With CMBS lending gone, local and regional banks supplied some capital, as did life insurance companies and pension funds. “At the end of the day, a self-storage owner has fewer options available than he did just 12 months ago,” Snyder says.
Today’s highly conservative lending environment is what is known as a “flight to quality,” says Neal Gussis, principal for Chicago-based Beacon Realty Capital. “Quality” is a combination of a property’s physical attributes and condition, location and historic performance, among other factors, Gussis says. “When underwriting a transaction today, lenders are likely to examine a longer historic period, as well as the micro and macro markets for trends and comparables.”
Financing terms have also shifted dramatically because lenders want more equity, according to Gussis, with lending programs not exceeding 70 percent of a property’s value, compared to 85 percent—or even 90 percent in some cases—in the previous years. “This has been a double whammy since cap rates for most properties have widened by at least 50 basis points.”
While financing is harder to come by, it is still available. “But loans are not plentiful and carry shorter fixed-rate terms and amortizations, more rigid underwriting and higher rates than in the previous five to six years,” says David Smyle, president of Benchmark Financial, La Mesa, Calif. “Lenders are very picky about the occupancy, borrower financial strength and experience, and property quality.”
Investors also need to recognize that today’s real estate investments are valued on generated income rather than potential income. “A property’s location must be able to stand the test of time,” Gussis says. “Owners will need to exercise more patience and create value over time by managing revenue and expenses. Making the right investment will also entail obtaining leverage that provides some room to ride out the economy ... most likely a loan that matures in no fewer than three years.”
In today’s recessionary environment, self-storage owners need to be “smarter than ever to manage rents, operating expenses and occupancy levels,” Gussis says. The key to a facility’s operational success is to provide customers with a range of price points and related amenities within their disposable thresholds, he adds. “Whether they want or need to rent a storage unit, most customers these days are highly price conscious. Creative marketing techniques can help attract the attention of potential customers looking for rental bargains.”
At the time of this writing, Congress was still working out the kinks in the billion-dollar bailout to soften the blow of the failing U.S. economy. “The bailout should have a good affect on the storage industry on a long-term basis,” Tran says. “The Treasury is trying to do everything they can to address falling home prices and mounting disclosures. Whether people are downsizing, buying or moving, storage is a good solution for them.”
“Any housing-market jumpstart will also inspire greater confidence in consumers to spend money and ultimately use storage products,” Gussis adds.