The Construction Slowdown
One segment of the self-storage industry hit the hardest was the construction of new facilities. The sudden spike in raw material costs—most notably steel—in the first six months of 2008 greatly affected new self-storage construction. “By July, steel escalated to almost 48 percent above pricing at the turn of the year,” notes Chip Cordes, vice president of U.S. Door and Building Components, Orlando, Fla. “Many projects experienced 10 percent to 20 percent increases; however, the total cost of most projects was not as drastic as what was expected.”
As the cost of steel rose, many projects already underway were suddenly under-budgeted. And with the tightening financial market, some developers struggled to keep their projects afloat. Plans for new facilities were put on hold or even scrapped entirely as construction costs soared and financing dried up. “There’s no doubt that the 2008 economy has had a negative affect on new self-storage construction,” says Caesar Wright, president of Mako Steel Inc., Carlsbad, Calif. The rise in raw materials coupled with a soft market made it difficult to find good loans. “In my 20 years in this industry, I’ve never seen anything like it,” Wright says.
The weak economy and lack of good financing “shut down” most new construction, notes Mike Parham, president of The Parham Group in Bulverde, Texas. “In the Southeast and Southwest markets we have been developing in for the last several years, construction has been limited to projects that started before the stock market’s volatility. The whole self-storage development cycle has shut down.”
Despite the lack of good financing from traditional lending sources, there are still a large number of new construction projects in the works. “I continue to work with clients who have identified excellent sites and have established banking relationships that make financing a non-issue for them,” Chiswell says. “The marginal developer who had been relying on finding a silent partner investor, along with high leverage on a cost-to-loan basis, has been almost totally eliminated from the game for now.”
“It’s extremely tough out there,” adds Buster Owens, president, Rabco Corp. in Winter Garden, Fla. “The bright side is that these escalating steel prices and other things we’ve seen over the last couple of years are on the way down, so marginal products are starting to fall back in line with the pro formas. There are still people out there that have access to financing, but it’s tougher now than it has been in the past.”
To stay in the game, some construction companies are turning to conversions and facility remodeling. “Our industry is starting to age,” Owens points out. “There are more 20-year-old buildings; some need facelifts or a new roof. Some of the big guys are taking time to enhance existing facilities by expansion or building a multi-story.”
And as steel and other costs—including crude oil—continue to drop, most remain positive that new construction will ramp up again. “As we recover from this economic slowdown, the population will once again purchase goods and store goods,” Cordes says. “Self-storage will become an important part of this trending cycle.”
The Search for Financing
When the housing crisis hit last year, it was unclear just how far it would reach. Ultimately, it would have a ripple affect. “The residential exposure caused more than 20 banks to fail in 2008, and many more to be considered ‘in trouble,’” Tran says.
With the failure of America’s financial institutions came fewer available loans and tightened underwriting standards. Suddenly, developers and investors, along with owners looking to refinance their existing loans, had a harder time finding financing. “Owners of stabilized properties in the self-storage sector were able to obtain very favorable terms in the past through the commercial mortgage-backed securities (CMBS) market,” says Eric Snyder, senior vice president, Buchanan Street Partners in Newport Beach, Calif. In fact, the CMBS market accounted for $224 billion in financing for all commercial real estate asset types in 2007, and provided self-storage owners with 80 percent non-recourse, 10-year fixed-rate loans in the 5 to 6 percent range, according to Snyder.