Much like Cinderella at the ball, self-storage owners are feeling pretty confident and falling in love with the Federal Reserve, as it continues to keep interest rates at historic lows. But midnight is approaching and, at some point, it’s back to reality. Luckily, that doesn’t mean a life of indentured servitude; but it does mean a potential bump in rates.

Interest payments are often a storage owner’s largest monthly expense, so even a modest increase can have a significant effect on the bottom line. While it may feel like you’re the darling of the ball, the clock is ticking, as Federal Reserve Chair Janet Yellen signals an end to quantitative easing and an increase in the federal funds rate.

Commercial Mortgage-Backed Security

In today’s market, there are some very attractive rates and terms. Commercial mortgage-backed security (CMBS) debt is a particularly attractive option, offering 10-year, non-recourse, fixed-rate debt with a 30-year amortization and an interest-only period for loans as small as $2 million. Rates generally range from 4.25 percent to 5 percent, with proceeds up to 75 percent loan-to-value (LTV). Prepayment penalties typically take the form of defeasance with open prepay during the last two to three months of the loan.

Life Insurance Companies

Life insurance companies are also offering very competitive rates and terms, often on a non-recourse basis. While these companies are generally more conservative in proceeds and more selective for the properties in which they lend, they make up for it with very competitive rates. The most selective assets and borrowers benefit from rates in the mid 3 percent to 4 percent range. Life companies offer a standard 10-year term and 25- to 30-year amortization structure, but also feature fully amortizing loans with a 15/15 and 20/20 structure.

As mentioned, these lenders are selective and prefer quality assets in primary and secondary markets. Loans are lower leverage in nature, with typical LTVs at 65 percent. Life companies are also attractive due to the flexible prepayment options they offer.

Local and Regional Banks

Local, regional and national banks also present an attractive option for borrowers looking for more flexibility. Loans terms max at five to seven years, with a 25-year amortization and LTV capped at 75 percent. Banks offer both fixed- and floating-rate options, with floating rates from 2.5 percent for highly capitalized borrowers to the high 3 percent range for more traditional borrowers.

Fixed-rate deals are in the low 4 percent range and generally offer interest-only options. Prepayment penalties are often on a declining basis, with 5 percent in year one, 4 percent in year two, 3 percent in year three, two percent in year four and 1 percent in year five being the most common.

Keep in mind bankers are more relationship-based and borrowers should be prepared to have operating accounts and/or other significant depository relationships in place with the lender. Credit unions offer similar rates and terms, but due to federal regulations are often required to offer open prepay.

Small Business Administration

Small Business Administration (SBA) loans are another popular option for self-storage owners. There are two types of loans available to this industry: SBA 7a and SBA 504.

The 7a program is most commonly structured with a prime-based rate that resets quarterly and a fully amortizing 25-year loan. This program is designed for borrowers who typically have an LTV in excess of 80 percent, want to refinance, and have a shorter holding period.

SBA 504 is a fixed-rate program that carries a rather steep 10-year prepayment penalty. The 504 program currently doesn’t allow for refinance and is only available for acquisition financing.

A Comparison

Perhaps these rates and terms don’t sound that impressive because we’ve been spoiled by a relatively low interest-rate environment over the past few years. However, when you compare rates over the past 50 years, the story is a little different. Ten-year money is often priced over 10-Year Treasuries. The chart below shows the history of nominal interest rate on 10-Year Treasuries.

As you can see, we’re experiencing some of the lowest 10-Year Treasury rates over the course of the past 50 years. Of course, there’s a spread premium above the Treasury that’s specific to every transaction, but this presents a general look at rate movements historically.

The Federal Reserve has a significant effect on interest rates, both short- and long-term. The federal funds rate is the rate at which banks can borrow from the Federal Reserve. As it becomes more costly for banks to borrow, it becomes more costly for consumers to borrow. Via the federal funds rate, the Federal Reserve has a direct impact on short-term interest rates. Changes to those rates often mirror changes to long-term interest rates. Here’s that same historical 10-year Treasury rate graph with the federal funds rate superimposed.

There certainly are some similarities in rate movements historically and, for those statistics majors out there, the correlation coefficient is .897, meaning a relatively high correlation between rates. The Fed has intimated that it will start to raise the federal funds rate once certain, undisclosed macroeconomic metrics have been met. Many are predicting it will begin to rise in early 2015.

Additionally, the Fed has impacted long-term rates through its quantitative-easing program by which it purchases Treasury bonds in an effort to keep long-term rates artificially low and support economic growth. However, the Fed has been tapering its bond purchases and, as of April 2014, is purchasing $55 billion per month, a decrease of $10 billion from the previous month. If this tapering continues, the Federal Reserve will no longer be buying Treasury bonds by the end of 2014. With less demand for bonds from the government, rates should rise.

What does this all mean in real terms? Let’s imagine a realistic 100-base point increase in rates from 4.5 percent to 5.5 percent on a $3 million loan.

A mere 1 percent increase in rates would result in an additional $22,000 in annual debt-service payments, or approximately $222,000, over the course of the 10-year loan. Additionally, the principal balance on the loan will be $73,500 higher when the loan comes due because more of the monthly payment is dedicated to interest and less to the principal paydown. As you can see, rates matter significantly.

The good news for storage owners is lenders generally look favorably on the industry as an asset class. Thanks to month-to-month leases and high operating margins, self-storage is better able to withstand changes in market conditions. The industry proved to be very resilient through the turbulent times from 2008 to 2012. The graph below highlights the historical default rate on CMBS debt for different commercial real estate asset classes over the past 14 years.

As you can see, self-storage has consistently had the lowest default rate of any asset class. Previously considered a “niche” asset by lenders and CMBS bond investors, many now understand self-storage metrics and see the value in lending on it to help minimize volatility in their portfolio.

Another turning point for self-storage as an asset class occurred in January 2012 with the cover-page article in “The Wall Street Journal” titled, “Storage REITs Enjoy a Boom,” chronicling the incredible success of the four self-storage real estate investment trusts (REITs) over the past few years, especially compared to the dismal performance of other REIT asset classes. Lenders are taking note. Self-storage is now a well-respected asset class and a sought after component of many lending portfolios.

It may make sense to refinance in this favorable market before rates begin to rise, as many economists believe they will. By historical standards, there’s certainly more room for rates to move up than down. Today, storage owners have the ability to lock in a fixed-rate loan for 10 years, which can potentially save hundreds of thousands of dollars and provide a competitive advantage over less savvy competitors. Midnight is fast approaching, and it’s time to lock down your Prince Charming.

Devin Huber is a principal at The BSC Group, which offers financial and loan advisory, mortgage-brokerage and loan-workout solutions to commercial real estate property owners and investors, with a special emphasis on the self-storage market. Prior to helping found The BSC Group, Huber was a senior vice president at Beacon Realty Capital and a key member of the firm’s Self Storage Group. To reach him, call 800.605.7880; e-mail [email protected]; visit www.thebscgroup.com.

Self-storage real estate investment trust (REIT) Public Storage Inc. has agreed to a $5.75 million settlement with Charlotte, N.C., city officials as compensation for the condemnation of one of its facilities. The city condemned the property to make room for an extension of the city’s light-rail service. The settlement was reached after Public Storage attorneys threatened to take the city to court after receiving appraisals they considered to be below market value.

The condemnation order forced self-storage tenants to move out of the 650-unit facility, costing Public Storage significant income, according to a press release issued by Cranfill, Sumner & Hartzog LLP (CSH), the law firm hired by the REIT to handle the eminent-domain case.

The city initially appraised the property at less than $4.1 million, but CSH attorneys Stephanie Autry and George Autry hired commercial real estate firm Cushman & Wakefield to provide a second appraisal. Richard Marchitelli, executive managing director of Cushman & Wakefield’s Valuation and Advisory group, appraised the property at $6.3 million, using a capitalization (cap) rate of 6.25 percent. The city’s appraisal used a cap rate of 9.5 percent, according to the release.

"Capitalization rate, or cap rate, establishes the rate of return an investor will receive based on the amount of income generated by the property in relation to the purchase price of the property,” Stephanie Autry said. “In simple terms, the lower the cap rate, the more valuable the investment."

To justify the lower cap rate used by Marchitelli, CSH sought the opinion of self-storage management and consulting firm The Heron Group Inc. “The firm's experts noted that the investment in self-storage facilities, particularly Public Storage's facilities, was a very safe investment, justifying a lower cap rate.” Autry said.

After submitting its findings to Charlotte officials, the city increased its appraisal by $800,000, which was still well below the appraisal from Cushman & Wakefield. Faced with taking the case to court, the city then agreed to an adjusted compensation of $5.75 million, according to CSH officials. The settlement was approved by the Charlotte City Council and the Federal Transportation Administration.

CSH has law offices in Charlotte, Raleigh and Wilmington, N.C. In addition to land condemnation and eminent-domain law, the firm's practice areas include medical malpractice and personal-injury law, intellectual-property law, employment law, family law, and products-liability law.

Based in Glendale, Calif., Public Storage has interests in 2,202 self-storage facilities in 38 states, with approximately 141 million net rentable square feet. Operating under the Shurgard brand name, the company also has 188 facilities in seven European countries, with approximately 10 million net rentable square feet.

U.K. operator Stock N Lock Self Storage has used an apprenticeship program to hire a teenager to a full-time position at the company’s facility in Worcester, England. Robert Tonks, 17, began an apprenticeship at the facility eight months ago. He’s believed to be one of three self-storage apprentices working in the United Kingdom, according to the source.

“Very few apprentices are employed within the self-storage industry in the U.K., and I commend Stock N Lock's owner Charles Rodway and his team for taking up this initiative,” Rennie Schafer, chief executive of the Self Storage Association of the United Kingdom, told the source. “It is fantastic that Stock N Lock has fostered Robert through the apprenticeship process and now into full-time employment. The core principles of customer service and business administration taught in the apprenticeship process are key elements for a successful self-storage manager, and I hope Robert has a long and successful career in the industry.”

Tonks’ apprenticeship is being managed by Leaping Man Professional Qualifications (LMPQ), a provider of work-related vocational training. “Rob has received excellent support training from the Stock N Lock Self Storage team,” said Debbie Rees, academy manager at LMPQ. “This has given him the confidence to succeed and make a positive impact on the business.”

"I would recommend the apprenticeship route to anyone. My confidence has grown immensely since joining, and I am learning ‘best-practice’ business skills from my colleagues here,” Tonks said. “I’ve even gained my counterbalance forklift-truck license.”

Stock N Lock has 680 units ranging from 10 square feet up to 300 square feet, and offers bulk and archival storage services in addition to traditional self-storage. Facility amenities include free WiFi, a conferencing suite, reception-area refreshments, and moving and packing supplies.

Hoerth Storage, a 132,853-square-foot self-storage facility in Fond Du Lac, Wis., recently sold for $4.9 million to a private investor. The property at 501 W. Rolling Meadows Drive is on approximately 12 acres. It includes 18 single-story buildings with 379 storage units, 35 of which are climate-controlled, and 21 commercial-warehouse spaces. Built in 1996, the property’s amenities include an onsite manager’s office, security lighting, video cameras, and drive-up bay doors for the commercial spaces.

Investment specialists Sean M. Delaney and Matthew E. Duda from the Chicago/Oak Brook office of Marcus & Millichap Real Estate Investment Services represented the buyer and seller, a developer. They were assisted by broker Matthew Fitzgerald in closing the transaction.

Marcus & Millichap has more than 1,300 investment professionals in offices throughout the United States and Canada. The company closed more than 6,600 transactions last year with a value of approximately $24 billion.

SpareFoot, an online marketplace for the self-storage industry, is hosting a “speed dating” event on June 18 at its Austin, Texas, headquarters to recruit 25 call-center agents, known by the company as Amazing Customer Experience (ACE) Team members. The event will be styled after the formalized match-making process by the same name, which encourages individuals to meet several potential matches during a short “meet and greet” period.

The company will host two speed-dating sessions, 6-7 p.m. and 7:30-8:30 p.m., at 720 Brazos St. During each session, 15 applicants will visit for three minutes each with 15 members of the ACE Team. When the gong sounds, the applicants will rotate seats and meet another team member. Wine and cheese will also be served.

The ACE Team currently has 58 members, according to the SpareFoot website. They assist self-storage customers with all needs including determining what size storage space they need, booking and managing storage reservations, and assisting with truck rentals. The agents also handle Web chat and e-mail inquiries.

“We are seeking unique individuals with customer-service and sales experience, a passion to learn and grow with a highly successful startup, and inquisitive personalities,” said Katie Smith, the company’s recruiter.

To be invited to the recruitment event, potential candidates should complete an application in the “Jobs” section at SpareFoot.com. Applicants also need to send an e-mail with the subject line “ACE Speed Date” to [email protected]. The first 30 RSVPs with submitted applications will be signed up to participate. The company plans to host a second event in July.

SpareFoot employees are offered paid insurance, free daily lunches prepared by a chef, stock options, snacks and beverages, a casual work environment, and vacation time.

Based in Austin, Texas, and founded in 2008, SpareFoot helps consumers find and reserve self-storage units, with comparison shopping tools that show real-time availability and exclusive deals. With a network of more than 7,000 storage facilities ranging from mom-and-pop operations to real estate investment trusts, the company reaches prospective storage renters though partnerships with brands including SelfStorage.com, Apartments.com and Penske Truck Rental.

By Marilyn Leslie

Thirteen years ago, self-storage was in its infancy in Hong Kong. At MiniCo Asia Ltd., we found it exciting and challenging to develop facilities in the region. Today we enjoy a thriving business and good reputation. Our experience has been eye-opening, and we’ve learned a lot about our customers’ buying habits. While we've benefitted from the many similarities between the Hong Kong and Asia markets, we've also had to adapt the established business model to find success.

Location and Amenities

The American concept of location as the most important factor in a successful self-storage operation is also true in Hong Kong. Initially, when there were fewer than 20 facilities in the region, location was not as critical. As more stores have opened, location has become a huge deciding factor for customers.

When we opened our first two facilities, we drew customers from all over Hong Kong and even from nearby areas of mainland China. Now our customer base has narrowed somewhat, as people have storage facilities closer to their businesses and residences. However, if you can create an atmosphere of service and ease of use, customers will come long distances to rent space at your store.

We discovered that the amenities our customers want most vary from those offered in the United States. We provide work areas and conference rooms for tenants at no charge. Customers use this space daily and schedule their time to use it. We’ve even had to referee arguments between customers! In one situation, we had to add another work area to meet the demand. Customers use this space to sort inventory, work on a computer, listen to music and even practice the violin. We also offer free Wi-Fi and tea and coffee at our facilities. This differentiates our services and gives customers a value-added reason to select us over a competitor.

Due to the lack of space of in Hong Kong, there aren’t many green lawns or inviting gardens. We created a "sky garden" on the roof of our Chai Wan store with lots of green and flowering plants. We provide tables and chairs for customers to use as a respite from the congestion of the region.

Ventilation is also a crucial factor to our tenants. In an area with high humidity, dense populations and little space, fresh air is an important health concern. We have fans mounted on the ceiling to keep the air moving and operate large dehumidifiers around the clock in areas that lack air-conditioning.

The Decision-Making Process

Compared to the U.S. market, the decision-making process is generally longer for Hong Kong self-storage customers. It usually starts with a phone call and then as many as three visits. Often the customer brings a family member to the facility to confirm his decision. Patience and follow-up are required to make a sale. It seems to be a very important decision, not to be taken lightly.

Hong Kong customers also stay for long periods of time. The average length of stay at our two oldest locations is more than three years.

Most Chinese place a high importance on numbers. Certain numbers are associated with negative aspects of life, while others are positive and associated with good luck. In performing the lock check at one facility, we discovered the units were not in numerical order as originally planned. In checking with the facility manager, we learned a customer had liked a certain unit location but not the number. We accommodated him by moving a “preferred” number from a vacant unit, thus creating a happy customer with a vested interest in his storage space.

When numbering the units on the fourth floor of one of our buildings, we avoided starting each unit number with a four because in the local culture, four represents death. The number three means life, so we used two threes in place of the four to identify the units.

Pricing

Pricing methods are also different in Hong Kong. We’ve found our clients communicate with one another, and our largest source of business is referrals. For this reason, we could not change the rates every week without upsetting current customers. New clients often want the same pricing as an existing tenant. If we offer any promotions to new customers, the established tenants complain and request the same discount. Our rate structure has to be consistent with frequent upward rate adjustments for all units.

Personal Relationships

Because renting storage space is such a big decision to people, we really get to know them. We work to create a personal relationship with every customer. Each time they visit their units, they’ll stop at the office to visit before accessing their goods. Our customers become our friends. When they go on holiday, they bring us gifts and photos. We receive personal e-mails from them. We give away movie tickets, trips and small gifts throughout the year to promote these relationships.

Most important, our customers accept the occurrence of accidents. Water in the units is a big problem in Hong Kong, particularly with older factories modified for self-storage. There have been several occasions where there has been damage due to water leakage. We apologize and offer some small gift. Most will accept the fact that “it was an accident,” and that’s the end of it. These issues are a way of life in Hong Kong.

It has been a rewarding endeavor to bring American-style self-storage to Hong Kong. We have learned to avoid the obvious while embracing the ambiguities.

Marilyn Leslie has been involved in the self-storage industry since 1998 when she began in the financial arena as chief financial officer for U.S.-based MiniCo Inc., then as president of Asian operations. She’s currently president of MiniCo Asia Ltd. During the last 10 years, she has worked in all areas of MiniCo’s self-storage business in Hong Kong. Her experience includes contract negotiations, facility planning and development, business modeling and budgeting, market assessment, finance structuring, reporting-systems implementation, and promotional planning. She manages four locations in Hong Kong and is responsible for developing and maintaining all critical business relationships with attorneys, bankers, vendors and others. For more information, www.minicoselfstorage.com.