State of the Self-Storage Industry 2010, Part II: Finance and Construction

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Continued from page 2

 
What does the future hold for self-storage financing?

Adams: As we move into 2010, the real estate market for new housing should begin to improve. Inventory levels are down, and home builders have built few new homes over the last several years. This improvement will have a positive impact on the self-storage market and significant benefits to the banks by helping to eliminate their real estate owned (REO) portfolios.

A significant number of banking institutions were poised to write off all the bad real estate in their portfolios by the end of 2009. Hopefully this internal cleaning of the books will allow new loan allocations, which will benefit the self-storage industry. Make no mistake about it―your project will have to be well-underwritten with significant equity contributions from the sponsors and strong balance sheets to get your project financed.
 
Hill: For the most part, self-storage has performed well in this recession, and the financing challenges owners face are no different from those of other commercial-property owners. Nonetheless, the commercial real estate financing markets continue to face some serious headwind. Property fundamentals are being challenged and asset values have declined, in many cases eroding significant equity in the transactions.

This year will likely be challenging for real estate financing, as the capital markets for securitized lending products attempt to regain some traction, and the major burden for real estate capital is placed on bank and insurance company balance sheets. Simply put, there’s just not enough capital available at the bank level to refinance all the upcoming maturities, not to mention the loans that have already matured this year and extended one or two years. Banks will likely become more aggressive in foreclosing on properties that are not performing and do not service debt if the sponsor cannot re-capitalize the deal.

The outlook for our industry in the long term is promising under the theory that self-storage loan performance will have, once again, proven itself during this recession. The lending community will gain additional comfort with the performance of the asset class as a result of this recession.
 
Ragsdale: Self-storage will remain a small piece of the overall commercial lending realm, therefore, little attention will be paid to it. Self-storage is being impacted by the fall of other property types and the constraints on credit far more than the property type has been impacted by the economic downturn. Banks that have a special interest and knowledge of self-storage will remain attractive options.
 
What’s the state of new self-storage construction today?

Campbell: Slow. People are either afraid to make the commitment due to the economy or, if they do want to build or expand, financing seems to be one of their biggest hurdles. If they’re able to get financing, the terms are favorable.
 
Wright: Challenging. Over the past 18 months, we've seen a significant slowdown in ground-up construction. That being said, it’s the opinion of many experts, myself included, that if you have a site that would lend itself to a new facility ... what a great time to build! Overall construction costs are the lowest I've seen in 15 years.
 
What challenges do developers and builders face?

Campbell: Financing seems to be the biggest hurdle from the builders and developers we talk to.
 
Wright: Without question, it's the ability to obtain financing. We’re living in an imperfect world when it comes to lending. Bottom line is that many banks are just not willing to take any risks with ground-up construction. My advice is to be persistent and patient with the banks. There are still many of them out there that have an appetite for ground-up construction.
 
Is there land available for new construction?

Barry: There are many fully approved sites for self-storage on the market today. The lack of development financing has virtually closed this market for the time being. For the same reasons, we suspect fewer investors will begin the land-development process until some of this supply clears the market.
 
Chiswell: There’s no question that we have a much more competitive environment, but there are still sites that could be developed. I know several owners with uniquely attractive locations that will be built in the year ahead. Anyone looking to develop a site is under increased pressure to have a very detailed loan package with an independent feasibility study.

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