Self-storage real estate investment trusts (REITs) reported total returns of more than 23% year-to date at the end of April, based on an index maintained by the National Association of Real Estate Investment Trusts. That number made self-storage REITs the best-performing of all REIT sectors, easily outperforming retail REITs, which generated returns of 10% over the same period that multifamily REITs brought in 15%.

By May 23, however, self-storage returns had already declined markedly from 23% to roughly 18%. And while many industry watchers have hailed the sector as recession-resistant, the heady returns of April may well be partially attributed to an overdue correction.

“Part of what is going on may simply be a little bit more of a correction upward because it seems as though their stock prices were beaten down more than they should have been last year,” says Brad Case, NAREIT’s vice president for research and industry information.

Indeed, self-storage REITs started to recover as early as December 2007 from a downturn that began a year earlier. “Their upturn [in self-storage REITs] started earlier than the upturn for the rest of the equity REIT marketplace,” notes Case. As well, the self-storage sectors= was more negatively impacted by the REIT downturn than other sectors, according to NAREIT. It is possible that the housing downturn is to blame.

Some investors have tended to avoid self-storage REITs in the long-term. They perceive self-storage to be a sector with lower barriers to entry, given that it is easier to build a self-storage facility than an office building. Investors tend to seek out property types that are seen as “very difficult and costly to build,” says Case.

However, Case points out, the success of self-storage properties is also based on branding initiatives and management. “You don’t make money in self-storage because nobody else can build self-storage, but because you can manage it better.” Self-storage REITs are also trying to develop very clear branding to target people who move from one city to another.

Ray Wilson, a Los Angeles-based self-storage industry researcher, reports that 250 to 300 new facilities come on line each year nationwide, which represents 1% of the existing industry supply. “Overall, the supply and demand ratio is in balance,” according to Wilson.

The median occupancy in the sector nationwide — including private self-storage companies — was roughly 90% at the end of the first quarter of 2008. Despite healthy occupancy overall, more self-storage facilities are offering concessions to attract tenants.

For instance, for the first quarter of 2008, the number of facilities offering concessions rose about 3% compared with the fourth quarter of 2007. Wilson says this is because landlords pushed asking rents up by 8% in the fourth quarter of last year and thus had to begin offering concessions to maintain their occupancies. Wilson also is watching several markets with the expectation that earnings there will decline this year. Those cities include Orlando, New Orleans, Indianapolis, Miami and Hartford, Conn.

“Going forward self-storage should perform relatively well,” Wilson predicts. “The owners are in a good position to start pushing up asking rents once the economy starts picking up. If the economy continues to decline, then eventually we’ll see more softening in performance.”

Paula Poskon, a senior research analyst with McLean, Va.-based Robert Baird & Co., says that demand for self-storage is more driven by life events than by the business cycle. For instance, a need for self-storage facilities comes up when people get married or divorced, or move for employment purposes.

The economic climate also generates some of the demand and she believes that in this housing downturn demand is being generated from people who are losing their homes and putting their belongings in self-storage. The impact of economic influences is more difficult to pin down, however, according to Poskon.

Poskon expects that self-storage REITs will continue to generate good returns going forward. For one, “the housing crisis is not going to be resolved anytime soon.” And for people who are having life events, “this is a service business and the storage companies offer a solution.” Considering that the need for that sort of solution is not going to change, “demand is going to remain pretty resilient over the course of this business cycle.”