Plans for the Next Game
Self-storage has proven to be recession-resistant, especially when compared to other asset classes in this economic recession and capital-markets depression. So what’s the plan for the next game?
In general, the outlook is bullish for self-storage. Owners with strong balance sheets will continue to enjoy cash-flow returns. Banks and commercial mortgage-backed security (CMBS) lenders with problem properties are choosing re-trade over foreclosure.
As an example, there’s a deal under contract in South California that has assumable CMBS financing to a qualified buyer, but with only a 10 percent down payment. The property was stabilized, but the owner could not pay down more equity to the debt. The lender sold the property instead, and the borrower pulled out remaining equity.
Capital chases yield, and equity capital is seeking storage in this asset class. Cap rates are declining slowly as values remain below replacement cost with little new construction. Cash flows are generally stable, with recessionary related declines now stabilizing and a general view of more optimism regarding the future. The summer rental activity will be the key metric of investor confidence for the balance of the year.
While some market observers worry about problem assets flooding the market, there’s little evidence that’s likely to occur. Typically, less than 1 percent of self-storage assets have been on a lender “watch list,” and less than 10 percent of these loans have gone to special servicers. Even if special assets double or triple in the next few years, there’s equity waiting to acquire the assets or debt.
The self-storage market is rebounding ahead of other real estate asset classes. This is another market determinant that indicates the strength and durability of self-storage cash flow. As equity is returning, market conditions are improving. Many believe 2010 will be the rebound year for self-storage.
R. Christian Sonne is senior managing director of Cushman & Wakefield’s Self-Storage Industry Group, a nationwide real estate consulting team of 12 professionals specializing in appraisal and market study of the self-storage asset class. To reach him, e-mail firstname.lastname@example.org.