Self Storage Questions

Anyone have any experience financing self storage deals? Some of these questions are hard to answer obviously without more info but I literally just have no idea and am flying blind so anything helps.

  • Let's say you have a good class A (if that even exists/whatever metrics they use) stabilized property in a top tier/sexy six market what would be an estimate of the cap rate range that they would trade on, like 7-9% ish?

  • What capital sources lend on self storage (bank, debt fund, CMBS, private lenders/hard money?).

  • What metrics do you look at (occupancy, lease term, lease roll, OpEx ratios, etc) – again I know nothing?

-Is 70%+ non-recourse first mtg financing possible and if so what type of spread are we talking (again assuming major market and good location and fixed or floating spread I don't care - ballpark me).

  • What about in tertiary markets would community banks, CMBS or debt fund still play even at higher proceeds? Any other capital sources?

Thanks and sorry in advance for the question overload

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Comments (15)

May 1, 2015 - 1:03am

Self storage is a totally different animal. About a year ago I was assigned a self storage deal to underwrite at the commercial bank I worked at but left before the process was complete. While I studied the biz, I was shocked to find how niche it is. It's like hotels in that it is real estate-business hybrid and the players usually specialize.

All I really remember was that there were a few firms that specialized in market studies for self storage and that population within x number of miles was a key driver in success. If I recall, temperature controlled units with elevators were important to have in higher end markets.

I can only speak for commercial banks but unless there is a special relationship or extenuating circumstances, I can't imagine a traditional lender issuing non-recourse debt on a 70% leveraged self storage deal.

Array

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May 4, 2015 - 2:41pm
Virginia Tech 4ever:

I can only speak for commercial banks but unless there is a special relationship or extenuating circumstances, I can't imagine a traditional lender issuing non-recourse debt on a 70% leveraged self storage deal.


Um, well, then use your imagination I guess. CMBS goes beyond 70% LTV nowadays. Commercial banks don't compete in the nonrecourse business in the first place.
May 4, 2015 - 3:06pm
prospie:

Virginia Tech 4ever wrote:I can only speak for commercial banks but unless there is a special relationship or extenuating circumstances, I can't imagine a traditional lender issuing non-recourse debt on a 70% leveraged self storage deal.

Um, well, then use your imagination I guess. CMBS goes beyond 70% LTV nowadays. Commercial banks don't compete in the nonrecourse business in the first place.

Well, I was only speaking for commercial banks: "I can only speak for commercial banks..."

And my organization has several non-recourse loans with commercial banks, so they absolutely issue non-recourse debt to the right clientele.

As far as my "imagination" I'd assume there aren't many CMBS lenders who do small deals. My guess is that storage unit deals are numerically populated by smaller, one-off deals under, say, $2 or 3 million.

Array

May 1, 2015 - 10:43am

Taking down a few points:

IRRelevant:

- What capital sources lend on self storage (bank, debt fund, CMBS, private lenders/hard money?).

All of those lenders listed will be players at different levels, for different sponsorship. Some experience with the product is going to be important for any lender.

IRRelevant:

-Is 70%+ non-recourse first mtg financing possible and if so what type of spread are we talking (again assuming major market and good location and fixed or floating spread I don't care - ballpark me).

Yes. Assuming decent operating history, sponsorship with storage experience, and appropriate debt yield/DSCR, CMBS will get there all day long. Other lenders too, I would think. In CMBS today, expect a fixed rate at +180-200 bps over 10-year treasury swaps depending on the deal.

IRRelevant:

- What about in tertiary markets would community banks, CMBS or debt fund still play even at higher proceeds? Any other capital sources?

CMBS will be a player, again. Lots of storage done in 2014 in tertiary locations between 70-75% LTV. I can't opine as to whether conduits made money on those deals, but they sold them. I can't speak generally to other types of lenders, but in one specific instance, I lost a bridge deal in a tertiary southern market to a regional bank that had a strong relationship with the sponsor.

May 1, 2015 - 11:40am
  • What metrics do you look at (occupancy, lease term, lease roll, OpEx ratios, etc) – again I know nothing?

I underwrite self-storage from time to time. What we look at is seasonality, insurance revenue and penetration, Churn rate (50% normally), population density 1-3-5, payroll... is it a portfolio, can the property support a regional, Market vs Economic Occupancy.

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Best Response
May 1, 2015 - 12:06pm
IRRelevant:

- Let's say you have a good class A (if that even exists/whatever metrics they use) stabilized property in a top tier/sexy six market what would be an estimate of the cap rate range that they would trade on, like 7-9% ish?

We just closed 2 self-storage construction loans in a top market and what we found when canvassing the market and talking to lenders is that cap rates can be pushed as far down as 5% depending on the product, location and sponsor. Self-storage is pretty hot right now, and this is evidenced by the cap rates falling to unprecedented lows. In a top market with a top operator, I would assume a cap in the 5.5 -7% range.

IRRelevant:

- What capital sources lend on self storage (bank, debt fund, CMBS, private lenders/hard money?).

In our case, we fielded quotes from several of these sources, but in both instances the deals went to banks who came in with the most aggressive rates and leverage. Much to my surprise, banks seemed to be the key players in this space. Would like to hear if anyone has seen anything different in their experience.

IRRelevant:

- What metrics do you look at (occupancy, lease term, lease roll, OpEx ratios, etc) – again I know nothing?

Self-storage is an interesting hybrid that I would liken to a cross between a hotel and multifamily building. Lease terms are short, but most renters stay in place for several months. There is demand for the units coming from residents that live in the area (renters that need extra storage space), commercial renters (small businesses that need extra storage space), and short-term situational renters (people relocating and going through life events such as unemployment or divorce).

Here is what I found lenders to care about most:

  1. Competitive radius supply - what is the total square feet per capita in the competitive radius (1.5 or 2-miles) of the facility. The national average is about 7.5 SF per capita, but each metro has its own equilibrium (usually lower because of higher density). Obviously, the further below the average the metric is, the better it is as this signifies undersupply in the competitive radius.

  2. Occupancy - Typically, anywhere from 10-15% average vacancy is considered stabilized for a self-storage facility due to "frictional vacancy." This is the vacancy rate resulting from constant turnover and move-ins of new tenants.

  3. Operator - Lenders highly favor facilities with national operators such as Extra Space Storage or CubeSmart as opposed to local or private operators. They benefit from better economies of scale, better websites and leasing, and their highly recognized brand names.

  4. Market Rates - Much like hotels, rates can change daily as operators adjust to the markets, so what is important to underwrite and consider with respect to rates are long terms trends and growth on a larger scale. Take a look at how much rates have grown over the past few years and where they are expected to move going forward. Marcus and Millichap produces the best self-storage reports, the Sparefoot blog has useful information, and REIS and StorTrack provide good local rent and occupancy comps by unit type and size. Climate controlled 10x10 units are becoming the benchmark in major markets. When underwriting, you can use a weighted blended rate calculated from the unit mix (as each unit type and size comes with a different price tag), or you can get detailed and project performance for each type if you prefer.

IRRelevant:

-Is 70%+ non-recourse first mtg financing possible and if so what type of spread are we talking (again assuming major market and good location and fixed or floating spread I don't care - ballpark me).

If we were able to secure 70% leverage on a construction loan, I would guess you can definitely push leverage into the 70s for a stabilized facility. I saw spreads in the low 200s over LIBOR, it all depends on how aggressive the lender is. I would say spreads on a good facility/location should be in the 200-400s, but I'd like to see if anyone has more info on this for stabilized facilities.

Hope this helps.

May 1, 2015 - 12:16pm

Glad to see there's WSO interest in Self Storage, our group doesn't look at SS yet but I'm pushing for it. As mentioned above it's a niche industry, but new players are entering the market (note TPG recently invested $120M in LifeStorage).

  • Increasing urban populations: More stuff and less square footage to store it
  • Decreased overhead: No tenants, no toilets, low Cap Ex
  • New technology driving down operating costs: For example, remote servicing from a kiosk
  • Fragmented industry: outside of the major players, it's primarily unsophisticated ownership (Mom & Pop)
  • Ability to utilize undesirable real estate: Like an odd-shaped parcel of land abutting train tracks

Snippets from Green Street Advisers, Self Storage March 2015 Report:
"Higher cap rates, astounding NOI growth since 2012 has been driven primarily by occupancy gains and expense control"

"Values are up 10-15% over the past year and over 40% since the 2007 peak"

"Lending to private developers is loosening; ergo, new supply is coming at an even faster pace"

Fasting Growing Markets (% change YOY in asking rents): Atlanta, Miami/Ft. Lauderdale, Oakland, Los Angeles - all increased 10% YOY

Fill the unforgiving minute with 60 seconds of run. - Kipling
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May 1, 2015 - 12:20pm

Also 7-9% for a top tier class A property is way too high.

Here are the Public Market Nominal Cap Rates
CUBE: 6.0%
EXR: 5.8%
PSA: 5.8%
SSS: 6.3%

Fill the unforgiving minute with 60 seconds of run. - Kipling
May 4, 2015 - 1:57pm
Gene Parmesan:

Also 7-9% for a top tier class A property is way too high.

Here are the Public Market Nominal Cap Rates
CUBE: 6.0%
EXR: 5.8%
PSA: 5.8%
SSS: 6.3%

This is very true. Storage is getting stupidly expensive.
May 4, 2015 - 2:13pm
prospie:

Gene Parmesan wrote:Also 7-9% for a top tier class A property is way too high.
Here are the Public Market Nominal Cap Rates
CUBE: 6.0%
EXR: 5.8%
PSA: 5.8%
SSS: 6.3%

This is very true. Storage is getting stupidly expensive.

It's genuinely amazing that people will pay more to store items than what those items are worth.

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