Storage REITs at a Crossroads: BMO's Shift to Urban Resilience Over Regulatory Risks

The real estate investment trust (REIT) sector has long been a barometer of economic health, but recent regulatory shifts and urbanization trends are reshaping investor priorities. Nowhere is this more evident than in the storage REIT space, where BMO Capital Markets has dramatically recalibrated its recommendations, downgrading Public Storage (PSA) and upgrading CubeSmart (CUBE). The pivot hinges on two critical themes: regulatory risks in high-cost markets and the resilience of urban portfolios in a softening economy.

The Los Angeles Problem: Why PSA Faces Regulatory Headwinds

BMO's downgrade of PSA to Market Perform stems from its outsized exposure to Los Angeles, which accounts for 17% of its SSNOI (Same Store Net Operating Income). The city's aggressive rent-restriction policies—part of a broader crackdown on housing affordability—have created a ceiling for revenue growth. BMO now forecasts a 0.1% decline in PSA's same-store revenue for 2025, a stark reversal from earlier expectations.

The risks extend beyond Los Angeles. As states and municipalities nationwide adopt stricter tenant protections, storage REITs with concentrated regional footprints face mounting pressure to balance profitability with compliance. PSA's aggressive acquisition strategy—often requiring premium pricing—adds another layer of risk. BMO warns that overpaying for assets in a consolidating sector could further strain margins.

CubeSmart's Urban Edge: Why Density Equals Resilience

In contrast, CubeSmart (CUBE) has positioned itself as the anti-PSA, with 90% of its NOI (Net Operating Income) derived from the top 40 U.S. metropolitan statistical areas (MSAs), including New York City. BMO's upgrade to Outperform reflects its belief that urban markets offer both defensive characteristics and growth upside.

Urban stickiness—the tendency of city dwellers to remain in densely populated areas even during economic downturns—gives CUBE a buffer against tenant churn. This is critical in an environment where rising interest rates and inflation could test consumer spending. BMO's analysts emphasize that CUBE's lower leverage ratio (relative to peers) and recent acquisitions, such as the consolidation of its Heitman joint venture, provide “balance sheet optionality” to pursue accretive deals.

The Numbers: FFO Upside and Undervalued Multiples

The case for CUBE is bolstered by BMO's financial forecasts. Analysts project CUBE's FFO (Funds From Operations) for 2025 and 2026 will exceed consensus estimates by 110 basis points and 220 basis points, respectively. These gains stem not only from its urban portfolio's stability but also from operational efficiency and disciplined capital allocation.

CUBE's current FFO multiple trades at a 20% discount to its five-year average, despite its stronger balance sheet and growth profile. This undervaluation, paired with its low leverage (debt-to-EBITDA of 5.3x vs. PSA's 6.1x), suggests it offers a margin of safety.

Investment Implications: Urban Fortunes vs. Regulatory Fates

BMO's analysis underscores a divergent path for storage REITs:
1. PSA's vulnerability lies in its reliance on high-regulation markets and a growth strategy that may overpay for assets.
2. CUBE's urban focus and financial flexibility position it to outperform in both stable and turbulent markets.

For investors, the choice is clear. PSA remains a high-beta play tied to regulatory outcomes in Los Angeles and other urban centers. Meanwhile, CUBE offers a defensive, income-driven opportunity with catalysts like FFO upside and acquisition momentum.

Final Take: Buy the Urban Future, Avoid the Rent-Regulation Minefield

The storage REIT landscape is bifurcating. BMO's shift isn't just a tactical call—it's a reflection of broader trends favoring resilient urban assets over geographically concentrated, regulatory-exposed portfolios. With CUBE's valuation discounts and PSA's looming risks, the strategic move is to rotate capital toward CUBE and away from PSA.

In an era where real estate's value is increasingly tied to place and policy, the city—rather than the suburbs—is where the next chapter of storage REIT success will be written.