This month, our roundtable of real estate experts gathered to discuss what's happening with self-storage in the Northeast states. This month's panel includes:
- Guy Blake of Pyramid Brokerage Co. in Kingston, N.Y.
- Linda Cinelli of LC Realty in North Branch, N.J.
- Joe Mendola of NAI Norwood Group in Bedford, N.H.
- Chuck Shields of Beacon Commercial Real Estate in Conshohocken, Pa.
1. Most banks are not lending aggressively or are difficult to work with at this time. What has been your experience?
Blake: It seems that the larger the deal, the more difficult it is to find lenders willing to make loans. Small local banks (that did not get involved in the sub-prime mess or conduit market) are still lending but only up to a couple million dollars. The terms haven’t really changed all that much as they have always been fairly conservative.
Cinelli: There is money out there, but only for an established operator with a track record and a strong P&L. The loan-to-value (LTV) is not going to be what it was in the past. The local banks are still strong; most do not have heavy bad debt, and they are actively seeking to loan money, but only to strong buyers.
Mendola: Banks are increasing underwriting standards to cover the uncertain future. Community banks have excellent balance sheets and are eager to lend. They will still do 75 percent LTV if the borrower has good credit and is not depending solely on the cash flow from the asset being financed. If that is not the case, the LTV quickly can go to 65 percent. The major banks and life companies are not lending because they are going through a de-leveraging process to preserve their capital base.
Shields: In conversations with lenders in eastern Pennsylvania, money is available but the standards and requirements underwriters set for obtaining financing are more strongly enforced. There is more equity needed than in the past, but borrowers with good credit, cash and a history of owning and managing self-storage are still able to get financing. Lenders are more particular. Luckily, unlike residential, self-storage is one property type that is still finding financing.
2. Some analysts say self-storage is a recession-proof business. What are owners in your market experiencing in terns of rental rates, rental concessions and the overall occupancies and turnovers?
Blake: Most operators are not yet ready to declare that self-storage is “recession-proof.” Occupancies are holding fairly steady and we’re not seeing any downward pressure on rates yet. Delinquency rates are creeping up a bit, which is not unusual for this time of year. So, all in all, the storage market in upstate New York seems to be holding its own, but the operators are sweating a bit nonetheless.
Cinelli: Of the operators we interviewed, some thought self-storage was recession-proof, but their occupancies have dropped from various sources: personal or business downsizing, cutting back on overall expenses and job losses. However, people who have to move out of their houses will have to store their belongings as they move into smaller apartments, so that creates an additional demand.
Mendola: In a mild recession like we are experiencing now, self-storage in New England is fairly recession-proof. The people downsizing from a larger home or foreclosed upon have offset the move-outs. They still value their stuff and put it in storage to hope for a better day. The occupancies for my clients, by and large, are as high as they have ever been because they are benefiting from the downsizing effect
Shields: The economy is affecting business. Rates are down and the published rate is not the rate that is required to rent the space. Concessions are needed to “make the deal” and more owners are making concessions to keep their tenants who’ve lost or fear losing their jobs and would be unable to pay the rent. Overall, occupancy is down (some owners have indicated down 5 to 10 percent). The result is that the owners are doing whatever it takes to keep tenants. They will match or better whatever their competition is doing.
3. How would you best describe current buyers?
Blake: Current owners have always been, and remain, the top source of buyers in the storage business. Those with cash available are taking a more predatory stance as far as acquisitions are concerned. The state of the market has put them in a strong negotiating position and savvy operators are taking advantage of it whenever opportunities arise.
Cinelli: Today’s buyers are existing operators looking to pick up facilities at prices more realistic than they have been the last four years. Some new product is coming in with prices that may allow them to purchase at higher cap rates. Both buyers and sellers do not have much of a sense of urgency and appear to be waiting out the market.
Mendola: Some of today’s buyers are becoming “bottom feeders” looking for a bargain. However, sellers are not buying into it partly because many do not have to sell immediately and their cash flows from operations are too great to consider a price concession. Current self-storage owners are also looking for opportunities to purchase properties in complimentary markets to existing facilities to expand their market share.
Shields: A majority of buyers are investors with cash or access to cash that see self-storage as a good investment with a good return. They are not necessarily self-storage operators but are looking to third-party managers or companies to run the facility. This indicates to me that self-storage still remains a strong option for anyone looking to invest.
4. Are you seeing owner financing or partial owner financing to help facilitate deals?
Blake: I am definitely seeing more owners willing to finance some or all of their deals. Since the number of buyers in the market has decreased dramatically, the motivated sellers are doing what is necessary to make the deal.
Cinelli: Sellers are becoming more aware of the possibility of owner financing to get their prices. It works well if the owner has real equity and would benefit by taking back the property in the event of a default. Owners are still hesitant to be the bank, but if the buyers are strong and have credibility and own or operate other facilities this may be the next step to sell. Still, I wouldn’t encourage a seller to take the risk of owner financing for first-time buyers in the self-storage business.
Mendola: Because LTV ratios are contracting, owner financing is something that sellers are willing to consider but the credit worthiness of the borrower and the price offered for the property have to be really good. The larger problem is that many owners have commercial mortgage-backed security loans (CMBS) on their properties. These loans carry a prohibition against secondary financing. Unless the buyer can offer good substitute collateral, this approach will not work in facilitating a sale.
Shields: Today’s lenders are looking for at least 25 percent equity from buyers. The more cash buyers need put down, the less they can pay for the facility. Secondary financing also helps the owner get closer to his asking price by enabling the buyer to come up with less cash. Not many sellers are willing to finance 70 to 75 percent of the sale. The future is too uncertain and no one wants to get the property back, especially if it is worth less than when it was sold. In addition, many times the cash in the deal does not pay off any existing mortgages on the property.
Michael L. McCune is president of the Argus Self-Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.
