Unlocking the potential of self-storage REITs

Now could be the time to consider self-storage REITs, as industry fundamentals may have bottomed, says Fidelity's Steve Buller.

• After a long and difficult stretch for operators of self-storage facilities, market conditions have recently shifted for the better, setting the stage for a rebound in this segment of the real estate investment trust market, according to Fidelity Portfolio Manager Steve Buller.
• "With self-storage REITs supported by strong business models and favorable growth rates, now may be a prime time to explore them at discounted valuations, considering they've historically traded at a premium to the overall REIT market," contends Buller, who manages Fidelity^® Real Estate Investment Portfolio.
• In helming the fund since 1998, Buller focuses on bottom-up, or stock-by-stock, security selection, relying in part on Fidelity's team of real estate analysts to choose what he considers reasonably valued REITs of sufficient quality. He maintains a flexible approach in order to adapt to a constantly changing investment environment.
• Recently, in recognition of the shifting market landscape, Buller altered the portfolio's positioning from an underweight to an overweight in self-storage REITs, given his optimistic view of a group of businesses he considers ripe for an uptick in demand.
• "The need for storage space tends to grow when people experience a major life change, such as death, divorce or a move," Buller explains. "And while death and divorce rates tend to stay consistent, fewer people have been moving these days because so many homeowners who locked in a low mortgage rate have a financial incentive to stay put."
• Moreover, he believes that a drop in interest rates—a shift that is not guaranteed, despite what the U.S. Federal Reserve has been signaling—could potentially unleash a flurry of home buying, thereby spurring demand for storage space.
• Buller cites two large self-storage operators that he believes are well-positioned to capitalize on such improvement: CubeSmart and Public Storage, both notable overweights in the fund as of June 30.
• The latter is the largest self-storage REIT, boasting the most national exposure across the biggest and most geographically diverse markets, points out Buller. Meanwhile, he likes CubeSmart for its competitive footprint in New York City, an area that disproportionately struggled during the COVID-19 pandemic and therefore offers considerable rebound potential, in his view.
• Another notable factor boosting demand for self-storage is the normalization of the pandemic-era trend of people needing to clear out space in either their homes or businesses, Buller notes. In turn, this has pressured self-storage rent as the market digests excess supply in the industry.
• "Valuations for self-storage REITs already reflect this decline in demand and now provide what I view as an attractive long-term investment opportunity," concludes Buller.