After two years of little to no activity in the self-storage financing market, 2011 may be the turnaround year for the industry. With more funds in the pipeline, will we see a resurgence of new development and construction?
In recent years, financing has been a challenge, both for existing self-storage owners looking to refinance their loans as well as those wishing to build new projects. Developers who were ready to build suddenly found their funding resources dry up. In addition, a decade-long rapid-build phase had led to overbuilt markets, giving lenders yet another reason to pull the plug on self-storage lending.
However, there are still underserved markets around the country and available land ripe for self-storage development. Plus, the recession left behind hundreds of empty commercial buildings that are ideal for conversions. This year, lenders are returning their focus to proven borrowers with solid backing, and once again considering loans for an industry that has proven to be resilient.
One of the brightest rays of hope is the industry’s new eligibility status for Small Business Administration (SBA) loans. While it’s too soon to evaluate what affect this will have on the overall market, the announcement alone has the industry buzzing. CMBS (commercial mortgage-backed securities) loans are also creeping back into the self-storage lending arena. Real estate investment trust Extra Space Storage recently obtained an $82.2 million CMBS loan from Bank of America/Merrill Lynch.
In this second of a three-part series, Inside Self-Storage asked experts in industry finance, construction and development for their insight to today’s market. Our panel discusses new lending options, how the economy has impacted construction and development, refinancing, and what’s on the horizon. Our experts are:
- Shawn Hill, principal, The BSC Group
- Georgia Ragsdale, CEO, Best American Financial Services LLC
- Christian Sonne, senior managing director, Self Storage Industry Group, Cushman & Wakefield Western Inc.
- Terry Campbell, vice president of sales and marketing, BETCO Inc.
- Amy Fuhlman, director of marketing, Janus International
- Caesar Wright, president, Mako Steel Inc.
What’s the state of today’s self-storage financing environment?
Hill: The financing market has improved throughout 2010 and should only continue to improve with time. Lenders are trying to close out their 2010 deals and starting to turn their attention to 2011, and there’s excitement and rumblings about new loan programs and capital sources that should be coming (back) into the market over the next year.
A lot of the lenders who came back into the market in 2010 were mainly focused on larger transactions and cleaning up their books. The expectation is that over time, loan amounts will come down and loan-to-value (LTV) will begin to creep up as competition for deals increases.
There’s also a lot of excitement, obviously, about SBA coming into the storage market. We expect to see more meaningful volume in this sector as lenders and the SBA start to figure that out. We’re not completely out of the woods yet as there are still bank failures expected in 2011, but things are markedly improved from this time two years and really even one year ago.
Ragsdale: The state of financing for self-storage has stabilized considerably after the deterioration, which continued into the middle of 2009. The state of general availability for funds remains heavily dependent on large and regional commercial banks, and some credit unions. Banks that don’t have a strong knowledge of self-storage still tend to shy away from making these loans. Some limited insurance portfolio lending is coming back online, which is attractive to corporate borrowers with stable class-A properties with low leverage.
Banks are still relying upon a “global cash flow” analysis when they look at a borrower, and favor borrowers with multiple sources of repayment and income. Interest rates remain low and generally attractive despite the lower leverage. Generally, a borrower can expect 65 percent LTV, 20- to 25-year amortization, and interest rates from 6 percent to 7 percent, with some opportunity for lower rates.
Sonne: The lending environment has improved significantly for self-storage in 2010. The year started off with limited capital available and has improved steadily. Now, banks and life insurance companies are lending at some of the lowest rates in years. There are even CMBS lenders back in the game. Interest rates range from 5 percent to 6 percent—great, low rates—and LTV is typically at 65 percent, up to 72 percent.
However good this is for the industry, it does not universally apply. Sponsorship (or the lender) must be very strong with a solid balance sheet, and this financing mostly applies to properties that have a stable operating history.