock market value, is 1,175%. CubeSmart, which has a heavy presence around New York, has returned 783%.
These real-estate investment trusts are beating the market again this year, but concerns are mounting that billions of dollars' worth of competing facilities under construction will challenge for market share and prevent rents from rising like they have in recent years.
"The fundamentals had been phenomenal for years during the economic recovery, much better than any other sector," said Eric Frankel, senior analyst at Green Street Advisors. "Developers and institutional investors caught on to it so there's been a lot of supply coming online."
Many of the new projects are being built by private developers. So it is hard to tell exactly how many new square feet are on the horizon.
Executives with Public Storage, the industry's 161-million-square-foot behemoth, told investors on a recent conference call that they estimate about $4 billion worth of new facilities have been built this year and that there will probably be about that much added again in 2019. In the decade leading up to 2016, they said, about $1 billion worth of new construction a year was typical.
Poppy Behrans, publisher of Mini-Storage Messenger, an industry publication, said there has been about 110 million square feet of new space added over the past two years and another 60 million or so slated to come online in 2019. She said it is hard to predict the impact of adding another Public Storage-worth of capacity across the country because storage markets are highly localized.
"What's going on in one spot can be completely different 20 to 40 miles away," she said.
The good news is that demand for storage doesn't seem to be slowing. Green Street estimates that 8% of the U.S. population uses self storage, up from 3% three decades ago, even as technology has eliminated a lot of household clutter, like compact discs and video tapes.
Analysts have struggled to peg storage-demand to particular macroeconomic factors, like housing starts or retail sales. The sector seemed to get a boost from the foreclosure crisis, which seems reasonable given that millions of people who lost homes probably had to move into smaller rentals or share housing.
Demand tends to be driven by death, divorce, downsizing and the like. A cultural aversion to parting with possessions has also helped storage owners thrive. Facility owners have shown they can raise rents much more aggressively than in other segments of real estate, such as apartments or offices.
"People always need some place to store their junk," said Alice Chung, a commercial real-estate analyst at Moody's Investors Service. "No one is going to start moving their stuff out just to save $3 or $4 a month."
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