A deal recently executed by real estate investment firm Harrison Street Real Estate Capital LLC shows the environment remains favorable for refinancing of self-storage loans.
“As the self-storage sector continues to perform well and exceed expectations, financing will continue to be there for qualified operators,” said Stephen Skok, managing director of mortgage banking firm HFF LP.
HFF recently helped Harrison Street refinance a 19-facility self-storage portfolio in Florida, Illinois, Nevada, New York, Ohio and Rhode Island. A national bank issued the two-year, $70 million loan.
While Skok couldn’t comment specifically about the Harrison Street refinancing, he said life insurance and commercial mortgage-backed securities (CMBS) loans are viable options for storage operators seeking long-term financing, while traditional bank loans are geared toward short-term deals.
According to Fitch Ratings, self-storage facilities have been a “growing contributor” to CMBS deals in 2013, at a little more than 4 percent of total CMBS activity. The deals have performed well, Fitch Ratings said, with a default rate of less than 1 percent.
Still, Fitch views self-storage assets cautiously, “as many self-storage units are located in areas with limited barriers to entry.”
New CMBS loans, which virtually came to a halt following the 2008 financial crisis, have sprung back to life over the past year. Skok said borrowers can expect to secure CMBS loans with a 70 percent to 75 percent loan-to-value ratio, while insurers are more conservative, with a ratio of 60 percent to 65 percent. For 10-year loans, Skok is seeing rates around 5 percent for CMBS loans and around 4.5 percent for insurer-backed loans.
Skok said even older self-storage facilities are eligible for refinancing now if they boast strong occupancy. Lenders prefer facilities with occupancy rates of at least 70 percent, he said.
“If it is an older property put in the Class C category because of some cracked pavement but has strong underlying economics, they can finance those assets,” Skok said.
Shawn Hill, principal of self-storage financial advisory firm The BSC Group, said the experience level of an operator is another factor that lenders consider when looking at self-storage refinancing. Hiring a third-party management company can help an inexperienced operator overcome the lack of a track record, he said.
Hill said refinancing activity at his firm has been robust over the past year, with 45 self-storage refinancing and acquisition deals closed for a total of $270 million. Hill expects refinancing volume to pick up steam heading into 2014 and beyond, as CMBS loans issued before the real estate crash come due.
Hill said he has seen many self-storage operators pay off loans early to refinance at today’s low interest rates, despite being charged penalties to do so.
“Overall interest rates are very low, and lenders are very aggressive right now. They’ve gotten past the fear that pervaded the market for the last couple years,” Hill said.
Hill doesn’t expect rates to stay where they are much longer.
“The general consensus is rates are going up—if not tomorrow, certainly in the future. We’ve been in an historically low environment for quite some time,” he said.