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Investors finding self-storage properties worth keeping

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New Jersey's booming multifamily and mixed-use markets are giving the self-storage subsector leverage to build interest among investors for existing properties, according to real estate experts.

“Even into 2010, there weren’t a whole lot of trades for self-storage properties, in large part due to economic conditions and vacancies running up. People were concerned about their jobs and began to realize they were spending $150 a month for units, so they were thinking, ‘Do I really need that stuff?,’ ” said Michael Fasano, vice president and regional manager of Marcus & Millichap’s Elmwood Park office. “But I think that has sailed itself out … as vacancies in multifamily and multitenant retail have collapsed, indicating more consumers will be demanding storage units than before.”

In the third quarter of 2012, several commercial real estate firms with offices in New Jersey announced self-storage transactions across all regions of the state, including Marcus & Millichap’s August sales of a 52,000-square-foot facility property in Neptune and a 66,750-square-foot facility property in South Harrison, as well as HFF’s September sale of a 10-property portfolio in New Jersey and New York.

Aside from healthy multifamily and mixed-use markets, Fasano said increased sales activity for self-storage properties can be attributed to lenders freeing up financing for the transactions.

“Before, no one wanted to come off the sidelines and go out in the market because they knew they couldn’t get financing,” Fasano said. “Then, in 2009, lenders started lending again for multifamily properties, and then in 2010, they did the same for retail. Now, there are more dollars available for specialty products like self storage, and that’s brought investors back into the marketplace.”

Michael McGuinness, CEO of the New Jersey chapter of commercial real estate association NAIOP, said another reason why investors have turned their attention to specialty properties like self storage is “because there’s not much else out there for investors that’s giving them a reasonable rate of return.”

“I think there’s a broader trend going on with investors looking to real estate for a return, so they’re investing in certain types of properties that they feel are comfortable investments because there’s a demand for it on the consumer side, like multifamily and self storage,” McGuinness said.

In terms of development, Fasano said he’s “not aware of any new additions or new construction of self-storage properties coming out of the ground since the ramp-up years of 2002 to 2007,” and he noted any possible future construction “will be only centered around new apartment construction — and that’s primarily in Hudson County.”

But McGuinness said potential self-storage groundbreakings would not be “limited to Hudson County by any stretch, because multifamily and mixed-use stuff is real hot right now and finding its way all over the place.”

“Any sort of established community that has a decent quality of life and a downtown near mass transit — like Morristown, Red Bank, New Brunswick and Princeton — is very attractive for investors and developers,” McGuinness said. “With aging baby boomers, we have a large sector of the population who don’t want to drive so much, who want to live near the train and decide to downsize to a smaller co-op or apartment, but still have a lot of stuff they want to keep. They’re looking for self storage ... so investors are probably seeing that as a solid type of investment.”

Still, Fasano said, “with occupancy at existing properties just recently starting to improve, and no robust job creation in the state, we’re not seeing anybody take on the risk to build self-storage units from scratch yet.”

Instead, Fasano said investors have begun taking advantage of “a better business opportunity in converting somewhat obsolete warehouse space in urban markets to self storage.”

“I think any self-storage construction is going to be driven by a need in a specific community,” Fasano said. “If a community has some vintage warehouse space and a need for more self storage, then I think investors are willing to take advantage of that opportunity.”

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