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Self-Storage Real Estate in the Western States: Capitalization Rates, Financing and New Development

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Is financing available in your market? If so, what loan terms are you seeing?

Berry: I would describe today’s loan market as a “designer” market. Those with AAA credit can get what they want as long as the loan to value (LTV) doesn’t exceed 75 percent. The approval process can be arduous, and without a AAA credit rating, loans will be very tough to get, period.

Boldish: In Oregon, cash transactions and owner financing are dominating most of the self-storage sales. Bank financing is available, but with most lenders not exceeding 70 percent LTV and a 10-year call. Rates vary from 5 percent to 7 percent.

de Jong: Financing has resulted in a further bifurcation of the market with a competitive advantage to the largest, best-capitalized operators. Interest rates and underwriting standards have favored these larger operators for the past several years, and this has not shown any significant signs of lifting. The larger the acquisition, the more capital required and the better the rates. Although the Small Business Administration (SBA) has been aggressively marketing to the self-storage community, we have not seen any deals completed in the Northern California market to date.

Gorden: Yes, financing is available for 60 percent LTV or less. Terms are generally 60 days to close with rates at 5 percent for life company loans on cherry-picked properties, or 5.75 percent to 6 percent on everything else. I’ve recently seen a 4.75 percent refinance. As yet, I have not seen an SBA deal close in the Phoenix area.

Lucas: Refinancing has been a challenge for some owners whose commercial mortgage-backed security loans have come due and their properties are no longer worth what they were a few years ago. This weakness, combined with tighter lending regulations, necessitated owners bring money to the closing table, take on a capable partner or even sell.

Today, typical loan terms are a 6.25 percent rate on a 30-year amortization with a 10-year call. Lenders are looking for debt yield—that’s the net operating income (NOI) divided by the loan amount—they want to see at least 10.5 percent on self-storage. If the numbers work, and the borrowers are really qualified, you can get the deal done. Timing is anywhere from 60 to 90 days.

As the investment market continues to stabilize, are you seeing any signs of new development in your area?

Berry: In Utah and Nevada, we are not seeing any current development of self-storage properties, but developers are beginning to shop for land. This could mean an increase in development activity in the coming years if developers are able to finance their projects.

Boldish: There are still non-performing properties available throughout Oregon. Our unemployment rate is higher than the national average and new development is slow. There are a few major developments in progress by nationally known companies, but I’m not seeing any speculative projects being built.

de Jong: There are several construction projects that will have been completed in the last 12 months in the San Jose area, including a development by Bay Area Self Storage and another by Extra Space Storage. These projects had been planned prior to the recession and were in markets where the occupancies and rates justified the additional capacity. I’m aware of several other projects in various stages of planning, and at least 17 additional sites where facilities that had been planned but are currently shelved for numerous reasons, including lack of available financing and excess supply.

Gorden: Currently, I’m aware of one development project that’s underway in a metro area, but in general the market demand has been met in Arizona. Several large lenders were still interested in funding the construction loan at 50 percent LTV. I’m not aware of any other experienced developers who are pursuing new development at this time.

Lucas: I’m currently aware of six different projects in Colorado that are in various stages of development. I’m just amazed. I thought it would be at least another year before this market took off again. Obviously the people who are developing have expertise and deep pockets to get the deals done.

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 and operates, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail

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