Real Estate Forum - December 2011

NEWS FRONT
REITs, Large Owner-Operators See Future in Storage

NEW YORK CITY—Self storage in the Northeast has seen a lot of activity of late, as REITs and larger owners and operators take note of the stability that the asset class affords. The past several months alone have seen a $560-million deal between locally based Storage Deluxe, in which the company sold properties in the Bronx, Brooklyn, Queens, Westchester and Fairfield counties to CubeSmart, a Wayne, PA-based operator.

Aaron Swerdlin, a senior managing
director at HFF who represented Storage
Deluxe in the sale, says, “As the year pro-
gressed, the focus became the dense urban
markets around the country.” Part of the
interest, he says, is due to a longer length of
stay among self-storage tenants in these
areas. “The average for the industry is
around 14 months. The average in urban
markets is 20 months-plus.”
Another factor for self storage is the sta-
bility of cash flow. “During the recession it
took its hits, but not nearly as much as
other core asset classes,” says Chris Sonne,
senior managing director with Cushman &
Wakefield’s Self Storage Industry Group.
“The nature of the cash flow is unique
because you’ve got month-to-month tenan-
cies. Essentially, you can raise rents on ten-
ants in place any time you’d like. And when
a tenant leaves, you just open the roll-up
doors and sweep out the unit.”
According to Steve Hryszko, first vice
president of the CBRE Self Storage Advisory
Group, interest among REITs stems primar-
ily from the lower cost of funds, which right
now “are at such a low level versus the pri-
vate owner-operators,” Hryszko says. “It
gives them an advantage. There are other
advantages operationally—specifically on
the marketing side.”
That point was mentioned in a midyear
report that Sonne authored for C&W. In it,
he outlined three advantages that investors
see in self-storage portfolios: lower cost of
funds, reduced transaction costs and sav-
ings in operational expenses.

Biotech Drives Big Building in Boston, Cambridge

The cranes have returned to Boston and Cambridge, where 2. 8 million square feet of commercial real estate is under construction. Of that total, 2. 2 million square feet of development commenced in 2011 and was driven by the area’s thriving biotechnology industry. The sheer amount of building, the number of developers and users involved and the geographic concentration—all in the urban cluster of Boston and Cambridge—communicate profound messages set against a backdrop of widespread global economic stagnation and uncertainty.

Behind all this growth is a biotech industry heavily supported by both public and private agendas. The public views it as an important

effort for the common good on a national level, and an important driver of high-paying jobs on state and local levels. The private sector sees it as a way to deliver highly desired products to a large and economically powerful group of Baby Boomers who desire, when possible, to optimize the length and enjoyment of their lives through therapies.

The Baby Boomer cohort controls over 80% of personal financial assets and accounts for more than 50% of personal discretionary spending. In addition, the group purchases nearly 80% of all prescription drugs. With the oldest of this generation only 65 years old, many years of income creation are still attainable through effective research efforts. Collaboration has come to be viewed as the best way to bring therapies into testing and, ultimately, distribution. Greater Boston, with its world famous concentration of hospitals and universities, was a forerunning center of private-sector biotech research in the

By Brendan Carroll

1980s, giving momentum to a complementary set of foundations. Since then, a large number of additional private-sector participants have blossomed.

Despite the now-infamous propensity for organizations to locate operations in disparate and far-flung settings worldwide, biotech industry constituents still choose to be located in concentrated “clusters.” Greater Boston is itself a cluster, and the most tightly focused areas for biotech research are in the city’s Longwood Medical Area and in Cambridge. Collectively the two account for 11. 4 million square feet of lab space, or 69% of the total for Greater Boston. Through new construction and conversions from other uses, the lab space in Boston and Cambridge alone has grown from just 4. 8 million square feet in 1998, a 137% growth rate, compared with a Greater Boston office inventory, which has grown 19% in the same time frame.

Boston’s current construction pipeline is unequaled anywhere else nationally, outside of the World Trade Center redevelopment site. Lab space accounts for some 1. 7 million square feet of the biotech industry-related development under way, with another 500,000 square feet coming from office (Biogen Idec’s headquarters development in East Cambridge). With the heavily anticipated commencement of the 250,000-square-foot expansion of the Broad Institute in East Cambridge and the probable commencement of a 400,000-square-foot expansion of Novartis’ Mid-Cambridge operation, there could very likely be three million square feet of space under construction by mid-2012, a boom inspired by the region’s bustling biotech sector.

Brendan Carroll is the senior vice president of research for Richards Barry Joyce & Partners in Boston. He may be contacted at bcarroll@rbjrealestate.com. The views expressed here are the author’s own.