By Jacqueline Blackwood
Last summer, President Obama and the U.S. Congress worked aggressively on ways to reduce the U.S. deficit, discussing further the agreement to raise the U.S. Department of Treasurys borrowing authority in attempt to avoid a default of its debt. Ben Bernanke, chairman of the U.S. Federal Reserve, even suggested the possibility of introducing another round of quantitative easing as an approach to stimulate the U.S economy and, in turn, the banks.
North of the border, the major banks in Canada, known as the Big Six (Bank of Montreal, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada), continue to remain relatively stable, as they managed to do throughout the economic downturn. It may be surprising, then, that financing from the Big Six and other financial institutions is still hard to come by for self-storage.
New construction for developers is especially difficult to initiate, with financing up to 65 percent of cost, at best. Prior to the recession, self-storage developers were able to finance lease-up costs in addition to construction costs. Nowadays they struggle for either. Its clear banks are far more conservative in terms of lending.
Even if an owner is in a good financial position and granted funding from the banks, the length of time it takes to finance a deal has increased drastically. There are stringent requirements and prerequisites that must be met, including a variety of third-party reports, all on top of an already prudent financial institution. Ultimately, the costs to financeaside from interest rate and bank feesare on the rise, while being coupled with lower leverage only means more equity is required.
Interestingly, its not the financing of the actual construction phase that has the banks hesitant; its the lease-up or bridge stage where they see the most risk. Despite the challenges noted above, theres a rise in the development and construction of newer facilities, albeit nowhere near as high as before the financial crisis began.
In 2008, there was a sense of panic within the Canadian self-storage industry. Many experts cautioned that numerous facilities would come up financially short to the degree they would have no alternative but to sell. Fortunately, the industry was stable enough to endure the recession and those warnings did not materialize, at least not to the anticipated extent.
Canada has seen self-storage facilities undergo financial distress, but to the best of my knowledge, there has only been one default. This circumstance was a function of high debt, high construction costs and outrageous lease-up expectations (rate and speed). Fortunately for both the bank and the owner, all the financing was recovered, and a good portion of the equity was also recovered.
Refinancing, in general, hasnt been a huge problem for the industry, as most maturing loans are rolling over with their existing lender. Theres speculation that some of the loans set to rollover in 2012 and beyond will be more difficult to acquire, but at this time, it has remained a non-issue.
Completing a Deal
A common question by those new to the industry, stemming from wanting a quick and easy transaction, is how long does it take to complete a deal? Whether buying, selling, expanding, acquiring or investing in a self-storage facility, its rarely a speedy process. From the bank side, deals are definitely taking significantly longer than in the pastas long as 90 days or longer depending on the deal. If its a refinancing deal with higher leverage, it can take up to 6 months to complete.
Capitalization rates have and continue to be relatively good. As the Canadian market has matured, a distinction has grown between the various products. Purchasers and vendors are now recognizing assets as either class-A, -B or -C. This classification as well as the quality of the market is reflected in cap rates. During the peak of the market in 2007 almost all the facilities, regardless of market or class, were purchased at a substantially similar cap rate.
Monthly rental rates in Canada vary regionally from an average of $138 to $212 for a standard 10-by-10 unit, based on numbers from a March study comparing the average cost of a 10-by-10 unit at high-end facilities in major cities. Surprisingly, Edmonton is second only to Vancouver as the most expensive place to store belongings. Naturally, monthly rates are lowest in Saskatoon and Winnipeg, and Montreal rounds out the bottom three with an average cost of $149. The rest of the major Canadian cities including Toronto, Ottawa, Calgary and Halifax sit at a common price around approximately $179 a month.
Despite concerns of rising costs, heavy inflation and new competition, it appears owners have been able to keep rates fairly consistent over the past few years. The rise of concessions, however, has been prominent in those areas with heavy competition.
As with most real estate assets, self-storage has seen return on investment harder to obtain and refinancing become more expensive. But thats the nature of speculation. Overall, self-storage in Canada remains a fairly safe investment.
Jacqueline Blackwood is the research and communication coordinator for Foy & Co. Investment Real Estate Services, a full-service company that specializes in equity raising and brokerage services for the Canadian self-storage market. Established in 2002, the company publishes the National Self-Storage Review," an industry newsletter. For more information, visit www.foyco.ca.