Self Storage: Self-storage proving to be recession-resilient

By Patrick Egan for The Real Deal

A little snippet of slightly altered Dickens might best describe the state of self storage: It is the best of times because it is (nearly) the worst of times.

Self-storage is making a comeback. Recent details highlight investors’ attraction to this market segment, including last month’s purchase by U-Store-It of two properties in the outer boroughs for $26.7 million from local developer and operator Storage Deluxe, which itself purchased three New York City development properties this year. As foreclosures skyrocket and many people re-evaluate their housing budget, self-storage, and its rising rents, may be the place to be for investors.

U-Store-It, a Pennsylvania-based real estate investment trust that is one of the largest nation’s self-storage owners, had one facility in Queens and wanted to create a larger footprint in New York City, as well as other high-barrier-to-entry markets such as Boston and Washington, D.C.

“Self-storage has proven to be a very recession-resilient product,” said Chris Marr, the company’s chief investment officer. “Compared to the traditional food groups of office and multi-family, self-storage has held up, if not done better.” The two new sites bring U-Store-It’s portfolio to 483 properties across the country, with approximately 31 million square feet.

Manhattan-based Storage Deluxe appeared to do well on the transaction. City records show that deeds on both properties — 395 Brook Avenue in the Bronx’s Mott Haven neighborhood and 2887 Atlantic Avenue in Brooklyn’s Cypress Hills neighborhood — last changed hands in 2003, at a total cost of $10.1 million. Storage Deluxe seems to be parlaying its profits into new projects. In June, the company purchased two buildings for development not far from the Atlantic Yards site in Downtown Brooklyn, for a total of $10.25 million. Earlier this year, Storage Deluxe purchased a 37,000-square-foot site at 124-16 31st Avenue in Flushing, Queens for $13.3 million.

The U-Store-It deal generated a tremendous amount of buyer interest, according to Aaron Swerdlin, Storage Deluxe’s broker and a senior managing director for Holliday Fenoglio Fowler, a national commercial real estate brokerage in Houston.

“There was so much interest at that price level from multiple sources,” said Swerdlin, who estimated that he’d done more than $500 million in self-storage deals in and around the city. “There are more buyers today than there have ever been in my career,” he said, based on the numbers and different types of buyers — REITs, pensions, private equity — he’s seen in recent transactions. He said he expects three additional transactions — one in the city and two just outside the city — to close by year-end.

The demand for self-storage has risen as its customers’ fortunes have sunk, evident as they lose their homes or downsize to smaller apartments. “In the last 12 months, we’ve been able to push rents without any concern,” said Marc Slayton, president of Post Storage in Manhattan. He declined to give figures but labeled rent growth as “very solid.”

Numbers released by Cushman & Wakefield’s Self-Storage Industry Group indicated that the self-storage market averaged 3.5 percent rent increases in the first half of 2010 over the second half of 2009.

That performance has attracted national REITs and their cheap sources of capital. Slayton said it’s hard to compete with them for stabilized properties, so he’s looking more closely at development deals. “The REITs pay crazy dollars.”

[therealdeal.com]

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