Self-Storage State of the Industry 2011: Financing, Construction and Development

By Amy Campbell Comments
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What does the future hold for self-storage financing?

Hill: The future for self-storage financing is bright and should only continue to improve. Self-storage has performed well throughout the downturn relative to other property types, and as lenders digest the performance, their appetite and willingness to lend in the sector should only grow with time. As more sources of capital come into the market, competition for deals will increase, and past history suggests this will lead to more competitive terms, which is great for borrowers.

Finally, until we see some very meaningful increases in jobs recovery, interest rates should remain low. The combination of these factors should lead to a nice lending window in the near term for borrowers.

Ragsdale: As CMBS loans come back online, albeit with a more practical loan product than we saw just before the financial collapse, it will take some pressure off of commercial lenders. SBA will also take a good deal of pressure off lenders and allow for common sense smaller loans with good rates.

The storage industry continues to improve in its sophistication thanks to the hard-working professionals in the industry, and this will continue to help lenders move funds into self-storage loans.

Sonne: Financing for assets will continue to improve in 2011 if interest rates hold steady. In general, the market for self-storage has improved in 2010 and the worst of the recession is over for this asset class.

What’s the state of self-storage new construction now?

Campbell: It’s primarily a financing problem. While there has been a loosening of available financing with the recent SBA’s loan program, particularly their SBA 7(a) loans for add-ons or refinancing, which offers 90 percent and up to $5 million, SBA 504 CDC loans for new construction and new sites will remain more difficult to acquire. So, until overall credit loosens, new construction loans will remain problematic. There’s also the factor of occupancies being stagnant or even dropping in some areas.

Fuhlman: Based on several 2010 publications, self-storage construction is estimated to be down 65 percent to 75 percent over the last two years. This lack of new, ground-up construction has been attributable primarily to restricted financing and the dramatic reduction in residential and multi-family development in most markets. There has been an uptick in conversions as a number of infill locations have a significant amount of properly located and zoned vacant existing space available.

Wright: New construction remains quite slow. However, over the past couple of months we have noticed a bit more interest, mostly from potential clients who own their land outright. These folks have a much stronger ability to maneuver through the very difficult task of obtaining financing.

What challenges do developers and builders face?

Campbell: The first challenge is finding the right location on which to build, particularly one that is underserved or has pent-up demand. The next biggest challenge continues to be finding available and adequate financing. Developers and builders still fall under the real estate umbrella and until the economy improves in this area, growth will continue to be stunted. This is why self-storage owners are looking at expansion of existing facilities, conversions and refurbishing as interim strategies until things improve with lending institutions.

Fuhlman: Developers continue to at least face the restricted financing and limited market growth issues. In addition, properly zoned and located self-storage vacant land has become more difficult to find. A number of developers have chosen to watch from the sidelines as messages from the federal government and general economy trends have been mixed at best.

Wright: The biggest challenge still remains the ability to obtain financing. That being said, the SBA recently changed its loan guidelines allowing self-storage business as an eligible business type. This has created a buzz in our industry and time will tell what impact it will really have.

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