Self-storage REITs could be an "interesting buying opportunity" as the second half of the year becomes more favorable, but a soft housing market poses risks to the outlook, according to analysts at Wells Fargo & Co.
Across the sector, rates for new customers or new units, so-called street rates, were down about 13% during the second quarter and lower roughly 18% in July, likely in an effort to stimulate additional demand after a slightly weaker spring selling season, analysts led by Eric Luebchow wrote in a report previewing the reporting season. Comparisons will likely get easier later in 2023 while merger activity could create firmer pricing, the analysts said, noting Public Storage's tie-up with Simply Self Storage.
On the housing front, move-related demand was still down in the second quarter, though the analysts said they expect to see "sequential improvements in occupancy, but still far below the pandemic peaks in 2021/2022."
"While there are no 'easy' ways to analyze self-storage demand, we believe housing sales and apartment rent data can at least provide some directional insights into self-storage occupancies," they said.
Self-storage stocks have fallen from their pandemic peaks, with a five-member Bloomberg index struggling to gain traction this year. It's been a mixed performance year to date, as CubeSmart and Global Self Storage Inc. gained, while Public Storage, Extra Space Storage Inc. and National Storage Affiliates Trust posted losses.
National Storage Affiliates Trust is at the highest risk of a guidance cut, according to Wells Fargo, with weaker-than-expected occupancy exiting May and street rates continuing to trend lower year-over-year. On the other hand, the analysts see CubeSmart's guide as "more achievable" with the company capitalizing on its "notable performance" in its top New York sub-market where street rates were up 5% through May.
Wells Fargo rates National Storage underweight and has an overweight on CubeSmart. CubeSmart is scheduled to report Thursday and National Storage next week.
The analysts noted encouraging signs in existing customers holding steady in the low-to-mid teens range, offsetting some of the street rate weakness. They also mentioned that supply pressures are limited to a handful of markets like Phoenix, Las Vegas, Portland, Atlanta, parts of New York, and a few others.
"We acknowledge some near-term caution into earnings — and likely no meaningful upside to guidance ranges — but continue to believe the sector can maintain positive same-store growth through 2024, and potentially accelerate if move-related demand improves and Street rate headwinds start to normalize," the analysts said.
