Although the credit crunch has created a pause in lending, the self-storage industry in Canada has remained healthy—occupancy and rental rates are climbing, and development is being absorbed. Operators are expected to begin focusing on building local portfolios. Buyers will buy on a single market basis taking a more centralized approach to acquisitions. Once local markets have seen substantial growth and development, the industry may once again see national buying of strong local portfolios.
Conduit mortgages rose swiftly in 2004. Interest in conduits grew quickly as 10 institutional lenders became involved, providing enormous leverage for the self-storage industry and making financing extremely accessible. Owners and developers were given non-recourse loans with aggressive underwriting for acquisitions or development. Interest rates were low and property values skyrocketed.
Three years later the market started and has continued to see uncertainty and hesitation. As a result of the credit crunch, structured financing has been impossible to price causing lenders to hold off on lending. Uncertainty in determining how to price conduits will change financing options. Financial experts predict that conduits will return, but at what rates and with what leverage?
As the market adjusts and assets become appropriately priced for risk, financing will go back to more traditional lenders for class-A facilities and strong borrowers, while conduits will charge a premium but provide financing for the remaining market.
When the market adjusts, interest rates may go up which will either force buyers to accept lower returns or, force sellers to sell for less. If neither scenario occurs the market will become stagnant. Buyers are willing to take a lesser return on class-A facilities leaving cap rates the same, and therefore adjusting for the interest rates. The best case scenario for buyers of class-B and C products will be to accept the same return as at the peak of the market. However, if interest rates increase prices will have to adjust, forcing buyers to pay less.