It’s also likely that lenders placing conduit loans will take a larger role in the servicing of these loans, which will allow them to build a stronger relationship with borrowers than in the past. There will be a market for good loans in the self-storage sector in cases where the borrower has a solid track record and the asset has consistent cash flow.
As the government’s Term Asset-Backed Securities Loan Facility (TALF) program takes hold and investors begin to pour more money into top-tier commercial bonds, it will have an affect on spreads and competition for regional banks and a few other lenders that seem to be the only groups right now with the desire to lend aggressively. Borrowers, however, should be concerned about loans coming due on average-quality storage facilities—ones for which occupancy hovers in the 80 percent range or lower.
Based on current market conditions, there are options for positioning assets to weather this economic storm. For owners that currently have loans coming due, there are choices. Consider transitioning to a two- to three-year bank loan that will help you get through the most turbulent part of this lending environment, after which you can expect credit requirements and lending parameters to loosen significantly.
Specifically, the conduit market should come back in the next 12 to 24 months. Loans coming due now will be able to be refinanced with moderate to aggressive terms. Bank loans with non-punitive prepayment penalties will enable borrowers to transition to a long-term, non-recourse loan with minimal cost.
There are additional steps you can take to prepare your business for a better loan in the future. Spend the extra capital to keep your asset in good shape, drive or maintain occupancy at high levels, and keep your tenants satisfied. In this way, you’ll be a market leader that will survive to see not only more aggressive lending, but also the return of higher property valuations and a more vibrant market for self-storage property owners and investors.
Anthony DiMarco has placed more than $1.2 billion in commercial financing since 2000. He’s the managing director for Security Mortgage Group of Rochester, N.Y., a provider of commercial mortgage financing for income properties including self-storage, apartments, manufactured home communities, and commercial/industrial facilities. To reach him, call 585.423.0230; visit www.securitymortgagegroup.net.