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'Animal spirits,' high tenant demand bolster self-storage REITs, execs say

Despite acknowledging continued competition from newly built properties, executives at the two top self-storage real estate investment trusts said they are optimistic about the industry's near future.

In an earnings conference call, Public Storage Chairman and CEO Ronald Havner Jr. said he expects deliveries of new storage properties worth $3.5 billion to $4 billion across the U.S. — a total roughly similar to that of 2017, when storage REITs' share prices suffered from reports of rising new supply.

Still, he called the storage business "incredibly resilient," adding that public companies' reported revenue growth remains positive despite a steep escalation in new construction in recent years.

An analyst noted Havner's relatively downbeat comments about the broader economy in 2017 conference calls, and asked what had changed.

"Well, I think, a year ago we didn't have a big tax law change," Havner replied. "The stock market was about 20% lower. Unemployment was good, but still not at the 4.0%, 4.1% [level], and animal spirits were a little less. So I think there's been an overall change in the tone of the economy. How long it lasts, I don't know."

Tenants recently have generally accepted proposed rate increases of 8% to 10%, a positive sign for durable income growth, CFO John Reyes added.

On a separate call, Extra Space Storage Inc. CEO Joe Margolis said new supply "will continue to present operational challenges," but added that the effect of new construction will vary from market to market. Margolis said the company's highly diversified portfolio will protect it from some of the challenges of that competition.

"Sometimes you have a new competitor opening within a mile, and it has absolutely no effect," he said. "And sometimes you have a new competitor opening on the outskirts of the trade area, and it has a very large effect. So to try to predict, based on the number of competitors opening, how monetarily it will affect every store, and roll that up, that's a tough thing."

Executives at both companies reported high demand from private investors for storage properties, and Margolis said capitalization rates on property transactions are not rising, a sign that prices are not falling.

"You would think, given the operational landscape and the rise in interest rates, that cap rates should be going up," he said. "But there is so much interest in this sector, I think because, compared to other sectors, it's still pretty good."