Investors have myriad questions about the current self-storage market. Should you surge forward with all the deals being presented while interest rates are low, or is it smarter to sit on your cash and wait for the recession to intensify? If you wait for the deepest parts of the slump, will there be better deals? Should you take advantage of cheap-money opportunities and invest in new development projects?
There are plenty of people with ideas on where to put your money in this COVID-19 climate. Growth stocks and stock-and-bond funds are at the top of the list of possible long-term investments, while savings and checking accounts, as well as money-market accounts, should be at the top of the list for short-term. With stocks, there was a little dip at the beginning of the pandemic. The market immediately rebounded, but many who pulled out their money are still looking for a safe place to park it. There are also folks who’ve lost their jobs, some of whom are sitting on 401(k) funds they can now convert into a self-directed IRA.
Frankly, there’s just more money sitting on the sidelines than there used to be. It includes cash being held by passive investors who want to get into the self-storage industry and are looking for properties to buy. Some are biding their time, waiting for the recession to produce distressed facilities to snatch up once they hit the market.
If you’re among the many investors wondering if now’s the time to act, below are some variables to consider. Yes, there are market challenges, but they might actually create some opportunities.
Loan Terms
As some self-storage owners struggle or fail to create value in their properties, they may not be able to refinance when the need comes. Banks are offering less-than-generous terms today. The loan-to-value (LTV) ratio is lower; debt-service coverage ratios are higher; and lenders are getting stricter when it comes to underwriting. An owner expecting to refinance and replace an 80 percent LTV loan with another may have a rude awakening. Investors are hoping that, as a result, more facilities will be coming on the market.
Interest Rates
Another consideration is current interest rates, which are historically low. Some self-storage operators are refinancing their portfolios to take advantage of the situation. In turn, some investment opportunities that didn’t make sense in the past will work today because the cost of capital has decreased.
Foreclosures
Foreclosure activity in self-storage could increase. Why? Because there are many owners who’ve diversified their interests into other asset classes, such as hotels, offices, senior living, etc. As those assets become distressed under the weight of the pandemic and a deepening recession, many may wind up in foreclosure or bankruptcy. The reality is owners who fall on hard times in other investment areas may be forced to sell their self-storage assets.
Lender Sentiment
There was a pause in self-storage development at the beginning of the health crisis. Now, banks are lending again because self-storage does well in a recession, and they’re interested in strengthening their balance sheets. They’re adding self-storage to bolster their holdings as the economy moves further into decline.
Life-insurance companies are underwriting more loans in the self-storage space for the same reasons. They know our industry performs extremely well when the economy slows. They want in on this game because they know it’s a solid bet. Numerous new hedge funds and family-office resources are pouring money into self-storage assets, too.
In turn, this creates more competition for storage properties. Some developers are playing the wait-and-see game because they’re wondering what the banks are going to do with reserve requirements and other loan stipulations. Frankly, stipulations that were easy to overlook prior to COVID-19 are making it more difficult to get projects underwritten in today’s market.
Yes or No?
So, knowing all these things, should you be bullish on self-storage right now? Certain experts think we’re in a “perfect storm” for real estate investing because some owners are fearful about the recession or having trouble refinancing, and are already looking to sell. Others believe you should wait until there’s a higher unemployment rate and foreclosures are more prevalent.
At my company, we’ve revitalized some development projects that were paused. (Capital is so cheap!) We’re also bullish about buying new or existing facilities that are distressed or have value-add potential. (Interest rates are low, and there are many passive investors who want to get in on the action!) We’re also syndicating most of our projects. In short, we’re taking advantage of this perfect storm!
Any type of market produces good self-storage opportunities. You just have to know where to look and how to take advantage of them. Happy investing!
Scott Meyers, founder of Self Storage Profits Inc. and Kingdom Storage Holdings, has been involved in the self-storage industry as a developer, owner, syndicator and operator since 2005. He and his companies have bought, sold, developed and converted more than 2.1 million square feet of storage across 13 states. His website, selfstorageInvesting.com, provides information, software and seminars to help people launch and grow a self-storage business. To reach him, email [email protected].
