Mendola: Conversions fit into the same category as new construction in the Northeast. There’s plenty of capital to invest in well-located markets that can show good unmet demand for self-storage. The issue is speculative projects of any type are difficult to finance. But if a developer can demonstrate a strong track record in self-storage management and a need for storage, conversion or new construction can be financed with conservative underwriting terms. Now that the Small Business Administration has entered the self-storage financing market, it has opened up new opportunities for self-storage development through its 504 real estate program.
As the economy and real estate market start to recover, should investors buy, and should owners consider selling or continue to operate their properties and see what happens?
Blake: It’s unquestionably a great time to buy! The tricky part is finding people who want to sell in this market. It’s well known this is a buyer’s market, so many would-be sellers are just biding their time waiting for things to improve. Plus, we’re seeing a number owners of distressed facilities who would love to sell but can’t because the value of their property is less than what they owe. This is going to take several more years for all this to shake out. The economic recovery in Upstate New York is progressing slowly. We’re beginning to see activity pick up a little bit, but we still have a long way to go.
Cinelli: Depending on their particular situation, there’s no clear direction for self-storage owners unless they are upside down in their loans. They take the chance if they wait for higher interest rates, larger players entering the market, and competing with rates. Today, we see more interest from owners looking for us to provide an opinion of value on their property, as most are looking to hold in the short term and plan for the future.
Mendola: As the economy recovers, I’m encouraging buyers to move aggressively to own self-storage in this economy. This is because self-storage is not distressed property in New England. We don’t have poor occupancies in the market and owners are not highly leveraged. So owners don’t have to sell unless they want to change their lifestyle. In New England, the economy is not nearly as challenged as the nation as a whole. For example, in New Hampshire particularly, the unemployment rate is 5.7 percent and we’re having an influx of manufacturing businesses coming into the state.
What advice would you gives owners with regard to the financing market for self-storage properties in today’s market?
Blake: Believe it or not, there’s financing to be had in this market―provided the property being financed is cash flowing! Lenders are being a bit more conservative than in prior years and they are looking hard at the borrowers, but most important is the cash flow of the property being financed. If you have a profitable facility, getting it financed is not going to be an issue. If you’re reporting losses to the IRS, only a buyer with a strong signature will be able to get financing and it will probably only be in the 50 percent to 60 percent loan-to-value range.
Cinelli: If owners can refinance, they might want to see if they can bring down their interest rates if they have the equity. If refinancing is not an option, owners need to look for an exit strategy and plan how or when they can sell. At some point, there will likely be a change of circumstances that will cause them to sell, and it’s best to have a plan in place.
Mendola: Concerning advice for financing in New England, there’s plenty of capital available from the local banks in the $2 million and less range with loan to values in the 70 percent to 75 percent range and interest rates in the 5.5 percent to 6.5 percent range. There’s also money to lend in the $5 million and up category with the life insurance companies and now some conduit lenders coming into the market. The area that’s most challenged to finance is the $2 million to $5 million loan amount. There are not many lenders willing to lend in this price range.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers. For more information, call 800.55.STORE; e-mail email@example.com .