Weaver: The larger national banks have restricted financing for storage and other investment properties, but the community banks are still seeking loans. They are actively pursuing lending opportunities, but underwriting is more stringent and property cash flow must demonstrate that it can support the loan. There is also more scrutiny of the potential borrower/guarantor in addition to the property cash flow. They are focusing on the “global” cash flow of the borrower from all of his investments.
4. What impact have credit problems had on cap rates?
Barnhill: Cap rates in the Gulf region have inched up about 20 basis points for high-quality properties and 40 to 50 basis points for B- and C-quality properties.
Eisenman: Borrowing costs for a buyer are as much a cost to be considered as property taxes and payroll. Most investors seek a target return for the cash invested and if long-term lending rates rise, buyers will pay more in interest payments, reducing the cash flow of an investment. Understandably, if an investor is going to earn less on an investment, the amount willing to be paid for that investment will be less whether it is self-storage, a retail center or other income-producing asset. If rental rates and occupancy soften, further pressure will be put on cap rates.
Riggs: Cap rates are still fairly steady. We’re still a seller’s market.
Rigl: Cap rates are ratcheting up as an indirect result of the CMBS-lending sources exiting the market. Life companies are in the market still, but at different spreads and other terms than that of CMBS lenders of 2007.
Weaver: Regarding interest rates, depending on the credit and experience of the borrower, rates are at prime plus .5 percent to prime plus 1.5 percent. Cap rates on actual sales are generally in the 8 percent range even for stabilized properties. Investors are looking for a higher margin on their investment return because of risk factors and the economy; for example, potential for decline in occupancy due to housing slump and tenants making other arrangements to reduce out-of-pocket rent dollars. In addition, the decline in short-term rates has not been reflected in long-term rates, because of lack of conduit financing and the increased spread from other long-term lending sources.
Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.