Eisenman: Both buyers and sellers are exercising more caution in this market because of the uncertainty in the economy and credit/capital markets. Buyers are less certain what their borrowing costs will be when a proposed transaction closes; many are including a “fudge factor” in their underwriting to absorb unexpected shifts in rates. Sellers are recognizing this and weighing it as competing offers are considered.
Riggs: Either the numbers work or not. I haven’t seen any panicked buyers or sellers. What I have seen are newer facilities in suburban areas of large cities like Baltimore, Richmond and Washington. Pro formas based on new or planned housing developments are not seeing the lease-up they anticipated because many of these developments are not selling as anticipated. This is because most of the housing credit problems are in the major cities and their hyper-expanding suburbs and exurbs.
Rigl: Some institutional buyers are hunting good deals, especially with those owners adversely impacted by the credit crunch. Some development strategies are being reworked by integrated property owners holding a variety of property types, possibly to jettison undeveloped parcels initially slated for storage to others with better liquidity positions.
Weaver: Even though the economy is unstable, storage properties that have stabilized income continue to be an attractive investment. We have had some recent inquiries from potential investors who are considering moving dollars from the stock market. I believe this trend will continue.
3. How are the local lenders for self-storage reacting to the “credit crunch”?
Barnhill: Local lenders are gradually becoming more cautious in their underwriting. Floating rate construction loans are at reasonable rates. Acquisition loans are available but with higher equity requirements.
Eisenman: Banks that lend short-term base lending decisions primarily on the credit and character of the borrower as opposed to the underlying real estate. They are offering attractive short-term rates due to recent rate reductions but they are taking a closer look at the underlying project’s viability. Long-term lenders recognize that the CMBS market will not be robust for years to come, and more traditional lenders such as life companies will apply lower loan-to-value ratios and more strict underwriting criteria than has been enjoyed in the CMBS market.
Riggs: I think lenders who understand the self-storage business still see this (now more than ever) as a very attractive investment class that is not directly affected by the ups and downs of the investment market. Interest rates are very good and lenders are willing to do deals. The big advantage is no shortage of buyers exists in this region, which keeps values up. In my area, it’s still a seller’s market.
Rigl: Local lenders are expressing interest in quality properties with a proven ability for success. CMBS loans are difficult or unavailable to most single-asset property owners.