Current economic scenario spikes uncertainty
The Federal Reserve has increased the interest rate three times in the last six months, in line with the market’s expectations.
On the other hand, the United States is undergoing a transition phase under the newly elected President Donald Trump, who has embarked upon several pro-American policies. Investors are jittery about the effects the Fed’s interest rate policy will bring to different sectors.
Let us find out how an upward-moving interest rate could be a blessing in disguise for self-storage REITs such as Public Storage (PSA), Life Storage (LSI), Macerich Company (MAC), and Extra Space Storage (EXR).
Public Storage and Extra Space Storage make up almost 9% of the iShares Cohen & Steers REIT ETF (ICF).
President Trump’s pro-American policies have increased confidence among citizens. According to preliminary results released by the University of Michigan in June 2017, the consumer sentiment index rose 1.1% year-over-year in June to 94.5%.
The index was, however, 2.7% lower than it was in May 2017, perhaps because consumers had become less optimistic about the future. However, strong job data, higher household income, and wealth provided a buffer against the rising uncertainty among citizens.
Higher consumption boosts revenue
In a higher household income scenario, people tend to spend more on acquiring properties and need more storage space. This need boosts demand for self-storage facilities, which in turn boosts revenue for REITs such as Public Storage.
Higher interest rate reduces affordability
As the Fed increases the interest rate, affordability falls, and renters aren’t able to live in large apartments. Consumers are forced to move into smaller apartments with affordable rents, which don’t typically provide attics or garages. The lack of such storage space at home increases the need for self-storage spaces, especially in high-demand cities.
Commercial REIT to boom in a growing economy
Public Storage has more than a 40% stake in PS Business Parks, so it also has an interest in commercial REITs. As the job market improves in a growing economy, space for commercial hubs such as office flexes should also increase, boosting commercial REIT business.
In the next article, we’ll learn about PSA’s shareholder return policy.