Anyone who lived through the Great Recession, the worst housing market crash in nearly 100 years, can tell you that these meltdowns aren't fun. Depressed property values, higher vacancies, increased mortgage delinquencies, and lower demand hurts nearly every sector within the real estate market.
But not all industries are affected the same way. Some companies like Public Storage (PSA 0.04%) could actually benefit if there is a housing market blowup. As concern grows over the risks of a housing crash, here's a deeper dive into why Public Storage could come out ahead.
It's in the distressed business
Challenging economic times like recessions and housing market busts can drive business for the storage industry. True a big market setback isn't the only reason customers look to store their things, and events like moving, downsizing, divorce, or death are some of the common drivers for customers to rent storage units.
The performance of real estate investment trusts (REITs) is tracked by the National Association of Real Estate Investment Trusts (NAREIT). During the Great Recession from 2007 to 2009, self-storage REITs were the only sector to show a positive gain in 2008, what many considered to be the worst year of the market crash. All other REIT sectors were down 12% to 60% during that same period.
Public Storage's share price fell 16% from 2007 to 2009 as recession conditions worsened. However, by the end of 2010, the REIT was up 17% from 2007, producing a 4% positive return. During that same time, the S&P 500 was still down 11%, having produced a negative 3% annualized return.
Self-storage benefits in high inflation times
High inflation doesn't necessarily coincide with every housing market setback, but if a housing market crash is coming in the near future, high inflation may well accompany it.
Self-storage rental periods last anywhere from a few months to a year. The short-term nature of the company's lease structure means self-storage operators are able to adjust their rental rates to offset rising inflation. Operating expenses rose 7.6% for Public Storage in Q2 2022, but revenue, thanks to higher realized annual rent per available square foot, grew by 16% more adjusting for inflation.
Its incredible balance sheet gives it leverage
Public Storage is the largest self-storage operator in the world, owning or having an interest in 2,600 storage facilities in 39 states. It's also one of the most well-funded and liquid REITs in the industry. Both of those factors give Public Storage the upper hand in a market decline.
Rising interest rates make it increasingly challenging for smaller to mid-size investors to secure affordable financing on a storage development or acquisition. That means Public Storage, which benefits from more favorable financing terms thanks to its high A credit rating, could have more access to acquisition opportunities with less competition.
From 2020 to 2021, a challenging time for many commercial real estate operators, Public Storage added 20 million square feet of storage space to its portfolio, spending a record $3.82 billion in those two years. The REIT has $1 billion in cash and cash equivalents to back it and a low debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of four times, giving it plenty of room to grow.
The shares are down 21% from their 52-week high, making right now a good time to load up on the stock at favorable pricing. Plus since Public Storage is a REIT, it's required to pay dividends, giving investors a reliable income stream that should be sustained during a housing crash. Right now its dividend yield is just under 2.5%, and the company has made 160 consecutive dividend payments.
