Self-Storage's Surging Profile

Rising rents, high occupancy and attractive returns on investment are sparking a healthy development pipeline. An estimated 600-plus new facilities are on track to come on line in 2016. New players are entering the sector, and existing developers are expanding their pipelines. Also of note is the hyper-local nature of self-storage markets. The typical trade area is no more than 3 to 5 miles, and developers are seeking higher risk-adjusted returns than are often available in conventional asset categories like office and multi-family.

Further, as the capitalization of opportunities tends to be relatively small, often too small for institutional debt and equity investors, cap rates remain in the 5 percent to 6 percent range. Further compression is possible for portfolios that reach sufficient scale. The trend of increased investment shows no signs of slowing as developers look to enter the market with multiple projects to capitalize.

Debt Strategies

Historically, local, regional and national banks have dominated the development and bridge loan opportunities for self-storage assets; CMBS has taken a large market share of non-recourse permanent opportunities. Debt funds, which often offer interest rates 200 to 400 basis points wider than those provided by banks, have recently started to win some of this shorter-term business, as borrowers try to steer clear of personal guaranties and maximize leverage to as much as 75 percent to 85 percent of cost.

Similarly, life insurance companies--which generally cap loan-to-value ratios for self-storage facilities at 65 percent--are maintaining an increased appetite for permanent non-recourse loans for stabilized self-storage facilities. Life companies generally offer more attractive interest rates, more prepayment flexibility, and easier, lower-cost closings than their CMBS counterparts. Ten-year CMBS loans might offer 4.5 percent to 5 percent interest and a 70 percent to 75 percent LTV. For a comparable deal, a life company might offer a 3.75 percent to 4.25 percent rate a slightly lower leverage point.