Capital-market volatility during the past 12 months has significantly changed the landscape for self-storage real estate investing and financing. If you have applied for a loan in the past eight to 10 months, you’ve likely noticed these changes firsthand.
Gone are the days of 85 percent to 90 percent loan-to-value ratios (LTV), 10-year interest-only periods, and 1.05 to 1.10 debt service coverage ratios (DSCR). As a result, more attention than ever is being focused on the intricacies of valuation underwriting.
As real estate investment and financing advisors, one of the issues we’re viewing on the street these days is that many property owners and investors are unaware—or more appropriately stated, in a state of denial—of how these new capital market realities will affect their financing and refinancing loan requests. Unfortunately, they became so accustomed to generous loan-program provisions and aggressive valuations from past years they’re having a difficult time adjusting to the current landscape.
If you understand why lending programs and valuations are in the state they are today, then you’ll be better prepared to capitalize on current market conditions to help meet your investment goals.
Behind the Scenes: Market Shifts
The amount of deal volume in today’s self-storage market compared to a year ago is very different. From 2005 to mid-2007, it seemed each passing week brought a new buyer, another portfolio transaction, or a new fund looking to invest in self-storage properties. Meanwhile, deals in all commercial property types were trading at a record pace.
Owners, developers and long-term property holders became sellers, given the valuations that self-storage assets were achieving nationwide. In most cases, these owners and investors met or exceeded their initial projected investment returns within one or two years, as opposed to a more traditional five-year hold time. Things were great and everyone was content ... and then came the correction in the securitized debt market.
Prior to mid-2007, the commercial mortgage backed security (CMBS) market was a well-oiled, fast-moving and efficient machine. Loans were issued by capital sources, pooled together, and then sold to a foreign buyer, pension fund or institutional investor at record pace.