Lessons Learned: Examining the Past to Start the New Year

Lessons Learned: Examining the Past to Start the New Year

Mini-Storage Messenger – February 14, 2016

Editor’s Note: In this inaugural quarterly series of articles, self-storage mortgage broker Neal Gussis offers market observations and lessons storage owners can learn as they consider their property financing options.

Regardless of whether you own properties that don’t experience harsh winter weather, or you’re dealing with Mother Nature’s rougher side this time of year, there’s one metaphoric meteorological phenomenon occurring now despite your location: The financial wind is at your back.

We’re off to this good start in 2014 because several financial factors worked in self-storage owners’ favors last year, including:

  1. The availability and low cost of capital
  2. Loans offered at historically low interest rates
  3. Higher lender underwriting standards
  4. Solid industry operating results
  5. Strong investor appetite for storage properties
  6. Continued ownership consolidation

Storage owners and investors can learn several lessons from these trends and capitalize upon them while planning their 2014 financial strategies.

Available, Low Cost Capital

The financial crisis’ heights in 2009 and 2010 taught us that when the lending spicket is turned off and there are limited loan dollars, then those lending will do so using extremely conservative program terms. Meanwhile, property values decrease, new construction slows and sales transactions grind to a halt (with the exception of distressed sales).

In contrast, we learned in 2013 that widely available capital spawns activity that includes owners refinancing at incredibly attractive terms, rising property values, significant sales transactions, greenshoots of new construction, facility expansions, and an influx of investors eager to capitalize on the self-storage property sector. During 2014, we expect the availability and cost of capital will remain strong, despite projections of rising interest rates.

Historically Low Interest Rates Help Borrowers

Among the most important lessons we learned in 2013 was that interest rates rise much quicker than they fall. As 2014 begins, the 10-Year Treasury is hovering at roughly 2.9%, while just a year earlier it was nearly 1% less. These low rates have allowed thousands of fortunate storage owners and investors to refinance their properties at 10-year fixed rates at, or below, 4%.

Many were skeptical these extremely low interest rates would remain given broader predictions they would rise slightly over time. However in June 2013, the Federal Reserve mentioned it would begin tapering bond buying or quantitative easing. Afterwards, rates spiked nearly 1% in less than two months. Since then, however, they have settled and demonstrated modest up-and-down movement.

In 2014, there is a high likelihood — if not certainty — that Fed policy makers lead by newly appointed Chairwoman Janet Yellen, will finally start pulling back on bond buying and their quantitative easing policies. The resulting market reaction will certainly influence your financing decisions as the year progresses. In addition to interest rate volatility, you’ll also want to stay vigilant for other factors that can affect lending markets, such as government actions and policy changes, or national or global turmoil.

A huge lesson learned from the recent past is that trying to time a property refinancing to save a few basis points can cost you dearly. The rates available now from banks and CMBS lenders (the predominant self-storage sector lenders) remain at very attractive levels.

High Underwriting Standard Levels

Yet another lesson learned during 2013 was that even with available and attractive loan programs, lenders’ credit analysis processes were extraordinarily thorough. While they can be tough to swallow if you’re in the market for financing, high underwriting standards truly strengthen real estate values and help prevent the type of lending practices which contributed to the recent global financial crisis.

As 2014 gets underway, lenders across the financing spectrum are looking to book business from new and existing customers. They are offering aggressive terms, as well as allowing higher loan-to-value ratios, lower debt service coverage and longer amortization periods.

When shopping for a new loan, provide the up-front information requested by your lender or mortgage broker in an organized and timely manner. Then, during the underwriting process, be prepared for an extensive and complete credit review. Borrowers who provide the requested information thoroughly and in a timely fashion will experience a smoother approval process.

Solid Industry Operating Results

Undoubtedly, it’s a good time to own self storage. In 2013, we saw countless properties achieve year-over-year operating result improvements, with some demonstrating best-ever performance outcomes. Many market analyses showed self storage performing better than any other commercial property type during the past several years.

Our industry continues to enjoy the spotlight shown on it by financial and real estate media, as well as fund managers and analysts. That’s not surprising when you consider such examples as how the four publicly traded storage REITs not only reported strong operating results in 2013’s third quarter, but also 5.5% to 7.3% growth in year-over-year revenues.

With more than 22 years of experience as a national self-storage mortgage broker and advisor, Neal Gussis is a Principal at CCM Commercial Mortgage, where he specializes in securing debt and equity for self-storage owners nationwide. During the past 12 months, CCM has secured more than $180 million in customer financing. Based in Chicago, he can be reached at 224-938-9419 or ngussis@CCMCommercialMortgage.com.