The positive performance of self-storage facilities over the last decade has resulted in a flood of new supply into many markets with little sign of slowing. Even as we draw closer to the end of a prolonged growth cycle, many individual and institutional investors view self-storage as more resilient to economic downturns than other asset classes, such as office buildings and retail centers.
This has created intense competition, especially for owners of older facilities who need to contend with newly constructed properties. Short-term, or “bridge,” financing can help in these situations. Access to an infusion of capital allows an owner to renovate or expand, which can enhance business reputation and strengthen brand identity. Updated sites can also operate more efficiently, saving money and improving income.
An Overview
Bridge financing usually closes quickly and with flexible terms. Due to their short-term nature—often six to 48 months—bridge loans are more expensive than longer-term capital offered by traditional lenders; however, they also offer many benefits:
- Bridge lenders are generally able to provide financing of up to 80 percent loan-to-value and, in some circumstances, may be able to fund within 30 days or less.
- Bridge loans typically have a fixed-rate, interest-only or floating-rate structure, and their non-recourse component is generally negotiable.
- Bridge lenders can provide loan commitments far sooner than with conventional financing, which should provide borrowers a heightened level of confidence in closing.
- The loan-qualification process is more streamlined and less time-consuming.
As the name suggests, this type of financing is designed to bridge gaps and help owners quickly seize on opportunities, pay costs associated with improvements, stabilize a property or buy time to secure permanent financing.
Physical Improvements
Some self-storage borrowers have used bridge financing to reposition their properties and brand identity. From a physical standpoint, this might involve investment in renovations or expansion. Some owners tear down existing, outdated buildings and erect new structures with more space and desirable features, such climate control, which can command higher rent.
Even relatively simple makeovers can make buildings look cleaner and brighter. For example, modern, LED lights can provide better illumination than old-fashioned fixtures, and motion sensors on light switches cut down on waste. Both increase site safety and security while reducing electricity consumption. Other improvements to the physical plant can reduce utility costs, prevent losses and make the property more attractive to potential customers, who are willing to pay more for modern amenities, perceived as greater value.
Operational Improvements
Another way to take advantage of a bridge loan is to implement operational improvements, which can make a real difference in optimizing performance and providing a tremendous return. Investments in this area might include the latest software to help automatically increase unit prices when conditions are ripe, or modern technology and automation tools. Short-term capital can allow owners to implement these solutions and realize revenue increases.
Smaller self-storage operators can use bridge financing to fight other expenses, such as rising property taxes. Many cannot effectively battle these increases without some short-term capital to help prosecute appeals.
Staying Competitive
Making physical and operational improvements to storage assets is a strong way to fight newer competition. Despite the influx of fresh supply, new properties have largely been able to find customers during lease-up. In some areas, however, they’ve driven down rental rates, increasing the importance of property features and benefits just to keep pace.
Meanwhile, developers still plan to open thousands of new self-storage facilities nationwide. For example, in cities like Portland, Ore., and Nashville, Tenn., developers have planned new assets that, if completed, will increase market inventory by more than 20 percent. Development activity in those areas has already been high, with increased competition forcing down rental rates more than 5 percent over the last year, according to Yardi Matrix.
When challenged by competition, strategic owners look to invest in physical and operational improvements. Bridge loan are a smart and efficient way to infuse your plan with the necessary capital.
Billy Meyer is managing director of real estate bridge lending for Seattle-based Columbia Pacific Advisors LLC, which manages more than $1 billion across a variety of alternative investment strategies including private real estate, real estate lending, growth capital, private equity and distressed debt. To reach him, call 206.734.3979; e-mail [email protected]; visit www.columbiapacific.com.
