Although the credit crunch has created a pause in lending, the self-storage industry in Canada has remained healthy—occupancy and rental rates are climbing, and development is being absorbed. Operators are expected to begin focusing on building local portfolios. Buyers will buy on a single market basis taking a more centralized approach to acquisitions. Once local markets have seen substantial growth and development, the industry may once again see national buying of strong local portfolios.
Conduit mortgages rose swiftly in 2004. Interest in conduits grew quickly as 10 institutional lenders became involved, providing enormous leverage for the self-storage industry and making financing extremely accessible. Owners and developers were given non-recourse loans with aggressive underwriting for acquisitions or development. Interest rates were low and property values skyrocketed.
Three years later the market started and has continued to see uncertainty and hesitation. As a result of the credit crunch, structured financing has been impossible to price causing lenders to hold off on lending. Uncertainty in determining how to price conduits will change financing options. Financial experts predict that conduits will return, but at what rates and with what leverage?
As the market adjusts and assets become appropriately priced for risk, financing will go back to more traditional lenders for class-A facilities and strong borrowers, while conduits will charge a premium but provide financing for the remaining market.
When the market adjusts, interest rates may go up which will either force buyers to accept lower returns or, force sellers to sell for less. If neither scenario occurs the market will become stagnant. Buyers are willing to take a lesser return on class-A facilities leaving cap rates the same, and therefore adjusting for the interest rates. The best case scenario for buyers of class-B and C products will be to accept the same return as at the peak of the market. However, if interest rates increase prices will have to adjust, forcing buyers to pay less.
Despite the current state of the financial industry, the self-storage market will remain strong for everyone in the short term. However the highest quality facilities will always outperform.
Operations have continued to evolve. The industry is becoming much more actively managed, as facilities are interested in institutional grade management. Staff is being trained in customer service including sales and marketing strategies, and facilities are catering to customer needs and establishing more consistent offerings. With high-quality operations, businesses have the opportunity to maximize revenue, adding value to property that will increase options. Opportunities to sell or refinance become easier because the risk to a buyer or lender is minimized.
Development has become more sophisticated. Increasingly, professional developers are entering the industry in search of better retail locations. Developers are now finding land and building facilities with the intent to sell. They are building class-A units, adding value to a site and then moving on. This is the first major influx of development in the last 10 years, and it is consistent nationwide. As the market adjusts to the credit crunch, development may slow. However, there may be some great opportunities for buyers over the next couple of years.
State of Today’s Industry
Overall, the self-storage market is performing well. Business is healthy and the focus is increasingly on quality customer service. There are steady increases in rental rates, high occupancy and first-class development. While significant, the only blip on the industry radar has been financing. The lending market is experiencing some uncertainty and no one knows what will happen to conduits in the next year. That said conduits are not the real issue. The real question is will financing be available to the bulk of the self-storage industry and at what interest rates and leverage? However, on the whole, the industry is stronger than ever while adjusting to a changing market.
Mike Foy is founder of Foy & Co., a brokerage, financial and equity consultant to the Canadian self-storage industry. Foy & Co., based in Toronto, is also partnering with Del Management Solutions to offer self-storage owners the option of third-party management. For more information, call 877.966.3807; e-mail [email protected].