Self-storage operators around the country are beginning to see occupancy levels increase, and financing is loosening for qualified buyers. In this article, real estate experts from the northeast states discuss leasing activity over the past year, and debate whether the region is ideal for self-storage investment. The contributors are:
- Guy Blake, Pyramid Brokerage Co., Newburgh, N.Y.
- Linda Cinelli, LC Realty, North Branch, N.J.
- Joe Mendola, NAI Norwood Group, Bedford, N.J.
- Chuck Shields, Beacon Commercial Real Estate, Radnor, Pa.
How have self-storage occupancies and leasing activity held up in the major metropolitan statistical markets (MSAs) over the last year in your market? Whats the general economic outlook?
Blake: Self-storage occupancies have held up reasonably well in New York. We saw some increased vacancy and delinquency during the height of the recession, but Im hearing better news from most operators these days. The general economic outlook is also pretty good. New York certainly felt the recession, but we didnt get clobbered. The housing market is showing signs of recovery and investment activity is picking up.
Cinelli: Based on conversations with our operators, the leasing activity hasnt declined from last year. Theyve experienced stability and, in some markets, an increase in occupancies. Theyve had to be competitive, and the mom-and-pop stores have to work much harder to compete with the national facilities. Offering more customer and special services have helped maintain better occupancies. We have a stable market for the most part and strong demand from buyers for performing facilities, as well as opportunities for value-added non-performing facilities. Depending on the particular buyers and threshold, if you get the right shoe, you can make it fit!
Mendola: The occupancies through out New England have held up very well. Well-located facilities are maintaining an 83 percent to 90 percent occupancy range. New England is verifying the theory that self-storage, although not recession-proof, is recession-resistant. In good times we get these occupancies because were accumulating more stuff. Today, were still storing, but the reasons are due to downsizing of living quarters or acquiring household goods through inheritance. I expect the coming year to be more of the same, although if the economy improves, occupancies will improve also.
Shields: For the most part, occupancy rates have at least stabilized and increased in many cases over the last 12 months. Some owners reported that even during the slow months when occupancy typically drops off, theyve seen new tenant increases since the beginning of the year. In general, there appears to be a moderate optimism coupled with a degree of uncertainty in the economy going forward. If there are signs of a recovery, its overshadowed by a wait-and-see attitude.
Have self-storage investors/owners in your market been able to refinance their properties or fund acquisitions? If so, how long is the loan process and what terms are you seeing?
Blake: Financing is available as long as the property is cash flowing. Weve been having success with local and regional banks and credit unions on smaller transactions, such as say $3 million or less. On larger deals, commercial mortgage-backed security (CMBS) lenders and insurance companies are getting back into the market.
Cinelli: The opportunity to refinance varies from the operator and the occupancy of the facility. Taxes have played a strong factor in cash flow. Banks are looking at the last 12 months, if the owners have been successful in winning their tax appeals, and whether their net operating income (NOI) will change substantially, which makes the loan more attractive. Buyers have the same pitfalls to obtain financing. Banks want 25 percent to 30 percent loan to value (LTV). If the buyer has experience and other facilities, the bank may look favorably. Or the buyer may need to collateralize the loan with their other facilities.
When we put a letter of intent together, 60 to 90 days from the signing of contracts sounds good in theory, but the banks run the show. If we have buyers who have a group of investors and the deal is not contingent on any financing, we can safely say 45 to 60 days due diligence and 30 days to close. We can come pretty close to that, unless the due diligence has issues not related to financing. Were seeing 5.5 percent to 6 percent, 25-year amortization schedule with 5- to 7-year terms. Some may reset at five years. Weve been able to get non-recourse, non-pre-penalty and assumable rates of 6 percent, maybe a little higher.
Mendola: Loan availability has been very good. Borrowers who have good credit and are not overleveraged can get the best loans available. Ive not seen any hesitation on the part of banks to lend if liquidity is there with the borrowers. Loans can be closed within 45 to 60 days, start to finish. Currently, most lenders are in the 75 percent to 80 percent LTV range, with rates fixed for five years between 6.25 percent and 3.75 percent. Loan amortizations are between 20 and 25 years.
Shields: Requirements for underwriting still remain tight for financing/refinancing, but investors are finding some relaxation of the requirements with some financial institutions. Banks, credit unions and insurance companies are beginning to be more aggressive in getting their money on the street. Even the conduit market is showing signs of being more competitive. As an example, there was a CMBS transaction in which two self-storage facilities were refinanced and money was taken out of the equity to acquire two additional facilities. The terms were 5.63 percent interest, 30-year amortization with a 10-year term. The turnaround was two months. Self-storage owners are also finding another source to draw from in Small Business Administration financing. This is especially attractive to the owner who needs to refinance up to 90 percent.
Is the Northeast a good place to invest in self-storage this year?
Blake: Absolutely! The Northeast is a stable market. Real estate lost some value here, but not much compared to other areas of the country, so the risk is reduced. Im also seeing deals at fairly attractive cap rates, unlike the high flying days of 2006-2007. Now is the time to buy!
Cinelli: Other than California, the Northeast is the best market. Rates are higher, and theres strong density and a better job force. The population has not over saturated self-storage in many of the urban markets. This is where people have the ability to work and accessibility to mass transportation, highways and New York City. They have cultural diversity, recreation, mountains, lakes and the ocean. Urban living cost per square foot is high, and storing stuff costs less per square foot, so self-storage is a way of life!
Mendola: The Northeast is a great place to invest in self-storage. We dont get the wild swings in occupancies and rent increases other markets do. Nor do we get the downturns in those metrics. Our cash flows are consistent and predictable. Most owners take into account equity buildup through loan amortization. Its not easy or inexpensive to build in prime locations here anymore. Consequently, many owners dont see better opportunities unless they venture out into more up-and-coming areas. That is not a welcomed strategy for most New England owner-operators.
Shields: The Northeast has always been a strong market for self-storage mainly because of its population and density. The number of people, the average household size and income all contribute to the need for self-storage. The facts alone for investing in self-storage indicate its a sound investment. Self-storage is one of the fastest growing businesses. It has doubled in size over the last 10 years and is anticipated to continue. It also has the lowest loan-default rate of all investment properties. Basically, investing in self-storage allows the opportunity for a quick return on investment with minimal risk and little personal involvement. In this economy self-storage in the Northeast is a reliable investment.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail [email protected].
