Watch for self-storage financing to be robust this year because of demand and the amount of competition for strong deals in today’s market. Banks, credit unions, life companies, debt funds, bridge and CMBS will be some of the most active lenders. Self storage continues to have a lower default rate than other property types and is beginning to see upticks in rental rates and occupancy following a slower period. There has also been less new construction than in previous years. Look for lenders to underwrite a higher vacancy factor since lease-up is taking longer. Lenders will look at the location and population count. Borrowers could start to see higher leverage at more compressed spreads. Count on a bifurcated market where perm loans and more stabilized properties are in high demand by lenders, while the bridge lending market — especially bridge-to-bridge deals — will be highly scrutinized and the underwriting may present a challenge for borrower’s and target loan amounts.
Underwriting will still be constrained by debt service coverage ratios and debt yield. Lenders require stabilized occupancy to be in the 82% to 92% range and typically underwrite rental increases in the 3% to 8% range. Strong markets are starting to stabilize and grow after a flat to declining occupancy/rental rate period. Inflationary pressures have alleviated over the last year, therefore rents have begun to grow again and occupancy rates are rising.
Leverage will be in the 55% to 65% range, while higher cost options could push to 75%. Ground-up construction will see 70% to 75% LTC. Five-year deals will see rates start in the high 6% range. Debt yield will be in the 7% to 8% range, although the best rates will be available for deals with at least 8.5% to 9% debt yield. Construction and bridge loans will typically need a 9%+ stabilized yield, although some capital providers will size as low as the required CMBS perm loan level of the low 8% range.
Banks including Bank OZK, Live Oak Bank, BCB Bank, First Bank, Fulton Bank, Dime Bank, Banc of California and Fidelity Bank will fund self-storage deals. Expect banks to prefer some level of recourse and want to see deposits and healthy global cash flows. Banks can offer bridge loans or perm financing and can typically provide attractive rates with 25- or 30-year amortization schedules. Credit unions such as Alliant Credit Union, American First Credit Union and Four Leaf Credit Union will also be active. Banks and credit unions can finance any size loan in any stage of lease-up. Bank and credit union rates are typically in the 5.5% to lower 6% range. The DSC for banks and credit unions will need to be in the 1.25x to 1.30x+ range. Life companies such as PGIM Real Estate, MetLife, Guardian Life and Aegon will fund deals.
CMBS lenders such as BofA, Wells Fargo, Morgan Stanley, Barclays, Citi, Goldman Sachs, Argentic, Natixis and Zions Capital Markets will strive to compete. Borrowers will see upper 5% to high 6% rates and full-term interest only. Leverage can be up to 65% and 9% debt yields. CMBS lenders will want a net worth at least equal to the loan amount. Many CMBS lenders will consider financing a handful of smaller self-storage loans to diversify their pools for securitization. CMBS lenders have a minimum of usually 1.30x DSC but can come down to 1.25x on occasion for better located, higher quality assets.
Debt fund, bridge and private money lenders such as Prime Finance, Rialto Capital, LoanCore Capital, Thorofare Capital, Emerald Creek Capital, Post Road Group, Red Oak Capital Holdings, AVANA Capital and A10 Capital will also be active. These lenders will provide non-recourse loans typically with bad-boy carve-outs. Many of these lenders will prefer institutional management companies.
Watch for lenders to seek high-quality climate-controlled assets. Lenders will be averse to markets with oversupply or per capita metrics that are too high. Markets with a lot of supply underway or in lease-up will also be tough. Cities with at least 10,000 people will be sought after. States and cities with inbound migration and population growth are best suited for new construction. Many markets in the Southeast and Southwest are seeing significant numbers of people relocating from other parts of the country. The Carolinas, Florida, Texas and Arizona are experiencing population growth, mainly from the northern
states and California. Keep an eye out for increases in the retirement age demographic as a driver of the in-migration phenomenon in the Smile states and in turn this will increase demand for new self-storage facilities.
One of the biggest changes will be increased reserves so lenders will be accounting for more reserves to get stabilization. A prominent recent trend is exceedingly detailed analysis regarding understanding rental rates in a property’s immediate trade area. The ECRI strategy and achievement of market rental rates in a timely manner is no longer readily accepted without question by the lending community.
Track record and experience in the space will be the most important factors. Lenders prefer lending to experienced self-storage owners who have fully completed developments and/or have a long history of operating in the sector. The ability to demonstrate operating experience/commercial asset management experience is helpful to lenders and credit departments. For a new owner, this is accomplished through having an experienced management company oversee day-to-day operations. Sufficient net worth and liquidity of a sponsor is also important in order to resolve any issues should they arise, as well as pay for any capital needs of the property.
