Inside Self-Storage

JAN 2019

Inside Self-Storage (ISS) is an information source for industry owners, managers, developers and investors covering news, trends, facility operation, finance, real estate, construction, development, marketing, technology, insurance and legality.

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(LTV) ratio. This is particularly applicable in markets where properties are valued on relatively low capitalization (cap) rates. For example, buyers seeking 75 percent LTV leverage should know that greater equity may be required for their next purchase. Development and Construction Financing When capital was tight and only a few lenders offered financing, virtually no new storage facilities were constructed between 2009 and 2012. Once capital became readily available from debt markets and investors, new developments started tracking at record levels in 2016. A record $9.39 billion was invested in self-storage from January 2016 through August 2018, according to U.S. Census data. During the same period, 1,858 facilities opened nationwide, Union Realtime figures show. The below graph, using data from the U.S. Census Bureau, illustrates construction put in place, not seasonally adjusted. Note: The last four months of 2018 are estimated at the same monthly level of spending as August 2018. Despite these recent development and construction surges, self-storage remains a micro-market industry, and it's impossible to categorically state that an entire Metropolitan Statistical Area (MSA) or market is overbuilt. Most new storage developments, particularly larger, multi-story properties, have occurred in the top 50 MSAs. Given pent-up consumer demand, many of these projects leased up more quickly than projected. However, as we get further into the development cycle, lease-up is now taking longer than expected, requiring many operators to offer discounted introductory rates to attract renters. In many cases, the lead time for finding a site, planning, entitlement and permitting is lengthy. And as we experience a market shift, project assumptions from 24 months ago are likely quite different today in relation to construction and financing costs, lease-up rates, and stabilization projections. Some projects simply may not pencil out any longer to attain a developer's anticipated return on investment. How Lenders View New Projects There are still many lenders who will provide construction financing for new projects. Key for them is the sponsor's strength and experience, as well as the development's feasibility and underlying economics. No two lenders will underwrite a deal in exactly the same way, but a common element to transactions being written is if they believe there'll be take-out or permanent financing at stabilization. Accordingly, lenders will take assumed stabilized NOI and conduct a stress test with criteria that typically include a 25-year amortization, a 6.5 percent (plus or minus) interest rate, and a DSC ratio of 1.3 or better. Given today's market conditions, don't assume they'll consider pro forma rent increases. On the contrary, they may apply a discount to rental rates. Financing Existing Facilities An existing property's historic performance is the primary determinant in the loan amount and terms. Lenders also consider new competitors, including those in the supply pipeline. If new competition has put downward pressure on street rates and monthly revenue, lenders will likely be less aggressive with loan proceeds. It's also imperative to work with a lender or mortgage broker who understands the unique dynamics and economics of self-storage. You don't want to go down the road with a lender who'll have the underwriter apply current, lower street rents to existing customers, as facility operators often implement price increases to existing tenants, even as street rents decrease. Planning Ahead It's always good to stay ahead of the curve. With interest rates inching upward and new-supply market pressures affecting so many locales, here are a few financing tips to consider: • Look to switch from variable- to ¢xed-rate ¢nancing. • Re¢nance sooner rather than later. Lock in a lower interest rate and maximize loan proceeds. • For maximum loan proceeds, seek lenders that offer longer amortization or interest-only periods. • Seek loan quotes on acquisitions early in the process so you're not surprised by equity requirements to close. • Re-evaluate development economics for projects in the pipeline; err on the side of being conservative. The best news is there are plenty of capital providers aggressively seeking to lend to self-storage owners and developers. Just be mindful that they can't control interest rates or new supply. With more than 25 years of experience as a national self-storage mortgage broker and advisor, Neal Gussis is a principal at mortgage-banking firm CCM Commercial Mortgage. He specializes in securing debt and equity for self-storage owners nationwide. He can be reached at 224.938.9419; e-mail ngussis@ccmfinancing.com; visit www.ccmfinancing.com. LEARN MORE Learn more from author Neal Gussis in the video "Best Practices and Market Knowledge for Seeking Self-Storage Financing," available in on-demand and DVD formats exclusively at iss-store.com. You can also join Neal at the upcoming ISS World Expo, where he'll present as part of a panel titled "Dollars and Sense: Industry Experts Discuss Self-Storage Finance." Learn more at issworldexpo.com. 24 ISS I January 2019 www.insideselfstorage.com

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