New construction was one of the biggest victims of the recession. After several years of rapid development—commercial and residential—the financial crisis brought construction to an abrupt halt. As financing dried up, developers were unable to fund new projects. In addition, there was a surplus of new houses and commercial buildings. Many remain empty today.
The self-storage industry, which had been in a rapid-build phase for nearly a decade, was impacted by not only the lack of funding, but also by over building in some cities. Where once a handful of facilities dominated a particular market, there were now a dozen.
Yet there are still markets around the country that are under served, and available land ready for self-storage development. The biggest hurdle now is obtaining financing. New projects backed by solid investors in well-located areas are more likely to receive funding. Likewise, existing properties that have shown consistent occupancy numbers and good returns will also find more favor when refinancing.
In this second of a three-part series, Inside Self-Storage asked experts in real estate, finance and development for their insight to today’s market. Our panel discusses how the economy has impacted construction and development, refinancing and cap rates, and what’s on the horizon. Our finance experts are:
- Richard Hill Adams, chairman and CEO, American Realty Capital Advisors
- Shawn Hill, principal, The BSC Group
- Georgia Ragsdale, CEO, Watermark Financial
Weighing in on the construction side are:
- John Barry, vice president of brokerage, Investment Real Estate LLC
- Terry Campbell, vice president of sales and marketing, BETCO Inc.
- Jim Chiswell, owner, Chiswell & Associates LLC
- RK Kliebenstein, president, Coast-To-Coast Storage
- Ben Vestal, executive vice president, Argus Self-Storage Sales Network
- Ray Wilson, president, Self-Storage Data Services Inc.
- Caesar Wright, president, Mako Steel Inc.
What is the state of today's self-storage financing environment?
Adams: Self-storage financing is becoming more difficult, in part due to the increase in capitalization rates. To exacerbate the problem, many lenders categorize self-storage as a single-purpose loan. The banking regulators also provide lending constraints on this type of product, which limits the amount of capital available to the industry.
New-project permanent financing requires greater leaseup and longer stabilized income to provide cash flow that will support the higher debt-coverage ratios lenders are looking for in today’s market. As we have seen in many parts of the country, real estate projects are under stress. Rents are lower, and owners will reduce the rental rate to maintain a project’s occupancy. The good news is the tenants stay; the bad news is they pay less money and cash flow goes down.
Hill: The market for self-storage financing as well as all commercial real estate―with the exception of perhaps multi-family properties―is still extremely conservative. Generally speaking, there’s ample capital available for high-quality, well-located, stabilized facilities looking to refinance existing debt at 65 percent or lower loan-to-value, with value calculated using conservative (market) cap rates.
In addition to underwriting the property fundamentals, lenders are also focused on the borrower's global cash flow, which includes an underwriting of any other properties the sponsor has an interest in to be sure those are performing as well. There is limited non-recourse capital available; most loans require at lease some level of personal guarantee.