Even in the throes of what some are calling the worst financial crisis since the Great Depression, some real estate investment trusts — those owning apartment buildings and self-storage facilities — have held up better than most stocks.
For the year, the storage sector was down by 4.3 percent, while apartments slid 14.15 percent. The broader universe of equity REITs, meanwhile, suffered a 29.6 percent decline, while the Standard & Poor’s 500-stock index plunged 38 percent.
And during the third quarter, in fact, the storage and apartment sectors actually posted strong gains. The storage REITs surged 19.3 percent, on average, for the quarter, and 33.8 percent, on average, for the first nine months of the year, according to the National Association of Real Estate Investment Trusts. Apartment REITs rose by an average of 12.5 percent for the quarter and 17.4 percent for the first three quarters, the association said. All property REITs, by comparison, had an average quarterly gain of 5.5 percent.
Why were investors buying up shares of these REITs while steering clear of so many other stocks? In part, these categories were undergoing an upward correction, real estate analysts say, after suffering big losses a year or so ago.
But the analysts offered another simple answer as well: safety. “They want to hide there right now,” Louis W. Taylor, a managing director at Deutsche Bank Securities, said of investors’ mind-set.
REITs — publicly traded companies that disburse most of their income as dividends — are often considered a good portfolio diversifier, and a haven in turbulent times, because they typically have a “low correlation” with broader markets. In other words, REITs might rise as the overall stock market declines, as happened in the third quarter, or not fall as precipitously.
But investors also see the problems in the housing and mortgage markets, which helped prompt the recent burnout on Wall Street, as particularly beneficial for self-storage and apartment companies, analysts say.
“A lot of households are really concerned about the future of housing prices and mortgage interest rates, so they’re going to wait it out and rent,” said Brad Case, the vice president for research and industry information at the REIT trade association, “and while they’re renting, they need a place to store their extra stuff.”
Occupancy rates for multifamily rentals have remained stable, averaging in the mid-90-percent range, industry reports show.
Home-ownership, meanwhile, slipped to 68.1 percent at the start of the third quarter from a peak of 69.2 percent in 2004, according to the Census Bureau.
Also helping both property sectors, as well as commercial real estate in general, is tighter supply. “There’s not a lot of new construction, really,” Case said. “The last construction boom we had was in the ’80s, with the exception of offices in the late ’90s, partly because construction costs have been relatively high and now financing is relatively expensive.”
Apartment REITs, in particular, have a clear advantage over most other real estate companies in getting financing. While many businesses have been affected by tighter credit, the operators of multifamily homes still have ample sources of capital available from Fannie Mae and Freddie Mac, despite the recent government takeover of the two mortgage companies. “Fannie and Freddie are still very active apartment lenders,” Taylor said. “The other sectors have to rely on the banks and insurers.”
Just last month, for example, Camden Property Trust announced the closing of $380 million in secured credit from a Fannie Mae lender.
At the same time, Taylor added, many apartment operators have kept expenses down as resident turnover has slowed, which means that they are spending less on things like advertising, repainting or replacing carpets. He noted, for instance, that AvalonBay Communities, a company for which he has a positive outlook, has had flat expense growth this year, compared with a 2 to 3 percent increase during typical years.
Michael J. Salinsky, a senior REIT analyst at RBC Capital Markets, also favored AvalonBay, along with BRE Properties and Essex Property Trust, which have a concentration in Western states. “On the West Coast you have a very, very wide gap in housing prices,” when compared with rental rates, Salinsky said. He noted that there had also been solid job growth in many cities in the region, which helps to maintain occupancy levels.
Taylor agreed. “The markets that have done the best this year have been Seattle and Northern California,” he said, where the economies are relatively stable.
To pinpoint the regions where self-storage operators have done well, however, investors can look at the other end of the economic spectrum.
“The self-storage REITs did the best in regions that had the worst housing markets, like Detroit,” said John Coumarianos, who follows real estate for Morningstar, the mutual fund tracker. “If you owned a self-storage business in Detroit, you’re doing great.”
Michigan, in fact, had the nation’s fifth-highest rate of home foreclosures in August, according to a report last month from RealtyTrac, which follows home foreclosures.
The higher the foreclosure rate, some investors reason, the higher the demand for storage space as people must find places to store their belongings when they move into apartments or smaller houses.
But the fortunes of the self-storage industry go beyond the economy.
“Any sort of disruption in a person’s life, be it positive or negative — marriage or divorce, job loss or job gain — could give rise for the need for self-storage,” said Paul Adnorato, a REIT analyst at BMO Capital Markets.
Still, if the economy becomes too bad, he said, the self-storage sector could be hurt as well. “I think people will re-examine their discretionary spending,” he said. And if land prices continue to slump, “that could create more development” of storage structures, Salinsky added. That would hurt business for current facilities.
At the top of many analysts’ lists of self-storage REITs is Public Storage. The company has recovered nicely from the difficulties it encountered early in its integration of Shurgard Self Storage, which it bought two years ago, analysts say. “Today it has virtually no debt,” Taylor said, “and it also has $800 million in cash.”
He said he also likes U-Store-It Trust, which had its own set of issues trying to absorb portfolios of private property it recently bought, “but they’re finally getting integration behind them.”
Salinsky, meanwhile, favors Extra Space Storage, because technological upgrades have improved its operations.
So the question remains: Should investors stock up on shares of self- storage REITs, or apartment REITs as well?
Analysts offer diverging views. Salinsky said he thinks that “valuations in both sectors are a little rich,” but for Taylor, “the stocks are really priced for perfection right now.”
Author: Vivian Marino, The New York Times
