While financial headlines during the past year have been dominated by the credit crisis, auto-industry bailouts and bankruptcies, residential foreclosures, the stimulus package, and credit card defaults, something that hasn’t received as much attention in the general press is commercial real estate. Until now.
Many analysts are now speaking of commercial real estate as the other shoe that, if it falls, will bring the economy to new lows and reverse some of the market gains made in recent months. For those in the industry, this potential situation isn’t really news at all. We’ve been aware of this elephant in the room for some time.
One of the largest risks to self-storage owners is the availability of credit. Owners who are most vulnerable are those who acquired or built properties in the last three years during the market’s peak. Those who built or acquired using short-term, high-leverage debt, or who purchased facilities based on pro forma rents or leasing activity, face the greatest challenge.
The reality is the value of many properties in this category are likely not worth their current loan balance. Additionally, many properties acquired based on leaseup or rental projections are not servicing their debt, as the recession has curbed projections. Even properties that are performing but have debt coming due in the next 24 months are at risk of foreclosure.
So what can you do amid all this negative news and outlook? Most important, don’t hide from the problem. Address it aggressively and seek alternative solutions.
First, let’s look at properties with enough cash flow to service their debt but loans maturing soon. It’s crucial to contact your lender now to discuss an extension. In this market, it’s never too early to begin these discussions. This will allow you to gauge the lender’s health and determine if you need to prepare for a sale. If you’re successful, it will allow you to avoid being forced to sell or refinance.