A challenge some operators face as mortgages reach their renewal date is a lack of interest from their existing lenders to reinvest, forcing them to look elsewhere for financing. Even with an existing cash flow, it’s difficult to find additional capital from a new source, as the relationship starts completely fresh. With no history or track record, it’s likely lenders will tend to be conservative until a solid foundation is established between the partners.
For example, we recently looked at a deal in which the owner built a new facility with high leverage, bringing higher interest rates. The loan is coming due, and the facility is still a long way from stable.
The owner now risks losing this asset plus another due to recourse or having to refinance with even more recourse to other assets. He has a very difficult decision to make, especially considering that, in the new environment, the facility isn’t worth the construction cost (even when it stabilizes).
If operators are able to reacquire financing from their investors, it will not come without additional costs. Owners may need to pay down some principle, which could mean finding secondary debt or investing/raising more equity. When all else fails, there are other options.
In Canada, there’s a growing opportunity for operators to seek capital through private sources looking to invest. This can help operators stay on course without capital restraints. It also allows investors who have little or no interest in operating or developing self-storage to instead hold preferred equity, participating debt or high-yielding debt while providing more needed capital to operators, who can use it to grow their business.
A second option is to find equity partners willing to invest capital and become a co-owner. The benefits are clear: Equity partners can be assured in many structures of a reasonable current return while getting a piece of the upside in the given opportunity; and the business will gain more control in its market by obtaining efficiencies with a larger revenue base.
Overall, we’re still seeing less competition from more traditional real estate asset classes, providing self-storage owners with a competitive edge. Our industry remains fairly healthy, with more self-storage occupied today than two years ago.
There’s no denying most markets have faced economic challenges, but the Canadian self-storage industry is still in high demand. As a result, most operators have remained in a good position. Even those markets that were hit significantly have managed to prevail on account of high occupancy rates. For example, a market that upheld a consistent 95 percent physical occupancy rate now holds an 85 percent rate, which is still pretty high considering the potential impact.
After a tough year in terms of financing, the lending institutions are making progress, with some interest beginning to resurface. The exact future of self-storage financing remains to be seen, as it relies heavily on the state of the economy. However, there are alternatives to traditional loans, which self-storage operators are starting to explore.
Jacqueline Blackwood is the research and communication coordinator for and Michael Foy is the founder of Foy & Co. Investment Real Estate Services, a full-service company that specializes in equity raising and brokerage services for the Canadian self-storage market. Established in 2002, the company publishes the “National Self-Storage Review," an industry newsletter. For more information, visit www.foyco.ca.