Self Storage Emerges as Lender Comfort Zone
The property type's stable group of financiers is now joined by new entrants steering away from other commercial real estate categories.
Thorofare Capital, a debt fund in Los Angeles, has financed self storage owners for the last decade, but it has increased its activity over the last 18 months, said Felix Gutnikov, a principal and head of originations for the firm. The lender generally provides construction, acquisition and bridge loans, particularly when a new owner is sprucing up existing properties and raising rental rates.
In May, Thorofare loaned $8.25 million to a sponsor looking to recapitalize and construct the last 20 percent of a 470-unit climate-controlled property in Vancouver, Wash. The financing includes a three-year term with a one-year, performance-based extension option, and upon completion and the receipt of a temporary certificate of occupancy, the interest rate will fall around 250 basis points to one-month LIBOR plus 5.25 percent. The loan also features interest-only payments for the full term.
“I would say we’re on the offense when it comes to traditional, high-quality self storage loan exposure,” Gutnikov said. “The sector has maintained positive performance in 2021, and its overall outlook is positive.”
Emerging from the financial crisis and the Great Recession, institutional investors and lenders took a shine to self storage properties, which benefitted from the housing disruption and then maintained investment momentum as multifamily construction boomed.
A similar dynamic is now playing out as the U.S. emerges from the worst of Covid-19 and lockdowns.
Self storage demand has increased over the last year amid the dislocation of college students as well as the migration from urban areas and work-from-home policies, which have helped fuel home sales and remodeling. In the first quarter this year, self storage REITs reported record occupancy and healthy rental rate growth.
Despite collapsing last spring, self storage investment sales in 2020 reached $7.7 billion, outpacing 2019 sales by 33 percent, according to Real Capital Analytics, a research firm that tracks property transactions of more than $2.5 million. While Blackstone and NexPoint Advisors made self storage operator acquisitions that accounted for more than 25 percent of sales volume, $3.5 billion in single-asset sales in 2020 marked a year-over-year increase of 13 percent, said Real Capital. Single properties made up $1.6 billion of the total $4 billion in self storage sales through May this year.
“The self storage market is as active as it has ever been,” said Joseph Iacono, CEO and managing partner of Crescit Capital Strategies, a New York-based debt fund that has financed self storage deals in the $15 million to $25 million range. “During the pandemic and coming out of it, we’ve seen the asset class perform very well relative to other asset classes.”
Self storage rental rates experienced their biggest fourth quarter increase on record at the end of 2020: 3 percent for climate-controlled units and 2.4 percent for non-climate controlled units, according to Moody’s Analytics. What’s more, rental rates grew 1.8 percent for climate-controlled units for the full year in 2020 and 1.7 percent for non-climate controlled units. Those were the biggest increases since 2014 and 2016, respectively.
At the moment, an eagerness among lenders to put money to work, the continuation of historically low interest rates and healthy fundamentals are benefitting self storage borrowers. Debt funds, CMBS lenders, banks, life insurance companies, REITs and the Small Business Administration are active in the sector, and more debt providers continue to allocate capital to it.
“Self storage has always had a stable lender pool, but it has been a little bit limited,” said Wyatt Campbell, a vice president with NorthMarq. “But lenders that are staying away from other asset classes are now looking to dip their toe into self storage.”
That’s particularly true among diversification-minded lenders that have exposure to retail and hospitality assets, added Griffin Guthneck, senior director of capital markets for JLL. The horde of capital chasing industrial and multifamily is also forcing lenders to look elsewhere for yield.
“There is a growing focus on alternatives, and self storage is a beneficiary of that attention,” Guthneck said. “There’s definitely more capital in this space now than there’s ever been.”
Broad Financing Options
Self storage financing terms vary depending upon the transaction, location, sponsor, loan amount and lender, observers say. For a conventional 10-year loan that requires only 50 percent of a property’s value, for example, life insurance companies will provide full-term interest-only financing at 3.5 percent or lower. CMBS lenders are willing to provide a higher percentage of leverage, but it comes with a pricier coupon and interest-only payments for only part of the term. Meanwhile, bridge lenders are typically charging interest rates of 2 percent to around 5 percent for five-year stabilization and value-add loans ranging from 55 percent to 75 percent of value.
Construction is picking up after slowing in 2020. During the year, only 682 self storage properties were completed, marking an 11 percent dip from 2019 and a 13.5 percent decline from 2018, according to Yardi Matrix. Interest rates for construction financing are generally priced between 4 percent and 5.5 percent, depending on the amount of debt needed, although some debt funds will fund higher-leverage deals and charge accordingly.
“It was really difficult, frankly, for banks and even debt funds to provide construction financing for the greater part of last year,” said Brad Wilmot, executive vice president of capital markets with CBRE. “That has certainly changed. People making credit decisions in the lending community feel comfortable that the world is getting back to more normalcy.”
The number of self storage lenders may be growing and driving more competition, but the sector’s fragmentation is a hurdle for some. Single-asset deals can be around $10 million or less, for example, meaning loan deployments are much smaller than what many larger lenders prefer.
Still, portfolio deals have been growing as private equity groups snap up single assets and pool them for a sale or a financing, said Mike Mele, who as vice chairman leads Cushman & Wakefield’s self storage advisory group.
“We’ve done more portfolio deals exceeding $100 million this year than in the previous 15 years as the buyer profile continues to shift to institutions from the small partnerships and mom-and-pops,” he added.
Financing portfolios not only provides lenders with the financing scope they prefer, but it also helps them diversify loans across multiple markets, and in some cases, multiple operators, said Warren de Haan, co-CEO with ACORE Capital in Los Angeles. Mitigating risk is especially important today as concerns about supply have begun to grow, he added. More than 800 properties totaling 59 million square feet are currently planned or under construction, according to Yardi Matrix.
In March, ACORE provided a $140 million construction loan to InSite Property Group for the development of some 40 self storage assets across the U.S. The deal includes an option to expand the loan to up to $215 million.
“We don’t want to finance properties that are in the eye of the supply storm,” de Haan said. “So portfolios have really been our go-to, and by and large, we like the accretive fundamentals of where we’re lending.”