Retail News Blog» Self Storage In Today’s Market – An Appraisers Perspective http://www.retailnewsblog.com Commercial Real Estate News. Some good news, some bad news, but always relavant to the times we live Tue, 20 Oct 2009 21:25:11 +0000 http://wordpress.org/?v=2.8.6 en hourly 1 Self Storage In Today’s Market – An Appraisers Perspective http://www.retailnewsblog.com/2009/10/self-storage-in-today%e2%80%99s-market-%e2%80%93-an-appraisers-perspective/ http://www.retailnewsblog.com/2009/10/self-storage-in-today%e2%80%99s-market-%e2%80%93-an-appraisers-perspective/#comments Thu, 15 Oct 2009 16:55:09 +0000 Jeffrey Shouse http://www.retailnewsblog.com/2009/10/self-storage-in-today%e2%80%99s-market-%e2%80%93-an-appraisers-perspective/

Now that the effects of the credit crisis have become more fully evident while continuing to grip our economy, 2009 has revealed a repositioning within the real estate markets. Commercial real estate values are returning to the core fundamentals that always drove the market prior to the rise of Commercial Mortgage Backed Securities (CMBS). The availability of easy, non-recourse money and the flood of investors transitioning away from Wall Street in the late 1990s led to an unprecedented spike in demand, which caused a dramatic increase in prices and a loosening of investment standards. The results have been painfully evident.

The last couple of years have represented a time in which markets stagnated, not solely due to the lack of available capital, but also due to the gap in expectations between buyers and sellers. Sellers clung to memories of historically low capitalization rates and aggressive rent projections, while buyers assumed the worst in their cash flow analysis and disregarded cap rates altogether. The chasm between buyers and sellers over the last couple of years has widened to the point of stunting almost all activity in the market. The result of the stagnation is that market values are relatively vague across most property types. However, in the self storage industry, this separation of value between buyers/sellers is not as pronounced as other property types. However, due to the lack of capital, capitalization rates for self storage facilities have increased 100 to 150 basis points over the last 12-18 months, with typical rates ranging from 8.0% to 10%. Transactions sub 8.0% are hard to find in this economy.

Most industry experts concur – the commercial real estate market trails residential and is affected by all of the additional external influences that affect the economy as a whole. When combined with the still-compounding effects of stock market fluctuations, increasing unemployment rates, decreased consumer spending (although some moderate, recent gains), and ongoing corporate restructuring and downsizing, conditions are likely to worsen in the near future. As just one more reminder, key markets such as New York are just beginning to feel the impacts of financial sector lay-offs with commercial space inventories dramatically increasing and residential foreclosures accelerating. These key markets set trends across other areas of the nation. In addition, one should be mindful still of the $3 trillion of commercial market debt coming due with no real sense of how this will be absorbed. Negative impacts could be substantial without a plan and available capital.

In addition, as financial institutions continue to flounder or be seized by the FDIC, related asset workouts are the growing trends. In the past, the FDIC would typically take over one bank in a time span covering years. In 2009, the FDIC has seized over 100 banks to date and the number is anticipated to rise rapidly. Sitting on the books of these failed financial institutions are portfolios of properties that must be immediately appraised for true, current value and factored against the current market conditions in order to dispose of the assets. While perhaps not directly deepening our economic crisis, this will most likely extend the overall recovery cycle with commercial real estate looking at another 5-7 year window for more healthy conditions.

With all of these factors in play, expect market participants in the future to be more realistic in their internal underwriting, but to place emphasis on initial cash-on-cash returns and a flight to quality. Well-located, good quality product will slowly begin to move again as the expectations between buyers and sellers move toward each other.

Jeffrey R. Shouse, PGP Valuation Inc

Self Storage Director

]]> http://www.retailnewsblog.com/2009/10/self-storage-in-today%e2%80%99s-market-%e2%80%93-an-appraisers-perspective/feed/ 0 Let’s Find Out What The Market Thinks About Self-Storage http://www.retailnewsblog.com/2009/04/lets-find-out-what-the-market-thinks-about-self-storage/ http://www.retailnewsblog.com/2009/04/lets-find-out-what-the-market-thinks-about-self-storage/#comments Tue, 21 Apr 2009 19:59:46 +0000 Jeffrey Shouse http://www.retailnewsblog.com/?p=581 How have the Capital markets affected lending for the self storage industry?

Like most other income property classes, with the exception of apartments, financing for self-storage properties has been hard hit with limited capital available in today’s market. Because of the management intensive nature of self-storage, lenders including banks and insurance companies who once were willing to fund loans on this property type have either taken self storage off their lending list or have tightened up underwriting parameters by decreasing loan to value ratios and increasing debt service coverage requirements. In general, underwriting Cap rates exceed 8.50%, loan to value ratios cap out at 60% and debt service coverage requires a minimum 1.30x. Only well located, seasoned and stabilized properties with sound management qualify for and have access to the lowest priced capital which in today’s market comes from a small group of insurance company lenders. Ten year fixed rates, in general start at 7.50% with the only nonrecourse money coming from insurance company lenders. 

Kenneth M. Fox, Cohen Financial

(415) 591-3111

Due to Wall Street exiting, the financing arena for commercial real estate has created a huge void to be filled by banks and life insurance companies. Since capital is at a premium, lenders have become significantly more selective with the sponsors they elect to do business with and more conservative on their underwriting of commercial real estate. In today’s lending environment, leverage on self-storage is typically in the 65% to 70% range with a 20 to 25 year amortization schedule and a debt service coverage ratio of between 1.20x to 1.30x on a trailing 12 month basis. We are having tremendous success with larger owner operators with significant experience and financial wherewithal with our life company and strong banking relationships on a national basis.

James Elmore, Tavernier Capital Partners, LLC

(561) 998-8300

 As the credit crunch continues to impact self-storage lending, one of the biggest risks right now facing a self-storage owner is the ability to refinance. Great rates with unbeatable terms are now a thing of the past and self-storage owners have got to reposition themselves in this new financial environment. Owners must be fully aware of impending maturities and now more than ever allow themselves plenty of time to find financing for their facilities that are coming due. As lenders continue to preserve the cash they have, seeking loan options sooner rather than later is crucial and will allow an owner to fully assess all financing alternatives and possibilities. With the conduit market being no-existent, borrower’s should begin with their local banking relationships and extend their search to include regional commercial banks and life insurance companies. These lender’s criteria seem to get more stringent as the months pass with quality and leverage being heavily scrutinized. Even your favorite local bank might not be in the market when it comes to refinancing your current loan. The best advice I can give is to start early and identify as many lenders as possible up front that will give you a couple of different options and provide backstops in case potential deals fall through the cracks.

Shane Weeks, Capmark Finance Inc.

(205) 991-6700

 The conduits are gone. Regional and local banks, credit unions and life companies are where the money is at. Also underwriting has tightened and they are looking closely at the sponsor. Only a handful of lenders are doing non recourse loans. Regarding financing in the upcoming year – you can still get recourse financing at 65%. 3, 5 & 7 year terms and 25-30 amortization are available.

Chuck Mills, CEM Capital

(949) 724-1404

 

With the single-family market struggling, how do you think this will affect the self-storage industry?

 The self-storage industry in difficult economic times historically has increased in revenue and occupancy. In 2009, we have seen the same monthly trends; but to increase revenue and occupancy we must improve every skill; customer service, phone etiquette, collections, marketing and maintenance of the properties. Along with improved skills; we have to offer specials that attract the struggling families. The current specials for the new tenants range from 3 months 1/2 off to rent one get a second unit for free for 6 months. All current tenants can pay for three months and get the 4th month free. If any tenant asks for a discount we give 10% no questions asked and with a smile on our face. The managers must be in continual training on customer service, collections, reporting and most importantly cleanliness of the property. Everything counts to gain the tenant in a struggling market. Limited dollars means more price shopping and good customer service comparison for the single family looking for storage.

Daniel “Skip” Elefante, Platinum Storage Group

(949) 770-2232

 The difficulties with the single family market translates to difficulty in the self-storage market with respect to the ability of self-storage owners to obtain financing for their project whether it is to take out an existing construction loan coming due, obtain a loan in order to acquire an existing facility, or procure a construction loan. The popular wisdom and the media have been playing on the historical assumption that when people lose their homes they automatically move into a small apartment and store their excess belongings in a storage facility. The driver in this case has more to do with that individual losing his/her job and thus their home. If that is the case, it becomes difficult to find the funds to pay rent on a storage facility as well. The entire process, in my opinion, is driven by job losses that translate into home foreclosures that result in banks not having funds to loan to self-storage operators. Until we can restore the job markets I do not see the banks recovering and being able or willing to return to the business of lending to self-storage owner/operators.

Kenneth E. Nitzberg, Devon Self Storage

(510) 450-9204

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