As of February 2009, large Canadian financial institutions were continuing to pull out of self-storage, leaving little hope for their return. The big banks and lending institutions on which owners and operators relied were no longer lending to this asset class.
Consequently, as mortgages begin reaching their renewal dates, money may not be available. Owners with mortgages coming due in the near term may have to rethink their game plan. Finding financing will become more difficult, and some owners may even need additional capital to replace all or some of their financing. If they cannot find the needed capital, they may be forced to sell.
A few large self-storage institutions and portfolios will still be able to acquire financing; however, it will not come without added cost. An example of the impending pressure of refinancing is Instorage Real Estate Investment Trust's mortgage-renewal deal. The company recently refinanced a $29.2 million loan on which it had previously paid less than 6 percent interest.
In the renewal, the company was only able to secure $25 million at a 9.65 percent interest rate for three years. This means that in addition to paying an increase of approximately 4 percent interest, Instorage also had to come up with $4.2 million in equity. The company is now paying approximately 650,000 more interest annually for less money. If these sites were 100 percent occupied, Instorage would have to increase rent $2.65 per square foot to maintain its bottom line.
Instorage’s mortgage refinancing is a good example of what the future may hold for many self-storage owners. Looking at the number of mortgages possibly coming up for renewal, the prospects are astonishing.