Public Storage: Stock of the Week

Why self-storage stocks are better than your average REIT play.

Andrew Willis 27 March, 2023 | 5:06AM
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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 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 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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Public Storage273.81 USD0.26Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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