When I look at the self-storage sector, which includes high-performing REITs like Public Storage (PSA), Extra Space Storage (EXR), and CubeSmart (CUBE), my investment thesis goes beyond the obvious. Sure, the industry offers high occupancy rates, stable cash flows, and attractive dividend yields. But the true bedrock of this industry’s success isn't just the sheer demand for stuff; it’s a powerful economic concept known as, "Customer Stickiness". This trait translates directly into high switching costs and exceptional pricing power.
I find it interesting when analysts get bogged down in near-term issues like interest rates and new construction (oversupply). While those factors matter, I believe the fundamental resilience of a well-located storage unit remains one of the strongest features in commercial real estate.
Beyond the Yield: My View on the Self-Storage Moat
Self-storage REITs are favorites in my portfolio because of their simple, scalable business model. Unlike traditional landlords dealing with long, complex leases and high turnover costs, self-storage utilizes month-to-month leases. This flexibility is a great feature for customers, but it's an even bigger strategic advantage for the REITs.
The month-to-month structure allows management teams to practice sophisticated revenue management, continuously adjusting rates based on supply, demand, and, most importantly, the customer's inertia.
This is where the unique economics of self-storage come into play. I recognize that a customer's cost of storage isn't just the monthly rent; it also includes the emotional and physical burden of moving their property.
The True Cost of Moving: Operational Inefficiency and Labor
Once a customer has established a routine and filled a unit, they have created a relationship that goes far beyond the monthly bill. I find that the savings would have to be significant—often 20% or 30% of the monthly rate—to make the hassle of moving worthwhile.
Why is this level of customer loyalty so high? I believe it comes down to three key factors that increase the switching cost:
Time and Labor: Moving a storage unit is demanding, involving renting a truck, hiring labor, and physically reorganizing the contents. For individual users, this is a major one-time inconvenience. For business owners who rent units to store supplies, tools, or inventory, the cost is amplified by employee wages. The unit’s contents often need to be moved to the business weekly, or even more frequently. The cost of paying employees to move items from distant units quickly outweighs any minor monthly savings.
Proximity Advantage: Most self-storage customers choose a unit based on its proximity to their home or business. A unit that’s five minutes away is drastically more convenient than one twenty minutes away. Losing that prime, convenient location is a major non-financial cost that customers are willing to pay a premium to avoid, as it directly impacts their time and, for businesses, their operational efficiency.
The Psychology of Effort: People rent storage units to solve a problem—clutter or space constraints. Once the problem is solved, they rarely want to think about the logistics again. The prospect of disrupting their solution just to save a few dollars creates a powerful psychological barrier to moving.
For the average customer or business, the nominal monthly saving offered by a competitor simply doesn't justify the significant physical, logistical, and labor effort required to switch facilities.
Cash Flow, Dividends, and the Top Players
The stability I see in this sector isn't theoretical; I experienced it firsthand this morning when I received my quarterly dividend payment from CubeSmart (CUBE). The reason these payouts are so reliable and often increase is directly tied back to the customer stickiness we just discussed. Unlike retail or office sectors, where major tenant loss can crater cash flow, the self-storage model, with thousands of individuals, low-cost leases, generates incredibly predictable, high-margin cash flow.
This stability is the engine for those strong dividends. Because the businesses have minimal capital expenditure needs and highly durable income streams, their dividend payouts are generally secure, even with higher payout ratios.
Different Moats, Same Goal: Location Strategy
My observations on location strategy are a great example of how these companies build their unique moats. I’ve noticed Public Storage (PSA) often lands near commercial strips and business parks, catering heavily to the logistical and operational inventory needs of small businesses. CubeSmart (CUBE), on the other hand, seems laser-focused on dense residential infill those apartment, townhouse, and condo complexes where people have high demand for overflow space but nowhere to park a moving truck for long. It’s a subtle but significant difference in who they are targeting with that essential 'proximity advantage.' This segmentation reinforces the durability of their individual cash flows.
To give you a clearer picture of how I view the leaders in this space, here is a summary of the three companies I follow and invest in most closely. Each offers something different, but together they show why the sector continues to perform well for income investors like me.
Company | Share Price (Oct 15, 2025) | Dividend Yield (TTM) | Payout Ratio | Debt/Equity | Net Profit Margin | Return on Equity | My View |
|---|---|---|---|---|---|---|---|
CubeSmart (CUBE) | $41.11 | 5.13% | 126.2% | 1.22x | 34.19% | 13.43% | My top dividend earner. Strong management, high institutional ownership, and consistent results. |
Public Storage (PSA) | $301.00 | 4.19% | 130.8% | 1.11x | 38.40% | 31.07% | The market leader with excellent brand recognition and proven pricing discipline. |
Extra Space Storage (EXR) | $149.19 | 4.63% | 141.1% | 0.94x | 31.08% | 6.97% | A growth-focused operator with smart acquisitions and healthy leverage levels. |
Pricing Power and Long-Term Stability
This sticky dynamic is why I see self-storage REITs as effectively operating "toll booths for people's stuff." They benefit from both short-term needs (a sudden move, a home renovation) and long-term customer inertia.
Knowing that many existing customers won't leave for anything less than a dramatic price cut, REITs can incrementally raise rates on tenured customers without spiking the churn rate. New customers may receive a low introductory rate, but once they settle in, they become subject to these incremental increases, which quickly drives the average rent per unit higher.
While I pay attention to cyclical slowdowns, the long-term investment case for self-storage remains robust. It’s a simple, resilient business fueled not just by demographic shifts, but by the universal human tendency to collect things and, once stored, to leave them exactly where they are. Investors who appreciate this durable, built-in advantage often find the sector an appealing core holding for stability and consistent dividend growth.
Tax and Reinvestment Considerations for REITs
It is crucial for any income investor to recognize that the majority of dividends paid by REITs, including those in the self-storage space, are generally taxed as ordinary income, rather than the more favorable qualified dividend rate. Because REITs must distribute at least 90% of their taxable income to shareholders to maintain their REIT status, they pass through income that is typically characterized as non-qualified business income. This means the high yield from these storage companies often gets taxed at your highest marginal income tax rate, which can significantly reduce the after-tax return.
For this reason, I believe other investors should consider holding self-storage REIT shares within tax-advantaged accounts, like a Traditional or Roth IRA. In a Roth IRA, the dividends accumulate tax-free and all withdrawals in retirement are tax-free. In a Traditional IRA, the taxes are deferred until withdrawal. Placing high-yield investments, like REITs, that distribute primarily non-qualified dividends into these wrappers is a smart way to maximize their effective return by shielding the yearly distributions from the ordinary income tax burden. Furthermore, I find that if your brokerage supports it, like my eTrade account, reinvesting these dividends (DRIP) is the most prudent strategy, as it leverages compounding by immediately buying more shares and turning income into capital growth without incurring the friction of tax drag in the short term.
Disclaimer: This blog post is for informational and educational purposes only and should not be considered financial advice. The author is not a financial advisor. All investments carry risk, and past performance is not indicative of future results. Always conduct your own due diligence before making any investment decisions.
